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Rule 497(c)
File No. 811-7588
STATEMENT OF ADDITIONAL INFORMATION
THE CARDINAL FUND
CARDINAL GOVERNMENT OBLIGATIONS FUND
CARDINAL GOVERNMENT SECURITIES MONEY MARKET FUND
CARDINAL TAX EXEMPT MONEY MARKET FUND
CARDINAL BALANCED FUND
CARDINAL AGGRESSIVE GROWTH FUND
SIX INVESTMENT PORTFOLIOS OF
THE CARDINAL GROUP
The Cardinal Fund ("TCF"), Cardinal Government Obligations Fund
("CGOF"), Cardinal Government Securities Money Market Fund ("CGSMMF"), Cardinal
Tax Exempt Money Market Fund ("CTEMMF"), Cardinal Balanced Fund ("CBF") and
Cardinal Aggressive Growth Fund ("CAGF") (collectively, the "Funds" and
individually a "Fund") are each a separate diversified, investment portfolio of
The Cardinal Group, an open-end, management investment company (the "Group").
The investment objectives of TCF are long-term growth of capital and income.
Current income is a secondary objective. The investment objectives of CGOF are
to maximize safety of capital and, consistent with such objective, earn the
highest available current income obtainable from government securities. The
investment objectives of CGSMMF are to maximize current income while preserving
capital and maintaining liquidity. The investment objectives of CTEMMF are to
maximize current income exempt from federal income tax while preserving capital
and maintaining liquidity. The investment objectives of CBF are current income
and long-term growth of both capital and income. The investment objective of
CAGF is appreciation of capital.
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For further information regarding the Funds or for assistance
in opening an account or redeeming Shares, please call (800)
282-9446 toll free.
Inquiries may also be made by mail addressed to the Group at
its principal office:
155 East Broad Street
Columbus, Ohio 43215
This Statement Of Additional Information is not a prospectus and
should be read in conjunction with the Prospectuses of the Funds, each dated as
of May 1, 1996, which have been filed with the Securities and Exchange
Commission. This Statement of Additional Information is incorporated by
reference in its entirety into the Prospectuses. The Prospectuses are
available upon request without charge from the Group at the above address or by
calling the phone number provided above.
MAY 1, 1996
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TABLE OF CONTENTS
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THE CARDINAL GROUP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . . . . . . . . . . . . . B-1
Additional Information on Portfolio Instruments . . . . . . . . . . . . . B-1
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . B-15
Portfolio Turnover . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-19
MANAGEMENT OF THE GROUP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-20
PRINCIPAL SHAREHOLDERS OF THE GROUP . . . . . . . . . . . . . . . . . . . . . . . . B-24
THE ADVISER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-24
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-26
TRANSFER AND DIVIDEND AGENT AND FUND ACCOUNTANT . . . . . . . . . . . . . . . . . . B-29
EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-30
THE DISTRIBUTOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-30
CUSTODIAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-33
LEGAL COUNSEL AND INDEPENDENT AUDITORS . . . . . . . . . . . . . . . . . . . . . . B-33
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION . . . . . . . . . . . . . . . . . . B-33
Determination of Net Asset Value . . . . . . . . . . . . . . . . . . . . . B-34
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-35
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-40
Description of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . B-40
Vote of a Majority of the Outstanding Shares . . . . . . . . . . . . . . . B-41
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-41
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-42
Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-42
Calculation of Total Return . . . . . . . . . . . . . . . . . . . . . . . B-43
Performance Comparisons . . . . . . . . . . . . . . . . . . . . . . . . . B-44
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-45
APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
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STATEMENT OF ADDITIONAL INFORMATION
THE CARDINAL GROUP
The Cardinal Group (the "Group") is an open-end management investment
company which currently offers six separate diversified investment portfolios,
each with different investment objectives.
This Statement of Additional Information contains information about
The Cardinal Fund ("TCF"), Cardinal Government Obligations Fund ("CGOF"),
Cardinal Government Securities Money Market Fund ("CGSMMF"), Cardinal Tax
Exempt Money Market Fund ("CTEMMF"), Cardinal Balanced Fund ("CBF") and
Cardinal Aggressive Growth Fund ("CAGF") (collectively, the "Funds" and
individually a "Fund").
Much of the information contained in this Statement of Additional
Information expands upon subjects discussed in the Prospectus of the respective
Fund. Capitalized terms not defined herein are defined in the Prospectuses.
No investment in Shares of a Fund should be made without first reading the
Prospectus of that Fund.
INVESTMENT OBJECTIVES AND POLICIES
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS
The following policies supplement the investment objectives and
policies of the Funds as set forth in their respective Prospectuses.
BANK OBLIGATIONS. As described in its respective Prospectus, CTEMMF,
CBF and CAGF may each invest in bank obligations consisting of bankers'
acceptances, certificates of deposit and time deposits.
Bankers' acceptances are negotiable drafts or bills of exchange
typically drawn by an importer or exporter to pay for specific merchandise,
which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Bankers' acceptances invested in by such Funds will be those guaranteed by
domestic and foreign banks having, at the time of investment, assets in excess
of $100,000,000 (as of the date of their most recently published financial
statements).
Certificates of deposit are negotiable certificates issued against
funds deposited in a commercial bank or a savings and loan association for a
definite period of time and earning a specified return. Certificates of
deposit and time deposits will be those of domestic banks and savings and loan
associations, if at the time of investment the depository institution has
assets in excess of $100,000,000 (as of the date of its most recently
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published financial statements) [, or (b) the principal amount of the
instrument is insured in full by the Federal Deposit Insurance Corporation].
COMMERCIAL PAPER. Commercial paper in which each of the Funds, other
than CGSMMF, may invest consists of unsecured promissory notes issued by
corporations. Except as noted below with respect to variable amount master
demand notes, issues of commercial paper normally have maturities of less than
nine months and fixed rates of return.
Such Funds will invest only in commercial paper which is rated at the
time of purchase within the two highest rating groups assigned by one or more
appropriate NRSROs, or if unrated, which the Adviser determines to be of
comparable quality. For a description of the rating symbols of the NRSROs, see
the Appendix.
U.S. GOVERNMENT OBLIGATIONS. CGOF and CGSMMF invest in, and TCF,
CTEMMF, CBF and CAGF may invest in, obligations issued or guaranteed by the
U.S. Government or its agencies or instrumentalities. Obligations of certain
agencies and instrumentalities of the U.S. Government are supported by the full
faith and credit of the U.S. Treasury; others are supported by the right of the
issuer to borrow from the Treasury; others are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; and
still others are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. Government would provide financial support
to U.S. Government-sponsored agencies or instrumentalities if it is not
obligated to do so by law.
MUNICIPAL SECURITIES. Municipal Securities which may be purchased by
CTEMMF currently can be divided into two basic groups: Municipal Notes and
Municipal Bonds.
Municipal Notes generally provide capital for short-term needs and
have maturities of one year or less. They include:
1. PROJECT NOTES. Project notes are sold through the
Department of Housing and Urban Development to raise funds for
federally sponsored urban renewal, neighborhood development and
housing programs. In low-income housing, proceeds from project notes
are chiefly used for construction financing prior to permanent
financing. In urban renewal the funds have generally been used for
land acquisition and site improvements. (No new urban renewal
projects are currently being undertaken as that program has been
superseded by the Community Block Grant Program contained in the
Housing and Community Development Act of 1974.) Project notes are
issued by public bodies created under the laws of one of the states,
territories or U.S. possessions and are referred to as Local Issuing
Agencies. Project Notes generally range in maturity
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from three months to one year. While they are the primary obligations
of the public housing agencies or the local urban renewal agencies
which have issued them, they are also secured by the full faith and
credit of the U.S. Government. Payment by the United States pursuant
to its full faith and credit obligation does not impair the tax-exempt
character of the income from project notes.
2. TAX ANTICIPATION NOTES. Tax anticipation notes are
issued by state and local governments in anticipation of collection of
taxes to finance the current operations of such governments. The
notes are generally payable only from tax collections and often only
from the proceeds of the specific tax levy whose collection they
anticipate.
3. REVENUE ANTICIPATION NOTES. Revenue anticipation
notes are issued by governmental entities in anticipation of revenues
to be received later in the then current fiscal year.
4. BOND ANTICIPATION NOTES. Bond anticipation notes are
issued in anticipation of a later issuance of bonds and are usually
payable from the proceeds of the sale of the bonds anticipated or of
renewal notes.
5. CONSTRUCTION LOAN NOTES. Construction loan notes,
issued to provide construction financing for specific projects, are
often redeemed after the projects are completed and accepted with
funds obtained from the Federal Housing Administration under "Fannie
Mae" (Federal National Mortgage Association) or "Ginnie Mae"
(Government National Mortgage Association).
6. TAX-EXEMPT COMMERCIAL PAPER. Tax-exempt commercial
paper is issued by state and local governments and agencies thereof to
finance seasonal working capital needs or in anticipation of longer
term financing. The stated maturity is 365 days or less.
Municipal Bonds are usually issued to obtain funds for various public
purposes, to refund outstanding obligations, to meet general operating expenses
or to obtain funds to lend to other public institutions and facilities. They
are generally classified as either "general obligation" or "revenue" bonds and
frequently have maturities in excess of one year at the time of issuance,
although issues having variable interest rates with demand features may permit
CTEMMF to treat them as having maturities of less than 397 days. See
"ADDITIONAL PURCHASE AND REDEMPTION INFORMATION -- Determination of Net Asset
Value" herein and "HOW IS NET ASSET VALUE CALCULATED?" in CTEMMF's Prospectus.
1. GENERAL OBLIGATION BONDS. General obligation bonds
are issued by states, counties, regional districts, cities,
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towns and school districts for a variety of purposes including mass
transportation, highway, bridge, school, road, and water and sewer
system construction, repair or improvement. Payment of these bonds is
secured by a pledge of the issuer's full faith and credit and taxing
(usually property tax) power.
2. REVENUE BONDS. Revenue bonds are payable solely from
the revenues generated from the operations of the facility or
facilities being financed or from other non-tax sources. These bonds
are often secured by debt service reserve funds, rent subsidies and/or
mortgage collateral to finance the construction of housing, highways,
bridges, tunnels, hospitals, university and college buildings, port
and airport facilities, and electric, water, gas and sewer systems.
3. INDUSTRIAL DEVELOPMENT REVENUE AND PRIVATE ACTIVITY
BONDS. Industrial development revenue bonds and private activity
bonds are usually issued by local government bodies or their
authorities to provide funding for industrial facilities, privately
operated housing, health care facilities, airports, docks and mass
commuting facilities, certain water and sewage facilities, qualified
hazardous waste facilities and high speed innercity rail facilities.
Under prior law, these bonds also were issued to finance commercial
facilities, sports facilities, convention and trade show facilities
and pollution control facilities. Payment of principal and interest
on such bonds is not secured by the taxing power of the governmental
body. Rather, payment is dependent solely upon the ability of the
users of the facilities financed by the bonds to meet their financial
obligations and the pledge, if any, of the real and personal property
financed by such bonds as security for payment.
Legislation to restrict or eliminate the federal income tax exemption
for interest on certain Municipal Securities has been enacted periodically in
the recent past and additional legislation may be enacted in the future. This
legislation may adversely affect the availability of Municipal Securities for
CTEMMF's portfolio. If any such legislation has a materially adverse effect on
CTEMMF's ability to achieve its investment objectives, CTEMMF will re-evaluate
its investment objectives and submit to its shareholders for approval necessary
changes in the objectives and policies of CTEMMF.
The Municipal Securities described above represent those which CTEMMF
currently expects to purchase. However, several new types of municipal bonds
and notes, particularly those with shorter maturities, have been introduced in
recent years and the Adviser believes that other types of municipal bonds and
notes may be offered in the future. Therefore, in order to preserve maximum
flexibility in seeking to attain its investment objectives, CTEMMF
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has determined not to limit its purchase to the types of Municipal Securities
described herein, although it will purchase only municipal obligations which
have the credit characteristics described herein. In addition, CTEMMF may not
purchase any municipal bonds or notes having characteristics or terms that are
inconsistent with the investment objectives or investment policies of CTEMMF.
Subsequent to CTEMMF's purchase of a security, it may be assigned a
lower rating or cease to be rated. In such an event the Adviser is required to
promptly reassess the credit quality of such security. If such security no
longer presents minimal credit risks or if the security is deemed to be an
"Unrated Security" or a "Second-Tier Security," within the meaning of Rule 2a-7
of the 1940 Act, and receives a rating by any NRSRO below the second highest
rating category, the Adviser is generally required to sell such security within
five business days of becoming aware of such an event.
VARIABLE RATE DEMAND MUNICIPAL SECURITIES. Variable rate demand
Municipal Securities are tax-exempt obligations that provide for a periodic
adjustment in the interest rate paid on the securities and permit the holder to
demand payment of the unpaid principal balance plus accrued interest upon a
specified number of days' notice either from the issuer or by drawing on a bank
letter of credit or comparable guarantee issued with respect to such security.
The issuer of a variable rate demand security may have a corresponding right to
prepay in its discretion the outstanding principal of the instrument plus
accrued interest upon notice comparable to that required for the holder to
demand payment.
The terms of the securities must provide that interest rates are
adjustable at intervals ranging from weekly up to semi-annually. The
adjustments are based upon the prime rate of a bank or other appropriate
interest rate adjustment index as provided in the respective instruments. The
variable rate demand securities purchased by CTEMMF are subject to the quality
characteristics for Municipal Securities described above. While these
securities are expected to have maturities in excess of one year, the Adviser
will determine at least monthly that such securities are of high quality. The
Trustees have instructed the Adviser to exercise its right to demand payment of
principal and accrued interest thereon, if a variable rate demand security held
by CTEMMF no longer meets the quality standards of CTEMMF, unless, of course,
the security can be sold for a greater amount in the market.
The principal and accrued interest payable to CTEMMF on demand will be
supported by an irrevocable letter of credit or comparable guarantee of a
financial institution (generally a commercial bank) whose short-term taxable
debt meets the quality criteria for investment by CTEMMF in Municipal
Securities, except in cases where the security itself meets the credit criteria
of CTEMMF without
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such letter of credit or comparable guarantee. Thus, although a variable rate
demand security may be unrated, CTEMMF will have at all times an alternate high
quality credit source to draw upon for payment with respect to such security.
The variable rate demand securities which CTEMMF may purchase include
participation interests in variable rate securities. Such participation
interests will have, as part of the participation agreement between CTEMMF and
the selling financial institution, a demand feature which permits CTEMMF to
demand payment from the seller of the principal amount of CTEMMF's
participation plus accrued interest thereon. This demand feature always will
be supported by a letter of credit or comparable guarantee provided by the
selling financial institution. Such financial institution will retain a
service and a letter of credit fee, and a fee for issuing commitments to
purchase on demand, in an amount equal to the excess of the interest paid on
the variable rate security in which CTEMMF has a participation interest over
the negotiated yield at which the participation interest was purchased by
CTEMMF. Accordingly, CTEMMF will purchase such participation interests only
when the yield to CTEMMF, net of such fees, is equal to or greater than the
yield then available on other variable rate demand securities or short-term
fixed rate tax exempt securities of comparable quality and where the fees are
reasonable in relation to the services provided by the financial institution
and the security and liquidity provided by the letter of credit or guarantee.
CONCENTRATION. CTEMMF may invest more than 25% of its net assets in
(i) Municipal Securities whose issuers are in the same state, (ii) Municipal
Securities, the interest upon which is paid solely from revenues of similar
projects and (iii) industrial development and pollution control revenue bonds
which are not variable rate demand Municipal Securities, i.e., Municipal
Securities which are related in such a way that an economic, business or
political development or change affecting one such Municipal Security would
also affect the other Municipal Securities; for example, Municipal Securities
the interest on which is paid from revenues of similar type projects or
Municipal Securities whose issuers are located in the same state. Provided,
however, that prior to CTEMMF's so investing its net assets CTEMMF will amend
its Prospectus to disclose such practice. The District of Columbia, each
state, each of its political subdivisions, agencies, instrumentalities and
authorities, and each multi-state agency of which a state is a member, is a
separate "issuer" as that term is used in this Statement of Additional
Information and in CTEMMF's investment restrictions contained in its
Prospectus. The identification of the "issuer" depends on the terms and
conditions of the security. When the assets and revenues of an agency,
authority, instrumentality or other political subdivision are separate from
those of the government creating the subdivision and the security is supported
only by the assets and revenues of the subdivision, such subdivision would be
deemed to be the sole
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"issuer." Similarly, in the case of an industrial development or pollution
control revenue bond, if that bond is supported only by the assets and revenues
of the nongovernmental user, then such nongovernmental user would be deemed to
be the sole "issuer." If, however, in either case, the creating government or
some other entity guarantees a security, such a guarantee would be considered a
separate security and must be separately valued.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. CGOF, CGSMMF, CTEMMF and
CBF may each purchase securities on a "when-issued" or "delayed-delivery"
basis (I.E., for delivery beyond the normal settlement date at a stated price
and yield). When a Fund agrees to purchase securities on a "when-issued" or
"delayed-delivery" basis, such Fund's custodian will set aside in a separate
account cash or liquid portfolio securities equal to the amount of the
commitment. Normally, the custodian will set aside portfolio securities to
satisfy the purchase commitment, and in such a case, the Fund may be required
subsequently to place additional assets in the separate account in order to
assure that the value of the account remains equal to the amount of such Fund's
commitment. It may be expected that a Fund's net assets will fluctuate to a
greater degree when it sets aside portfolio securities to cover such purchase
commitments than when it sets aside cash. In addition, because a Fund will set
aside cash or liquid portfolio securities to satisfy its purchase commitments
in the manner described above, such Fund's liquidity and the ability of the
Adviser to manage it might be affected in the event its commitments to purchase
"when-issued" or "delayed-delivery" securities ever exceeded 25% of the value
of its assets. Under normal market conditions, however, neither CGOF's,
CGSMMF's, CTEMMF's nor CBF's commitments to purchase "when-issued" or
"delayed-delivery" securities will exceed 25% of the value of its assets.
When such a Fund engages in "when-issued" or "delayed-delivery"
transactions, it relies on the seller to consummate the trade. Failure of the
seller to do so may result in that Fund's incurring a loss or missing the
opportunity to obtain a price considered to be advantageous. CGOF, CGSMMF,
CTEMMF and CBF will engage in "when-issued" or "delayed-delivery" transactions
only for the purpose of acquiring portfolio securities consistent with such
Fund's investment objectives and policies and not for investment leverage.
MORTGAGE-RELATED SECURITIES. CBF may, consistent with its investment
objectives and policies, invest in mortgage-related securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities. CBF
may, in addition, invest in mortgage-related securities issued by
nongovernmental entities; provided, however, that to the extent CBF purchases
mortgage-related securities from such issuers which may, solely for purposes of
Section 12 of the 1940 Act, be deemed to be investment companies, CBF's
investment in such securities will be subject to
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the limitations on its investment in investment company securities set forth
below in its investment restrictions.
Mortgage-related securities, for purposes of CBF's Prospectus and this
Statement of Additional Information, represent pools of mortgage loans
assembled for sale to investors by various governmental agencies such as the
Government National Mortgage Association and government- related organizations
such as the Federal National Mortgage Association and the Federal Home Loan
Mortgage Corporation. Although certain mortgage-related securities are
guaranteed by a third party or otherwise similarly secured, the market value of
the security, which may fluctuate, is not so secured. If CBF purchases a
mortgage-related security at a premium, that portion may be lost if there is a
decline in the market value of the security whether resulting from changes in
interest rates or prepayments in the underlying mortgage collateral. As with
other interest-bearing securities, the prices of such securities are inversely
affected by changes in interest rates. However, though the value of a
mortgage-related security may decline when interest rates rise, the converse is
not necessarily true, since in periods of declining interest rates the
mortgages underlying the securities are prone to prepayment, thereby shortening
the average life of the security and shortening the period of time over which
income at the higher rate is received. Conversely, when interest rates are
rising, the rate of prepayment tends to decrease, thereby lengthening the
period of time over which income at the lower rate is received. For these and
other reasons, a mortgage-related security's average maturity may be shortened
or lengthened as a result of interest rate fluctuations and, therefore, it is
not possible to predict accurately the security's return to CBF. In addition,
regular payments received in respect of mortgage-related securities include
both interest and principal. No assurance can be given as to the return CBF
will receive when these amounts are reinvested.
CBF may invest in mortgage-related securities which are collateralized
mortgage obligations structured on pools of mortgage pass-through certificates
or mortgage loans. Collateralized mortgage obligations will be purchased only
if rated in the four highest bond rating categories assigned by an appropriate
NRSRO or, if unrated, which the Adviser deems to present attractive
opportunities and are of comparable quality.
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-related securities
and among the securities that they issue. Mortgage-related securities issued
by the Government National Mortgage Association ("GNMA") include GNMA Mortgage
Pass-Through Certificates (also known as "Ginnie Maes") which are guaranteed as
to the timely payment of principal and interest by GNMA and such guarantee is
backed by the full faith and credit of the United States. GNMA is a
wholly-owned U.S. Government corporation within
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the Department of Housing and Urban Development. GNMA certificates also are
supported by the authority of GNMA to borrow funds from the U.S. Treasury to
make payments under its guarantee. Mortgage-related securities issued by the
Federal National Mortgage Association ("FNMA") include FNMA Guaranteed Mortgage
Pass-Through Certificates (also known as "Fannie Maes") which are solely the
obligations of FNMA and are not backed by or entitled to the full faith and
credit of the United States. FNMA is a government-sponsored organization owned
entirely by private stockholders. Fannie Maes are guaranteed as to timely
payment of the principal and interest by FNMA. Mortgage-related securities
issued by the Federal Home Loan Mortgage Corporation ("FHLMC") include FHLMC
Mortgage Participation Certificates (also known as "Freddie Macs" or "PCs").
FHLMC is a corporate instrumentality of the United States, created pursuant to
an Act of Congress, which is owned entirely by Federal Home Loan Banks.
Freddie Macs are not guaranteed by the United States or by any Federal Home
Loan Banks and do not constitute a debt or obligation of the United States or
of any Federal Home Loan Bank. Freddie Macs entitle the holder to timely
payment of interest, which is guaranteed by FHLMC. FHLMC guarantees either
ultimate collection or timely payment of all principal payments on the
underlying mortgage loans. When FHLMC does not guarantee timely payment of
principal, FHLMC may remit the amount due on account of its guarantee of
ultimate payment of principal at any time after default on an underlying
mortgage, but in no event later than one year after it becomes payable.
OTHER ASSET-BACKED SECURITIES. CBF may also invest in interests in
pools of receivables, such as motor vehicle installment purchase obligations
(known as Certificates of Automobile Receivables or CARS) and credit card
receivables (known as Certificates of Amortizing Revolving Debts or CARDS).
Such securities are generally issued as pass-through certificates, which
represent undivided fractional ownership interests in the underlying pools of
assets. Such securities may also be debt instruments which are also known as
collateralized obligations and are generally issued as the debt of a special
purpose entity organized solely for the purpose of owning such assets and
issuing such debt.
Such securities are not issued or guaranteed by the U.S. 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 time period by a letter of credit issued by a financial institution
(such as a bank or insurance company) unaffiliated with the issuers of such
securities. Non-mortgage backed securities will be purchased by CBF only when
rated in one of the four highest rating categories by an appropriate NRSRO at
the time of purchase.
The development of these asset-backed securities is at an early state
compared to mortgage backed securities. While the
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market for asset-backed securities is becoming increasingly liquid, the market
for mortgage backed securities issued by certain private organization and
non-mortgage backed securities is not as well developed. The Adviser will
limit purchases of asset-backed securities to securities that are deemed to be
readily marketable by the Adviser at the time of purchase.
Asset-backed securities held by CBF arise through the grouping by
governmental, government-related and private organizations of loans,
receivables and other assets originated by various lenders. Interests in pools
of these assets differ from other forms of debt securities, which normally
provide for periodic payment of interest in fixed amounts with principal paid
at maturity or specified call dates. Instead, asset-backed securities provide
periodic payments which generally consist of both interest and principal
payments.
The estimated life of an asset-backed security may vary with the
prepayment experience with respect to the underlying debt instruments. The
rate of such prepayments, and hence the life of an asset-backed security, will
be a function of current market interest rates and other economic and
demographic factors. Since prepayment experience can vary, asset-backed
securities may be a less effective vehicle for locking in high long-term
yields.
SECURITIES OF OTHER INVESTMENT COMPANIES. Each Fund may invest in
securities issued by other investment companies. Each Fund currently intends
to limit its investments so that, as determined immediately after a securities
purchase is made: (a) not more than 5% of the value of its total assets will
be invested in the securities of any one investment company; (b) not more than
10% of the value of its total assets will be invested in the aggregate in
securities of investment companies as a group; and (c) not more than 3% of the
outstanding voting stock of any one investment company will be owned by such
Fund. As a shareholder of another investment company, a Fund would bear, along
with other shareholders, its pro rata portion of that company's expenses,
including advisory fees. These expenses would be in addition to the advisory
and other expenses that such Fund bears directly in connection with its own
operations. Investment companies in which TCF, CGOF, CBF and CAGF may invest
may also impose a sales or distribution charge in connection with the purchase
or redemption of their shares and other types of commissions or charges. Such
charges will be payable by such Fund and, therefore, will be borne directly by
shareholders.
INCOME PARTICIPATION LOANS. CBF may make or acquire participation in
privately negotiated loans to borrowers. Frequently, such loans have variable
interest rates and may be backed by a bank letter of credit; in other cases
they may be unsecured. Such transactions may provide an opportunity to achieve
higher yields than those that may be available from other securities offered
and sold to the general public.
B-10
<PAGE> 13
Privately arranged loans, however, will generally not be rated by a
credit rating agency and will normally be liquid, if at all, only through a
provision requiring repayment following demand by the lender. Such loans made
by CBF may have a demand provision permitting such Fund to require repayment
within seven days. Participation in such loans, however, may not have such a
demand provision and may not be otherwise marketable. To the extent these
securities are not readily marketable, they will be subject to CBF's 15%
limitation on investments in illiquid securities. Recovery of an investment in
any such loan that is illiquid and payable on demand will depend on the ability
of the borrower to meet an obligation for full repayment of principal and
payment of accrued interest within the demand period, normally seven days or
less (unless such Fund determines that a particular loan issue, unlike most
such loans, has a readily available market). As it deems appropriate, the
Group's Board of Trustees will establish procedures to monitor the credit
standing of each such borrower, including its ability to honor contractual
payment obligations.
CBF will purchase income participation loans only if such instruments
are, in the opinion of the Adviser, of comparable quality to securities rated
within the four highest rating groups assigned by an applicable NRSRO.
REPURCHASE AGREEMENTS. Securities held by each of the Funds may be
subject to repurchase agreements. Under the terms of a repurchase agreement, a
Fund would acquire securities from member banks of the Federal Reserve System
and registered broker-dealers which the Adviser deems creditworthy under
guidelines approved by the Group's Board of Trustees, subject to the seller's
agreement to repurchase such securities at a mutually agreed-upon date and
price. The repurchase price would generally equal the price paid by the Fund
plus interest negotiated on the basis of current short-term rates, which may be
more or less than the rate on the underlying portfolio securities. The seller
under a repurchase agreement will be required to maintain at all times the
value of collateral held pursuant to the agreement at not less than the
repurchase price (including accrued interest). In the event of a bankruptcy or
other default of a seller of a repurchase agreement, the Fund could experience
both delays in liquidating the underlying securities and losses, including:
(a) possible decline in the value of the underlying securities during the
period while the Fund seeks to enforce its rights thereto; (b) possible
subnormal levels of income and lack of access to income during this period; and
(c) expenses of enforcing its rights. Additionally, there is no controlling
legal precedent confirming that the Fund would be entitled, as against a claim
by such seller or its receiver or trustee in bankruptcy, to retain the
underlying securities, although the Board of Trustees of the Group believes
that, under the regular procedures normally in effect for custody of the Fund's
securities subject to repurchase agreements and under federal laws, a court of
competent jurisdiction would rule in favor of the Group
B-11
<PAGE> 14
if presented with the question. Securities subject to repurchase agreements
will be held by the Group's custodian or another qualified custodian or in the
Federal Reserve/Treasury book-entry system. Repurchase agreements are
considered to be loans by a Fund under the 1940 Act.
REVERSE REPURCHASE AGREEMENTS. CTEMMF is permitted to enter into
reverse repurchase agreements for temporary or emergency non-investment
purposes in an amount not exceeding (together with other borrowings) 5% of the
value of CTEMMF's assets at the time of entering into the agreement. CTEMMF,
however, has not entered into such agreements in the past and does not intend
to enter into such agreements in the foreseeable future.
FOREIGN INVESTMENT. Investment in foreign securities is subject to
special investment risks that differ in some respects from those related to
investments in securities of U.S. domestic issuers. Since investments in the
securities of foreign issuers may involve currencies of foreign countries, a
Fund may be affected favorably or unfavorably by changes in currency rates and
in exchange control regulations and may incur costs in connection with
conversions between various currencies.
Since foreign companies are not subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to U.S. companies, there may be less publicly
available information about a foreign company than about a U.S. company.
Securities of many foreign companies are less liquid and more volatile than
securities of comparable U.S. companies.
In addition, with respect to certain foreign countries, there is the
possibility of expropriation or confiscatory taxation, political or social
instability, or diplomatic developments which could affect a Fund's investments
in those countries. Moreover, individual foreign economies may differ
favorably or unfavorably from the U.S. economy in such respects as growth of
gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position.
TCF, CBF and CAGF will acquire such securities only when the Adviser
believes the risks associated with such investments are minimal.
OPTIONS TRADING. Each of TCF, CGOF, CBF and CAGF may purchase put and
call options. A call option gives the purchaser of the option the right to
buy, and a writer has the obligation to sell, the underlying security at the
stated exercise price at any time prior to the expiration of the option,
regardless of the market price of the security. The premium paid to the writer
is consideration for undertaking the obligations under the option contract. A
put option gives the purchaser the right to sell the
B-12
<PAGE> 15
underlying security at the stated exercise price at any time prior to the
expiration date of the option, regardless of the market price of the security.
Put and call options purchased by such Funds will be valued at the last sale
price, or in the absence of such a price, at the mean between bid and asked
price.
When a Fund writes an option, an amount equal to the net premium (the
premium less the commission) received by the Fund is included in the liability
section of the Fund's statement of assets and liabilities as a deferred credit.
The amount of the deferred credit will be subsequently marked-to-market to
reflect the current value of the option written. The current value of the
traded option is the last sale price or, in the absence of a sale, the average
of the closing bid and asked prices. If an option expires on the stipulated
expiration date or if the Fund enters into a closing purchase transaction, it
will realize a gain (or a loss if the cost of a closing purchase transaction
exceeds the net premium received when the option is sold) and the deferred
credit related to such option will be eliminated. If an option is exercised,
the Fund may deliver the underlying security in the open market. In either
event, the proceeds of the sale will be increased by the net premium originally
received and the Fund will realize a gain or loss.
TCF and CGOF may also purchase or sell index options. Index options
(or options on securities indices) are similar in many respects to options on
securities except that an index option gives the holder the right to receive,
upon exercise, cash instead of securities, if the closing level of the
securities index upon which the option is based is greater than, in the case of
a call, or less than, in the case of a put, the exercise price of the option.
MEDIUM-GRADE DEBT SECURITIES. As stated in the Prospectus for CBF,
CBF may invest in securities within the four highest rating groups assigned by
an appropriate NRSRO (e.g. S&P and Moody's), including securities rated BBB by
S&P or Baa by Moody's or, if unrated, judged by the Adviser to be of comparable
quality ("Medium-Grade Securities").
As with other fixed-income securities, Medium-Grade Securities are
subject to credit risk and market risk. Market risk relates to changes in a
security's value as a result of changes in interest rates. Credit risk relates
to the ability of the issuer to make payments of principal and interest.
Medium-Grade Securities are considered by Moody's to have speculative
characteristics.
Medium-Grade Securities are generally subject to greater credit risk
than comparable higher-rated securities because issuers are more vulnerable to
economic downturns, higher interest rates or adverse issuer-specific
developments. In addition, the prices of Medium-Grade Securities are generally
subject to greater market risk and therefore react more sharply to changes in
interest rates.
B-13
<PAGE> 16
The value and liquidity of Medium-Grade Securities may be diminished by adverse
publicity and investor perceptions.
Because certain Medium-Grade Securities are traded only in markets
where the number of potential purchasers and sellers, if any, is limited, the
ability of CBF to sell such securities at their fair value either to meet
redemption requests or to respond to changes in the financial markets may be
limited.
Particular types of Medium-Grade Securities may present special
concerns. The prices of payment-in-kind or zero-coupon securities may react
more strongly to changes in interest rates than the prices of other
Medium-Grade Securities. Some Medium-Grade Securities in which CBF may invest
may be subject to redemption or call provisions that may limit increases in
market value that might otherwise result from lower interest rates while
increasing the risk that CBF may be required to reinvest redemption or call
proceeds during a period of relatively low interest rates.
The credit ratings issued by NRSROs are subject to various
limitations. For example, while such ratings evaluate credit risk, they
ordinarily do not evaluate the market risk of Medium-Grade Securities. In
certain circumstances, the ratings may not reflect in a timely fashion adverse
developments affecting an issuer. For these reasons, the Adviser conducts its
own independent credit analysis of Medium-Grade Securities.
FUTURES CONTRACTS. As discussed in the Prospectuses of the TCF, CGOF,
CBF and CAGF, each of those Funds may enter into futures contracts. This
investment technique is designed primarily to hedge against anticipated future
changes in market conditions which otherwise might adversely affect the value
of securities which a Fund holds or intends to purchase. For example, when
interest rates are expected to rise or market values of portfolio securities
are expected to fall, a Fund can seek through the sale of futures contracts to
offset a decline in the value of its portfolio securities. When interest rates
are expected to fall or market values are expected to rise, a Fund, through the
purchase of such contracts, can attempt to secure better rates or prices for
the Fund than might later be available in the market when it effects
anticipated purchases.
The acquisition of put and call options on futures contracts will,
respectively, give a Fund the right (but not the obligation), for a specified
price, to sell or to purchase the underlying futures contract, upon exercise of
the option, at any time during the option period.
Futures transactions involve brokerage costs and require a Fund to
segregate liquid assets, such as cash, U.S. Government securities or other
liquid high grade debt obligations, to cover its performance under such
contracts. A Fund may lose the expected
B-14
<PAGE> 17
benefit of futures transactions if interest rates, securities prices or foreign
exchange rates move in an unanticipated manner. Such unanticipated changes may
also result in poorer overall performance than if the Fund had not entered into
any futures transactions. In addition, the value of a Fund's futures positions
may not prove to be perfectly or even highly correlated with the value of its
portfolio securities, limiting the Fund's ability to hedge effectively against
interest rate and/or market risk and giving rise to additional risks. There is
no assurance of liquidity in the secondary market for purposes of closing out
futures positions.
REGULATORY RESTRICTIONS. To the extent required to comply with
Securities and Exchange Commission Release No. IC-10666, when purchasing a
futures contract or writing a put option, a Fund will maintain in a segregated
account cash or liquid high-grade securities equal to the value of such
contracts.
To the extent required to comply with Commodity Futures Trading
Commission Regulation 4.5 and thereby avoid being classified as a "commodity
pool operator," a Fund will not enter into a futures contract or purchase an
option thereon if immediately thereafter the initial margin deposits for
futures contracts held by such Fund plus premiums paid by it for open options
on futures would exceed 5% of such Fund's total assets. A Fund will not engage
in transactions in financial futures contracts or options thereon for
speculation, but only to attempt to hedge against changes in market conditions
affecting the values of securities which such Fund holds or intends to
purchase. When futures contracts or options thereon are purchased to protect
against a price increase on securities intended to be purchased later, it is
anticipated that at least 25% of such intended purchases will be completed.
When other futures contracts or options thereon are purchased, the underlying
value of such contracts will at all times not exceed the sum of: (1) accrued
profit on such contracts held by the broker; (2) cash or high quality money
market instruments set aside in an identifiable manner; and (3) cash proceeds
from investments due in 30 days.
INVESTMENT RESTRICTIONS
Each Fund's investment objectives are fundamental policies and as such
may not be changed without a vote of the holders of a majority of that Fund's
outstanding Shares. In addition, the following investment restrictions of the
Funds may be changed only by a vote of a majority of the outstanding Shares of
a Fund (as defined under "ADDITIONAL INFORMATION - Vote of a Majority of the
Outstanding Shares" in this Statement of Additional Information).
B-15
<PAGE> 18
In addition to the investment restrictions set forth in their
respective Prospectuses, each of TCF, CGOF, CBF and CAGF may not:
1. Purchase securities on margin, except for use of short-term
credit necessary for clearance of purchases of portfolio securities and except
as may be necessary to make margin payments in connection with derivative
securities transactions;
2. Underwrite the securities issued by other persons, except to
the extent that the Fund may be deemed to be an underwriter under certain
securities laws in the disposition of "restricted securities";
3. Purchase or sell real estate (although investments in
marketable securities of companies engaged in such activities and securities
secured by real estate or interests therein are not prohibited by this
restriction).
4. Purchase or sell commodities or commodities contracts, except
to the extent disclosed in the current Prospectus of the Fund.
In addition, CGOF may not:
1. Purchase participations or other direct interests in oil, gas,
or other mineral exploration or development programs; or
2. Mortgage, pledge, hypothecate or, in any other manner,
transfer as security for indebtedness any security owned by a Fund, except as
may be necessary in connection with permissible borrowings, in which event such
mortgaging, pledging or hypothecating may not exceed 5% of the Fund's assets,
valued at cost and except that the deposit of assets in escrow in connection
with writing covered call options will not be deemed to be the mortgage,
pledge, hypothecation or transfer of assets as security described above.
CGSMMF will not:
1. Pledge, mortgage or hypothecate its assets, except that to
secure borrowings permitted for temporary or emergency non-investment
purposes, the Trust may pledge securities having a market value at the time of
pledge not exceeding 15% of its total assets (so long as certain state law
restrictions are applicable, the market value of securities subject to any such
pledge will not exceed 10% of the market value of the Trust's total assets);
2. Underwrite the securities issued by other persons, except to
the extent that the Fund may be deemed to be an underwriter under certain
securities laws in the disposition of "restricted securities";
B-16
<PAGE> 19
3. Purchase or sell real estate or real estate mortgage loans;
4. Purchase commodities or commodities contracts;
5. Purchase participations or other direct interests in oil, gas
or other mineral exploration or development programs; or
6. Purchase securities on margin, except for use of short-term
credit necessary for clearance of purchases of portfolio securities.
CTEMMF will not:
1. Pledge, mortgage or hypothecate its assets, except that to
secure permitted borrowings it may pledge securities having a market value at
the time of pledge not exceeding 15% of the Trust's total assets; provided,
however, so long as certain state law restrictions are applicable, the market
value of securities subject to any such pledge will not exceed 10% of the
market value of the Trust's total assets;
2. Underwrite the securities issued by other persons, except to
the extent that the Fund may be deemed to be an underwriter under certain
securities laws in the disposition of "restricted securities";
3. Purchase or sell real estate, although the Trust may invest in
Municipal Securities or temporary investments secured by interests in real
estate;
4. Purchase or sell commodities or commodity contracts;
5. Purchase securities on margin, except for use of short-term
credit necessary for clearance of purchases of portfolio securities;
6. Write, purchase or sell put or call options, except to the
extent that securities subject to a demand obligation or stand-by commitment
may be acquired;
7. Purchase participations or other direct interests in oil, gas,
or other mineral exploration or development programs; or
8. Purchase securities which are not Municipal Securities and the
income from which is subject to federal income tax, if such purchase would
cause more than 20% of the Trust's total assets to be invested in such
securities.
The following additional investment restrictions may be changed
without the majority vote of the outstanding Shares of any of the Funds. Each
Fund may not:
B-17
<PAGE> 20
1. Purchase securities of other investment companies, except (a)
in connection with a merger, consolidation, acquisition or reorganization, and
(b) to the extent permitted by the 1940 Act or pursuant to any exemptions
therefrom;
2. Engage in any short sales;
3. Invest more than 15% of the Fund's total assets in securities
which are restricted as to disposition; or
4. Purchase or retain securities of any issuer if the officers
and trustees of the Group and the officers and directors of its investment
adviser, who each owns beneficially more than 1/2 of 1% of the outstanding
securities of such issuer, together own beneficially more than 5% of such
securities.
In addition, each of TCF, CBF and CAGF has the following
nonfundamental investment restrictions: each such Fund may not (1) mortgage or
hypothecate the Fund's assets in excess of one-third of the Fund's total
assets, (2) purchase participations or direct interests in oil, gas or other
mineral exploration or development programs (although investments by the Fund
in marketable securities of companies engaged in such activities are not
prohibited by this restriction), or (3) invest more than 10% of the Fund's
total assets in securities of issuers which, together with any predecessors,
have a record of less than three years' continuous operation.
If a percentage restriction or requirement set forth above is met at
the time of investment, a later increase or decrease in such percentage
resulting from a change in net asset value will not be considered a violation
of the policy. However, should a change in net asset value or other external
events cause a Fund's investments in illiquid securities to exceed the
limitation in its non-fundamental policy as set forth in its Prospectus, the
Fund will act to cause the aggregate amount of illiquid securities to come
within such limit as soon as reasonably practicable. In such an event,
however, the Fund would not be required to liquidate any portfolio securities
where the Fund would suffer a loss on the sale of such securities.
The Group has represented to the California Department of Corporations
on behalf of each of the Funds that, in order to comply with applicable
regulations, each Fund may acquire or retain securities of other open-end
management investment companies only if such investments are made in open-end
management investment companies sold with no sales commission and the Fund's
investment adviser waives its management fee with respect to such investments.
The Group intends to comply with this undertaking with respect to a Fund for so
long as such Fund has its Shares registered for sale in the State of California
or such representation is required by the California Department of
Corporations.
B-18
<PAGE> 21
The Group has represented to the Texas State Securities Board on behalf
of each of TCF, CBF and CAGF that each such Fund will limit its investments in
warrants, valued at the lower of cost or market, to no more than 5% of the
value of its net assets. Included within such amount (but not in excess of 2%
of the value of such Fund's net assets) are warrants which are not listed on
the New York or American Stock Exchanges. For purposes of this limitation,
warrants acquired in units or attached to other securities will be deemed to be
without value. The Group has also represented to the Texas State Securities
Board on behalf of each of CBF and CAGF that neither Fund may purchase or sell
interests in real estate limited partnerships, although investments in readily
marketable interests in real estate investment trusts or readily marketable
securities of companies or limited partnerships which invest in real estate are
not prohibited.
The Group intends to comply with these representations on behalf of a
Fund for so long as such Fund has its Shares registered for sale in the state
to which such representations were made.
PORTFOLIO TURNOVER
The portfolio turnover rate for each Fund is calculated by dividing
the lesser of that Fund's purchases or sales of portfolio securities for the
year by the monthly average value of the portfolio securities. The Commission
requires that the calculation exclude all securities whose remaining maturities
at the time of acquisition were one year or less.
Because CGSMMF and CTEMMF intend to invest entirely in securities with
maturities of less than one year and because the Commission requires such
securities to be excluded from the calculation of portfolio turnover rate, the
portfolio turnover with respect to each of CGSMMF and CTEMMF is expected to be
zero percent for regulatory purposes. For each of the other Funds, the
portfolio turnover rates for the fiscal years ended September 30, 1995 and 1994
were as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
Fund 1995 1994
---- ---- ----
<S> <C> <C>
TCF(1) 19.78% 23.20%
CGOF(1) 36.71% 21.95%
CBF 37.62% 59.09%
CAGF 80.35% 95.70%
<FN>
_________________________________
1 Includes periods prior to the effective date of the Reorganization.
</TABLE>
B-19
<PAGE> 22
For such Funds, the portfolio turnover rate may vary greatly from year
to year as well as within a particular year, and may also be affected by cash
requirements for redemptions of Shares. Portfolio turnover will not be a
limiting factor in making investment decisions.
MANAGEMENT OF THE GROUP
The trustees and officers of the Group, together with their addresses
and principal business occupations and other affiliations during the last five
years, are shown below. Each person named as a trustee also served as a
director of TCFI and as a trustee of CGST, CTEMT and Cardinal Government
Obligations Fund, CGOF's predecessor, prior to the Reorganization. Each
trustee who is an "interested person" of the Group, as that term is defined in
the 1940 Act, is indicated by an asterisk.
<TABLE>
<CAPTION>
Name, Business Position(s) Held Principal Occupation(s)
Address and Age with the Group During Past 5 Years
--------------- ---------------- -----------------------
<S> <C> <C>
*H. Keith Allen Chairman and Trustee, Chief Operating Officer, Secretary,
155 East Broad Street Member of Executive, Treasurer and a Director of The
Columbus, Ohio 43215 Nominating and Investment Ohio Company (investment banking);
Age: 54 Committees formerly Senior Executive Vice
President of The Ohio Company.
Gordon B. Carson Trustee, Member of Principal, Whitfield Robert
5413 Gardenbrook Drive Executive Committee Associates (construction consulting
Midland, Michigan 48642 firm).
Age: 84
John B. Gerlach, Jr. Trustee, Member of Audit Since 1994, President and a
37 West Broad Street Committee Director of Lancaster Colony
Columbus, Ohio 43215 Corporation (diversified consumer
Age: 41 products); prior thereto, Executive
Vice President, Secretary and a
Director of Lancaster Colony
Corporation.
Michael J. Knilans Trustee, Member of From November, 1989 to August,
1119 Kingsdale Terrace Executive Committee 1995, Member of the Ohio Bureau of
Columbus, Ohio 43220 Workers' Compensation and Chairman
Age: 68 from 1992 through August, 1995.
James I. Luck Trustee President, The Columbus Foundation
1234 East Broad Street (philanthropic public foundation).
Columbus, Ohio 43205
Age: 50
</TABLE>
B-20
<PAGE> 23
<TABLE>
<S> <C> <C>
David L. Nelson Trustee, Member of Audit Chairman of the Board of Directors
18 James Lane and Nominating Committees of Herman Miller, Inc. (furniture
Stamford, CT 06903 manufacturer); former Vice
Age: 65 President, Customer Support,
Americas Region, and Vice
President, Customer Satisfaction,
Industry Segment, of Asea Brown
Boveri, Inc. (designer and
manufacturer of process automation
systems for basic industries).
*C. A. Peterson Trustee Chartered Financial Analyst, former
150 E. Wilson Bridge Rd. Senior Executive Vice President and
Worthington, Ohio 43085 Director of The Ohio Company
Age: 69 (investment banking).
Lawrence H. Rogers II Trustee Self-employed author; former Vice
4600 Drake Road Chairman, Motor Sports Enterprises,
Cincinnati, Ohio 45243 Inc.
Age: 74
*Frank W. Siegel President and Chartered Financial Analyst and
155 East Broad Street Trustee, Member of Senior Vice President, The Ohio
Columbus, Ohio 43215 Executive and Nominating Company (investment banking);
Age: 43 Committees former Vice President, Keystone
Group (mutual fund
management/administration); former
Senior Vice President, Trust
Advisory Group (mutual fund
consulting).
Joseph H. Stegmayer Trustee, Member of Audit President and a Director of Clayton
724 Hampton Roads Dr. and Nominating Committees Homes, Inc. (manufactured homes);
Knoxville, TN 37922-4071 former Vice President, Treasurer,
Age: 44 Chief Financial Officer and a
Director of Worthington Industries,
Inc. (specialty steel and plastics
manufacturer).
Karen J. Hipsher Secretary Executive Secretary, The Ohio
155 East Broad Street Company (investment banking).
Columbus, Ohio 43215
Age: 50
James M. Schrack II Treasurer Vice President and Trust
155 East Broad Street Officer of The Ohio Company
Columbus, Ohio 43215 investment banking).
Age: 37
</TABLE>
B-21
<PAGE> 24
<TABLE>
<CAPTION>
<S> <C> <C>
Bruce E. McKibben Assistant Employee of The Ohio
155 East Broad Street Treasurer Company (investment banking).
Columbus, Ohio 43215
Age: 26
</TABLE>
As of April 19, 1996, all trustees and officers of the Group as a group
owned fewer than one percent of the Shares of each Fund then outstanding.
Pursuant to the ultimate authority of the Board of Trustees of the
Group, the Executive Committee is responsible for the general management of the
affairs of the Group. This Committee's actions are reported to and reviewed by
the Board of Trustees.
Messrs. Allen and Siegel are Chairman, President and a director, and
Vice President and a director, respectively, of the Adviser, and Mr. Schrack is
a Vice President of the Adviser. The compensation of trustees and officers of
the Group who are employed by The Ohio Company is paid by The Ohio Company.
Trustees' fees plus expenses are paid by the Group, except that Messrs. Allen
and Siegel receive no fees from the Group.
The following table sets forth information regarding all compensation
paid by the Group to its Trustees for their services as trustees during the
fiscal year ended September 30, 1995. The Group has no pension or retirement
plans.
<TABLE>
<CAPTION>
COMPENSATION TABLE
Name and Position Aggregate Compensation Total Compensation From the
With the Group* From the Group Group and the Fund Complex**
--------------- -------------- ----------------------------
<S> <C> <C>
H. Keith Allen $ 0 $ 0
Chairman, Trustee and Member of
Executive, Nominating and Investment
Committees
Gordon B. Carson $2,000 $12,000
Trustee and Member of Executive
Committee
John B. Gerlach $2,000 $13,000
Trustee and Member of Audit Committee
Michael J. Knilans $2,000 $12,000
Trustee and Member of Executive
Committee
James I. Luck $2,000 $12,000
Trustee
</TABLE>
B-22
<PAGE> 25
<TABLE>
<CAPTION>
Name and Position Aggregate Compensation Total Compensation From the
With the Group* From the Group Group and the Fund Complex**
--------------- -------------- ----------------------------
<S> <C> <C>
David L. Nelson $2,000 $13,000
Trustee and Member of Audit and
Nominating Committees
C.A. Peterson $2,000 $12,000
Trustee
Lawrence H. Rogers, II $2,000 $12,000
Trustee
Frank W. Siegel $ 0 $ 0
Trustee, President and Member of
Executive and Nominating Committees
Joseph H. Stegmayer $1,500 $10,000
Trustee and Member of Audit and
Nominating Committees
<FN>
___________________________________
*During the fiscal year ended September 30, 1995, John L. Schlater, a
former officer of The Ohio Company and the Adviser, had served as a trustee of
the Group but no longer does so as of the date hereof. Mr. Schlater did not
receive any compensation from the Group or the Fund Complex.
**For purposes of this Table, Fund Complex means one or more mutual
funds, including the Group, which have a common investment adviser or
affiliated investment advisers or which hold themselves out to the public as
being related.
</TABLE>
B-23
<PAGE> 26
PRINCIPAL SHAREHOLDERS OF THE GROUP
As of April 19, 1996, the following are the only persons known to the
Group who were expected to own 5% or more of TCF's, CGSMMF's or CTEMMF's shares
upon consummation of the Reorganization:
<TABLE>
<CAPTION>
Fund Name and Address of 5% or more Beneficial Owner Percentage Owned (2)
---- ----------------------------------------------- ----------------
<S> <C> <C>
TCF The Ohio Company1 6.18%
155 East Broad Street
Columbus, Ohio 43215
CGSMMF The Ohio Company1 9.23%
155 East Broad Street
Columbus, Ohio 43215
CTEMMF The Ohio Company1 6.41%
155 East Broad Street
Columbus, Ohio 43215
<FN>
__________________________
1 Either directly or in its capacity as a trustee of certain plans or
trusts.
2 As of April 19, 1996 with respect to the applicable predecessor Fund.
</TABLE>
There were no persons known to the Group to be the beneficial owner of
more than 5% of any other Fund's Shares or of the total number of the Group's
Shares outstanding as of April 19, 1996.
THE ADVISER
The Group has entered into an Investment Advisory and Management
Agreement dated as of June 18, 1993, as amended January 10, 1996 (the
"Investment Advisory Agreement"), with Cardinal Management Corp. (the
"Adviser"). Pursuant to the Investment Advisory Agreement, the Adviser has
agreed to provide investment advisory and management services as described in
the Prospectuses of the Funds. As compensation for such services, facilities
and expenses, the Adviser receives a fee (1) from each of CGOF, CGSMMF and
CTEMMF, computed and accrued daily and paid monthly, based on an annual rate of
.50% of the daily net asset value of that Fund; (2) from TCF, computed and
accrued daily and paid monthly, based on an annual rate of 0.60% of the daily
net asset value of TCF; and (3) from each of CBF and CAGF, computed and accrued
daily and paid monthly, based on an annual rate of .75% of the daily net asset
value of that Fund.
Prior to the effective date of the Reorganization, the Adviser provided
investment advisory and management services to Cardinal Government Obligations
Fund, CGST and CTEMT and received a fee at the same annual rate for such
services as described above for CGOF, CGSMMF and CTEMMF, respectively. The
Ohio Company, prior to the
B-24
<PAGE> 27
effective date of the Reorganization, provided investment advisory services to
TCFI, and received a fee for such services based on an annual rate of .50% of
the daily net value of such Fund.
For the fiscal years ended September 30, 1995, 1994, and 1993, the
investment advisory fees incurred by each of the Funds (including their
respective predecessors prior to the Reorganization) were as follows:
<TABLE>
<CAPTION>
Fees Incurred for Year Ended September 30,
<S> <C> <C> <C>
Fund 1995 1994 1993
- - ---- ---- ---- ----
TCF $1,158,534 $1,325,607 $1,370,536
CGOF 783,803 947,139 972,887
CGSMMF 2,031,367 1,978,541 2,227,209
CTEMMF 344,000 449,777 449,464
CBF 101,585 103,264 11,128(1)
CAGF 71,508 66,792 5,058(1)
<FN>
______________________________
1 Commenced operations June 24, 1993.
</TABLE>
The Adviser is a wholly owned subsidiary of The Ohio Company, an
investment banking firm organized in 1925. Descendants of H. P. and R. F.
Wolfe, deceased, and members of their families, through their possession of a
majority of the voting stock, may be considered controlling persons of The Ohio
Company. H. Keith Allen is an officer and director of The Ohio Company. Frank
W. Siegel and James M. Schrack II are each officers of The Ohio Company.
Unless sooner terminated, the Investment Advisory Agreement with respect
to a Fund continues for successive one-year periods ending June 18 of each year
if such continuance is approved at least annually by the Group's Board of
Trustees or by vote of a majority of the outstanding Shares of that Fund (as
defined under "ADDITIONAL INFORMATION -- Vote of a Majority of the Outstanding
Shares" below), and a majority of the Trustees who are not parties to the
Investment Advisory Agreement or interested persons (as defined in the 1940
Act) of any party to the Investment Advisory Agreement by votes cast in person
at a meeting called for such purpose. The Investment Advisory Agreement is
terminable as to a Fund at any time on 60 days' written notice without penalty
by the Trustees, by vote of a majority of the outstanding Shares of that Fund,
or by the Adviser. The Investment Advisory Agreement also terminates
automatically in the event of any assignment, as defined in the 1940 Act.
B-25
<PAGE> 28
The Investment Advisory Agreement provides that the Adviser shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Group in connection with the performance of the Investment Advisory
Agreement, except a loss resulting from a breach of fiduciary duty with respect
to the receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith, or negligence on the part of the Adviser in the
performance of its duties, or from negligent disregard by the Adviser of its
duties and obligations thereunder.
PORTFOLIO TRANSACTIONS
Pursuant to the Investment Advisory Agreement, the Adviser, subject to
the policies established by the Board of Trustees of the Group and in
accordance with the Funds' investment restrictions and policies, is responsible
for each Fund's portfolio decisions and the placing of the Funds' portfolio
transactions. Purchases and sales of portfolio securities which are debt
securities usually are principal transactions in which such portfolio
securities are normally purchased directly from the issuer or from an
underwriter or market maker for the securities. Purchases from underwriters of
portfolio securities generally include a commission or concession paid by the
issuer to the underwriter, and purchases from dealers serving as market makers
may include the spread between the bid and asked price. Transactions on stock
exchanges involve the payment of negotiated brokerage commissions.
Transactions in the over-the-counter market are generally principal
transactions with dealers. With respect to the over-the-counter market, the
Group, where possible, will deal directly with dealers who make a market in the
securities involved except in those circumstances where better price and
execution are available elsewhere.
For the fiscal years ended September 30, 1995, 1994 and 1993, the
brokerage fees incurred by each of TCF (including its predecessor, TCFI, prior
to the Reorganization), CBF and CAGF are set forth in the following table.
None of those commissions were paid to The Ohio Company, and during such
periods, none of CGOF, CGSMMF or CTEMMF (nor any of their predecessors prior to
the Reorganization) incurred any brokerage commissions.
<TABLE>
<CAPTION>
Brokerage Commissions Incurred
for Year Ended September 30,
<S> <C> <C> <C>
Fund 1995 1994 1993
- - ---- ---- ---- ----
TCF $215,180 $188,616 $101,220
CBF 20,490 18,285 3,260(1)
CAGF 22,011 20,634 7,530(1)
<FN>
______________________________
1 Commenced operations June 24, 1993.
</TABLE>
B-26
<PAGE> 29
In executing such transactions, the Adviser seeks to obtain the best net
results for a Fund taking into account such factors as price (including the
applicable brokerage commission or dealer spread), size of order, difficulties
of execution and operational facilities of the firm involved and the firm's
risk in positioning a block of securities. While the Adviser generally seeks
reasonably competitive commission rates, for the reasons stated in the prior
sentence, a Fund will not necessarily be paying the lowest commission or spread
available.
The Adviser may consider provision of research, statistical and other
information to the Group, a Fund or the Adviser in the selection of qualified
broker-dealers who effect portfolio transactions for a Fund so long as the
Adviser's ability to obtain the best net results for portfolio transactions of
that Fund is not diminished. Such research services include supplemental
research, securities and economic analyses, and statistical services and
information with respect to the availability of securities or purchasers or
sellers of securities. Such research services may also be useful to the
Adviser in connection with its services to other clients. Similarly, research
services provided by brokers serving such other clients may be useful to the
Adviser in connection with its services to a Fund. Although this information
is useful to a Fund and the Adviser, except as described below, it is not
possible to place a dollar value on it. It is the opinion of the Board of
Trustees and the Adviser that the review and study of this information will not
reduce the overall cost to the Adviser of performing its duties to the Funds
under the Investment Advisory Agreement. The Adviser, on behalf of the Funds,
may direct brokerage transactions to Columbine Research in return for the
provision of research services. For the fiscal year ended September 30, 1995,
the amount of such transactions and related commissions on behalf of The
Cardinal Fund Inc., predecessor to TCF, were $2,631,275 and $4,400,
respectively. Such brokerage transactions are subject to the requirements as
to price and execution as described above. The Group is not authorized to pay
brokerage commissions which are in excess of those which another qualified
broker would charge solely by reason of brokerage and research services
provided.
As of April 7, 1996, the Adviser and The Ohio Company entered into an
agreement with Baseline Financial whereby the Adviser will direct brokerage
transactions to Baseline Financial in part as compensation for certain research
services. Such services include fundamental and technical portfolio management
information with respect to equity securities.
In addition, the Group has authorized the Adviser to place brokerage
transactions through Pershing and Company, a division of Donaldson, Lufkin &
Jenrette, in return for Lipper Data information prepared for the Group's
Trustees relating to information on fees and expenses of other mutual funds.
However, such brokerage transactions are subject to the requirements as to
execution and price described above.
Investment decisions for a Fund are made independently from those for
another Fund of the Group or any other investment company or account managed by
the Adviser. Any such other Funds, investment company or account may also
invest in the same
B-27
<PAGE> 30
securities as a Fund. When a purchase or sale of the same security is made at
substantially the same time on behalf of one Fund and another Fund, investment
company or account, the transaction will be averaged as to price and available
investments will be allocated as to amount in a manner which the Adviser
believes to be equitable to the Fund and such other Fund, investment company or
account. In some instances, this investment procedure may adversely affect the
price paid or received by a Fund or the size of the position obtained by that
Fund. To the extent permitted by law, the Adviser may aggregate the securities
to be sold or purchased for a Fund with those to be sold or purchased for other
funds or for other investment companies or accounts in order to obtain best
execution. As provided by the Investment Advisory Agreement, in making
investment recommendations for the Group, the Adviser will not inquire or take
into consideration whether an issuer of securities proposed for purchase or
sale by the Group is a customer of the Adviser, its parent or its subsidiaries
or affiliates and, in dealing with its customers, the Adviser, its parent,
subsidiaries and affiliates will not inquire or take into consideration whether
securities of such customers are held by the Group.
During the fiscal year ended September 30, 1995, none of the Funds,
except CBF, held any securities of its regular brokers or dealers, as defined
in Rule 10b-1 under the 1940 Act, or their parent companies. During each year,
CBF held commercial paper of Ford Motor Credit Corp., CIGNA Corp., Sears
Acceptance Corp. and General Motors Acceptance Corp, each of which is a regular
dealer for CBF. As of September 30, 1995, CBF held $500,000 of commercial
paper of each such dealer.
Pursuant to Investment Advisory Agreement, the Adviser also serves as
general manager and administrator to each of the Funds. The Adviser assists in
supervising all operations of each Fund (other than those performed by The
Fifth Third Bank under the Custodian Agreement and by the Adviser under the
Transfer Agency and Fund Accounting Agreement).
The Adviser has agreed to maintain office facilities; furnish
statistical and research data, clerical, certain bookkeeping services and
stationery and office supplies; prepare the periodic reports to the Commission
on Form N-SAR or any replacement forms therefor; compile data for, prepare for
execution by each Fund and file all of a Fund's federal and state tax returns
and required tax filings other than those required to be made by each Fund's
custodian and Transfer Agent; prepare compliance filings pursuant to state
securities laws with the advice of the Group's counsel; assist to the extent
requested by the Group with the Group's preparation of its Annual and
Semi-Annual Reports to Shareholders and its Registration Statement (on Form
N-1A or any replacement therefor); compile data for, prepare and file timely
Notices to the Commission required pursuant to Rule 24f-2 under the 1940 Act;
keep and maintain the financial accounts and records of each Fund,
B-28
<PAGE> 31
including calculation of daily expense accruals; and generally assist in all
aspects of each Fund's operations.
TRANSFER AND DIVIDEND AGENT AND FUND ACCOUNTANT
The Group has entered into a Transfer Agency and Fund Accounting
Agreement dated as of June 18, 1993, as amended as of January 10, 1996 (the
"Transfer Agency Agreement"), with the Transfer Agent, pursuant to which the
Transfer Agent has agreed to act as the transfer agent, dividend disbursing
agent and administrator of plans for each Fund and to provide certain fund
accounting services for each Fund. Pursuant to the Transfer Agency Agreement,
the Transfer Agent, among other things, performs the following services in
connection with each Fund's shareholders of record: maintenance of shareholder
records for the Fund's shareholders of record; processing shareholder purchase
and redemption orders; processing transfers and exchanges of shares of the
Group on the shareholder files and records; processing dividend payments and
reinvestment; and assistance in the mailing of shareholder reports and proxy
solicitation materials. In consideration of such services each Fund has agreed
to pay the Transfer Agent monthly an annual fee equal to $18 (for TCF, CBF and
CAGF) or $21 (for CGOF, CGSMMF and CTEMMF) per shareholder account plus
out-of-pocket expenses.
In addition, the Transfer Agency provides certain fund accounting
services to each of the Funds, including maintaining the accounting books and
records for each Fund, including journals containing an itemized daily record
of all purchases and sales of portfolio securities, all receipts and
disbursements of cash and all other debits and credits, general and auxiliary
ledgers reflecting all asset, liability, reserve, capital, income and expense
accounts, including interest accrued and interest received, and other required
separate ledger accounts; maintaining a monthly trial balance of all ledger
accounts; performing certain accounting services for each Fund, including
calculation of the net asset value per share, calculation of the dividend and
capital gain distributions, if any, and of yield, reconciliation of cash
movements with such Fund's custodian, affirmation to that Fund's custodian of
all portfolio trades and cash settlements, verification and reconciliation with
that Fund's custodian of all daily trade activity; providing certain reports;
obtaining dealer quotations, prices from a pricing service or matrix prices on
all portfolio securities in order to mark the portfolio to the market; and
preparing an interim balance sheet, statement of income and expense, and
statement of changes in net assets for each Fund. In consideration for such
services, each Fund has agreed to pay the Transfer Agent a fee, computed daily
and paid periodically at an annual rate of .03% of such Fund's average daily
net assets.
For the fiscal years ended September 30, 1995, 1994 and 1993, the fees
incurred by each of the Funds (including their respective
B-29
<PAGE> 32
predecessors prior to the Reorganization) for transfer agency and fund
accounting services provided by the Transfer Agent were as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
Fund 1995 1994 1993
- - ---- ---- ---- ----
<S> <C> <C> <C>
TCF $255,882(1) $ 327,423(1) $297,199(1)
CGOF 215,273 255,671 253,174
CGSMMF 895,470 1,054,325 977,828
CTEMMF 79,777 95,478 94,836
CBF 25,950 25,266 3,536(2)
CAGF 25,079 25,671 3,184(2)
<FN>
__________________________
1 TCFI, as predecessor to TCF, did not incur any fund accounting fees.
2 Commenced operations June 23, 1993.
</TABLE>
EXPENSES
If total expenses borne by a Fund in any fiscal year exceed expense
limitations imposed by applicable state securities regulations, the Adviser
will reimburse that Fund by the amount of such excess. As of the date of this
Statement of Additional Information, the most restrictive expense limitation
applicable to the Funds limit each Fund's aggregate annual expenses, including
management and advisory fees but excluding interest, taxes, brokerage
commissions, and certain other expenses, to 2 1/2% of the first $30 million of
a Fund's average net assets, 2% of the next $70 million of such Fund's average
net assets, and 1 1/2% of such Fund's remaining average net assets. Any
expense reimbursements will be estimated daily and reconciled and paid on a
monthly basis.
THE DISTRIBUTOR
The Ohio Company serves as agent for the Funds in the distribution of
their Shares pursuant to a Distribution Agreement dated June 18, 1993, as
amended as of January 10, 1996 (the "Distribution Agreement"). Unless
otherwise terminated, the Distribution Agreement remains in effect for
successive annual periods ending on June 18 if approved at least annually (i)
by the Group's Board of Trustees or by the vote of a majority of the
outstanding shares of the Group, and (ii) by the vote of a majority of the
Trustees of the Group 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
B-30
<PAGE> 33
person at a meeting called for the purpose of voting on such approval. The
Distribution Agreement may be terminated in the event of any assignment, as
defined in the 1940 Act.
In its capacity as Distributor, The Ohio Company solicits orders for the
sale of Shares, advertises and pays the costs of advertising, office space and
the personnel involved in such activities. The Distributor receives no
compensation from the Group under the Distribution Agreement, but may receive
compensation under the Distribution and Shareholder Service Plan described
below and retain all or a portion of the sales charges with respect to its
sales of Shares of TCF, CGOF, CBF and CAGF.
For the fiscal years ended September 30, 1995, 1994 and 1993,
commissions paid to The Ohio Company with respect to the sale of Shares of TCF,
CGOF (and their respective predecessors), CBF and CAGF, after discounts to
dealers, were $439,190, $1,261,115 and $4,250,912, respectively.
As described in the Prospectus, the Group has adopted a Distribution and
Shareholder Service Plan (the "Plan") pursuant to Rule 12b-1 under the 1940 Act
under which each of TCF, CGOF, CBF and CAGF (collectively, the "12b-1 Funds"
and individually a "12b-1 Fund") is authorized to pay The Ohio Company for
payments it makes to broker-dealers, including The Ohio Company, banks and
other institutions (with all of the foregoing organizations being referred to
as "Participating Organizations") for providing distribution or shareholder
service assistance or for distribution assistance and/or shareholder service
provided by The Ohio Company pursuant to an agreement between The Ohio Company
and the Group. Payments to such Participating Organizations may be made
pursuant to agreements entered into with The Ohio Company. The Plan authorizes
each 12b-1 Fund to make payments to The Ohio Company in an amount not in
excess, on an annual basis, of 0.25% of the average daily net asset value of
that 12b-1 Fund.
As required by Rule 12b-1, the Plan was approved by the initial sole
shareholder of each 12b-1 Fund and by the Board of Trustees, including a
majority of the Trustees who are not interested persons of that 12b-1 Fund and
who have no direct or indirect financial interest in the operation of the Plan
(the "Independent Trustees"). The Plan may be terminated as to a 12b-1 Fund by
vote of a majority of the Independent Trustees, or by vote of majority of the
outstanding Shares of that 12b-1 Fund. Any change in the Plan that would
materially increase the distribution cost to a 12b-1 Fund requires shareholder
approval. The Trustees review quarterly a written report of such costs and the
purposes for which such costs have been incurred. The Plan may be amended by
vote of the Trustees, including a majority of the Independent Trustees, cast in
person at a meeting called for that purpose. For so long as the Plan is in
effect, selection and nomination of those Trustees who are not interested
persons of the Group shall be committed to the
B-31
<PAGE> 34
discretion of such disinterested persons. All agreements with any person
relating to the implementation of the Plan with respect to a 12b-1 Fund may be
terminated at any time on 60 days' written notice without payment of any
penalty, by vote of a majority of the Independent Trustees or by a vote of the
majority of the outstanding Shares of such 12b-1 Fund.
The Plan will continue in effect for successive one-year periods,
provided that each such continuance is specifically approved (i) by the vote of
a majority of the Independent Trustees, and (ii) by a vote of a majority of the
entire Board of Trustees cast in person at a meeting called for that purpose.
The Board of Trustees has a duty to request and evaluate such information as
may be reasonably necessary for them to make an informed determination of
whether the Plan should be implemented or continued. In addition the Trustees
in approving the Plan must determine that there is a reasonable likelihood that
the Plan will benefit the 12b-1 Funds and their Shareholders.
The Board of Trustees of the Group believes that the Plan is in the best
interests of the 12b-1 Funds since it encourages Fund growth and retention of
Fund assets. As a 12b-1 Fund grows in size, certain expenses, and therefore
total expenses per Share, may be reduced and overall performance per Share may
be improved.
As authorized by the Plan, the Group has entered into a Rule 12b-1
Agreement with The Ohio Company pursuant to which The Ohio Company has agreed
to provide certain shareholder services in connection with Shares of a 12b-1
Fund purchased and held by The Ohio Company for the accounts of its customers
and Shares of a 12b-1 Fund purchased and held by customers of The Ohio Company
directly, including, but not limited to, answering Shareholder questions
concerning the 12b-1 Funds, providing information to Shareholders on their
investments in the 12b-1 Funds and providing such personnel and communication
equipment as is necessary and appropriate to accomplish such matters. In
consideration of such services the Group, on behalf of each 12b-1 Fund, has
agreed to pay The Ohio Company a monthly fee, computed at the annual rate of
.25% of the average aggregate net asset value of Shares of that 12b-1 Fund held
during the period in customer accounts for which The Ohio Company has provided
services under this Agreement. For the fiscal year ended September 30, 1995,
fees earned by The Ohio Company under this Rule 12b-1 Agreement, with respect
to CBF, were $32,534, and, with respect to CAGF, were $22,594.
In addition, The Ohio Company may enter into, from time to time, Rule
12b-1 Agreements with selected dealers pursuant to which such dealers will
provide certain Shareholder services including, but not limited to, those
discussed above.
B-32
<PAGE> 35
CUSTODIAN
The Fifth Third Bank, 38 Fountain Square Plaza, Cincinnati, Ohio 45263,
has been selected to serve as the Funds' custodian pursuant to the Custody
Agreement dated June 18, 1993, as amended as of January 10, 1996. In such
capacity the custodian will hold or arrange for the holding of all portfolio
securities and other assets of the Funds.
LEGAL COUNSEL AND INDEPENDENT AUDITORS
Baker & Hostetler, 65 East State Street, Columbus, Ohio 43215, is
counsel to the Group and will pass upon the legality of the Shares offered
thereby. The Group has selected KPMG Peat Marwick LLP, Two Nationwide Plaza,
Columbus, Ohio 43215, as independent auditors for the Funds. The financial
statements of the Funds (or their respective predecessors) included in this
Statement of Additional Information have been included herein in reliance upon
the report of KPMG Peat Marwick LLP, independent auditors, given upon the
authority of said firm as experts in accounting and auditing.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Funds' Shares may be purchased at the public offering price and are
sold on a continuous basis through The Ohio Company, principal underwriter of
the Funds' Shares, at its address and number set forth on the cover page of
this Statement of Additional Information, and through other broker-dealers who
are members of the National Association of Securities Dealers, Inc. and have
sales agreements with The Ohio Company.
Based upon the value of TCFI's portfolio securities and other assets and
the number of outstanding shares as of the fiscal year ended September 30,
1995, the net asset value and redemption price per share was $13.23. The total
offering price per share was $13.85 per share (net asset value / .9550,
assuming the then current maximum sales charge of 4.5% of the offering price).
The total offering price is reduced on sales of $100,000 or more.
Based upon the value of Cardinal Government Obligations Fund's portfolio
securities and other assets and the number of outstanding shares as of the
fiscal year end September 30, 1995, the net asset value and redemption price
per share was $8.18. The total offering price per share was $8.57 per share
(net asset value / .9550, assuming the then current maximum sales charge of
4.50% of the offering price). The total offering price is reduced on sales of
$100,000 or more.
Based upon the value of CBF's portfolio securities and other assets and
the number of outstanding Shares as of the fiscal year ended September 30,
1995, the net asset value and redemption price
B-33
<PAGE> 36
per share was $11.52. The total offering price per share was $12.06 per share
(net asset value / .955, assuming the then current maximum sales charge of
4.50% of the offering price). The total offering price is reduced on sales of
$100,000 or more.
Based upon the value of CAGF's portfolio securities and other assets and
the number of outstanding Shares as of the fiscal year ended September 30,
1995, the net asset value and redemption price per share was $12.37. The total
offering price per share was $12.95 per share (net asset value / .955, assuming
the then current maximum sales charge of 4.50% of the offering price). The
total offering price is reduced on sales of $100,000 or more.
The Group may suspend the right of redemption or postpone the date of
payment for Shares during any period when (a) trading on the New York Stock
Exchange (the "Exchange") is restricted by applicable rules and regulations of
the Commission, (b) the Exchange is closed for other than customary weekend and
holiday closings, (c) the Commission has by order permitted such suspension, or
(d) an emergency exists as a result of which (i) disposal by the Group of
securities owned by it is not reasonably practical or (ii) it is not reasonably
practical for the Group to determine the fair value of its net assets.
Use of the check-writing redemption procedure will be subject to the
rules and regulations of The Fifth Third Bank (the "Bank") governing checking
accounts. Neither the Bank nor the Group shall incur any liability to a
participating shareholder under this procedure for not honoring a check that
exceeds the value of Shares in a shareholder's account, for honoring checks
properly drafted, for effecting redemptions pursuant to payment thereof or for
returning checks not accepted for payment. This procedure may be terminated at
any time by the Group, the Bank or the participating shareholder. A
shareholder participating in the check-writing redemption procedure has not
established a checking or other account with the Bank for the purposes of
Federal Deposit Insurance or otherwise.
DETERMINATION OF NET ASSET VALUE
The Group values the portfolio securities of CGSMMF and CTEMMF
(collectively, the "Money Market Funds" and individually a "Money Market Fund")
using the amortized cost valuation method. This method involves valuing a
security at its cost and thereafter accruing any discount or premium at a
constant rate to maturity. By declaring these accruals to the Money Market
Funds' shareholders in the daily dividend, the value of a Money Market Fund's
assets, and, thus, its net asset value per share, will generally remain
constant. Although this method provides certainty in valuation, it may result
in periods during which the value of a Money Market Fund's securities, as
determined by amortized cost, is higher or lower than the price the Money
Market Fund would receive if it sold
B-34
<PAGE> 37
the securities. During such periods, the yield on Shares of the Money Market
Fund may differ somewhat from that obtained in a similar fund with identical
investments utilizing a method of valuation based upon market prices and
estimates of market prices for all of its portfolio securities. For example,
if the use of amortized cost by a Money Market Fund resulted in a lower
aggregate portfolio value on a particular day, a prospective investor in the
Money Market Fund would be able to obtain a somewhat higher yield than would
result from investment in a similar fund utilizing solely market values, and
existing investors in the Money Market Fund would receive less investment
income.
The valuation of the Money Market Funds' portfolio securities based upon
their amortized cost and the maintenance of the Money Market Funds' per share
net asset value of $1.00 is permitted based on the Money Market Funds'
adherence to certain conditions, including maintaining a dollar-weighted
average portfolio maturity of 90 days or less and purchasing only portfolio
securities having remaining maturities of 397 days or less. The Board of
Trustees has also established procedures designed to stabilize, to the extent
reasonably possible, the Money Market Funds' net asset value per share, as
computed for the purpose of sales and redemptions, at $1.00. Such procedures
include review of the Money Market Funds' portfolio holdings by the Board of
Trustees at such intervals as it may deem appropriate to determine whether the
Money Market Funds' net asset value calculated by using available market
quotations deviates from $1.00 per Share and, if so, whether such deviation may
result in material dilution or may be otherwise unfair to existing
shareholders. These procedures also include a review by the Adviser in
accordance with policies established by the Board of Trustees not less
frequently than monthly of the quality of certain Municipal Securities having
variable interest rates and demand features that permit CTEMMF to calculate the
maturity of such obligations to a point in time prior to their stated maturity.
In the event the Board of Trustees determines that deviation in net asset value
exists, the Board of Trustees will take such corrective action as it deems
necessary and appropriate, which action might include redemption of Shares in
kind, selling portfolio securities prior to maturity to realize capital gains
or losses or to shorten average portfolio maturity, withholding dividends,
reduction of the number of Shares outstanding (i.e. the declaration of a
negative dividend) or establishing a net asset value per share by using
available market quotations.
TAXES
GENERAL. Each Fund intends to qualify as a "regulated investment
company" under the Code for so long as such qualification is in the best
interest of that Fund's shareholders. In order to qualify as a regulated
investment company, a Fund must, among other things: derive at least 90% of
its gross income from dividends, interest, payments with respect to securities
loans, and
B-35
<PAGE> 38
gains from the sale or other disposition of securities or foreign currencies,
or other income derived with respect to its business of investing in such
stocks, securities, or currencies; derive less than 30% of its gross income
from the sale or other disposition of stocks, securities, options, future
contracts or foreign currencies held less than three months; and diversify its
investments within certain prescribed limits. In addition, to utilize the tax
provisions specially applicable to regulated investment companies, a Fund must
distribute to its shareholders at least 90% of its investment company taxable
income for the year. In general, a Fund's investment company taxable income
will be its taxable income subject to certain adjustments and excluding the
excess of any net long-term capital gain for the taxable year over the net
short-term capital loss, if any, for such year.
A non-deductible 4% excise tax is imposed on regulated investment
companies that do not distribute in each calendar year (regardless of whether
they otherwise have a non-calendar taxable year) an amount equal to 98% of
their ordinary income for the calendar year plus 98% of their capital gain net
income for the one-year period ending on October 31 of such calendar year. The
balance of such income must be distributed during the next calendar year. If
distributions during a calendar year were less than the required amount, such
Fund would be subject to a non-deductible excise tax equal to 4% of the
deficiency.
Although each Fund expects to qualify as a "regulated investment
company" and to be relieved of all or substantially all federal income taxes,
depending upon the extent of its activities in states and localities in which
its offices are maintained, in which its agents or independent contractors are
located, or in which it is otherwise deemed to be conducting business, a Fund
may be subject to the tax laws of such states or localities. In addition, if
for any taxable year a Fund does not qualify for the special tax treatment
afforded regulated investment companies, all of its taxable income will be
subject to federal tax at regular corporate rates (without any deduction for
distributions to its shareholders). In such event, dividend distributions
would be taxable to shareholders to the extent of earnings and profits, and
would be eligible for the dividends received deduction for corporations.
It is expected that each Fund will distribute annually to shareholders
all or substantially all of that Fund's net ordinary income and net realized
capital gains and that such distributed net ordinary income and distributed net
realized capital gains will be taxable income to shareholders for federal
income tax purposes, even if paid in additional Shares of the Fund and not in
cash.
Distribution by a Fund of the excess of net long-term capital gain over
net short-term capital loss is taxable to shareholders as long- term capital
gain in the year in which it is received,
B-36
<PAGE> 39
regardless of how long the shareholder has held the Shares. Such distributions
are not eligible for the dividends-received deduction.
Federal taxable income of individuals is subject to graduated tax rates
of 15%, 28%, 31%, 36% and 39.6%. Further, the marginal tax rate may be in
excess of 39.6%, because adjustments reduce or eliminate the benefit of the
personal exemption and itemized deductions for individuals with gross income in
excess of certain threshold amounts.
Capital gains of individuals are subject to tax at the same rates
applicable to ordinary income; however, the tax rate on capital gains of
individuals cannot exceed 28%. Capital losses may be used to offset capital
gains. In addition, individuals may deduct up to $3,000 of net capital loss
each year to offset ordinary income. Excess net capital loss may be carried
forward to future years.
Federal taxable income of corporations in excess of $75,000 up to $10
million is subject to a 34% tax rate; however, because the benefit of lower tax
rates on a corporation's taxable income of less than $75,000 is phased out for
corporations with income in excess of $100,000 but lower than $335,000, a
maximum marginal tax rate of 39% may result. Federal taxable income of
corporations in excess of $10 million is subject to a tax rate of 35%.
Further, a corporation's federal taxable income in excess of $15 million is
subject to an additional tax equal to 3% of taxable income over $15 million,
but not more than $100,000.
Capital gains of corporations are subject to tax at the same rates
applicable to ordinary income. Capital losses may be used only to offset
capital gains and excess net capital loss may be carried back three years and
forward five years.
Certain corporations are entitled to a 70% dividends received deduction
for distributions from certain domestic corporations. Each Fund will designate
the portion of any distributions which qualify for the 70% dividends received
deduction. The amount so designated may not exceed the amount received by that
Fund for its taxable year that qualifies for the dividends received deduction.
A Fund will be required in certain cases to withhold and remit to the
United States Treasury 31% of taxable dividends paid to any shareholder who has
provided either an incorrect tax identification number or no number at all, or
who is subject to withholding by the Internal Revenue Service for failure
properly to include on his return payments of interest or dividends.
Information set forth in the Prospectuses and this Statement of
Additional Information which relates to federal taxation is only a summary of
some of the important federal tax considerations generally affecting purchasers
of Shares of a Fund. No attempt has
B-37
<PAGE> 40
been made to present a detailed explanation of the federal income tax treatment
of a Fund or its shareholders and this discussion is not intended as a
substitute for careful tax planning. Accordingly, potential purchasers of
Shares of a Fund are urged to consult their tax advisers with specific
reference to their own tax situation. In addition, the tax discussion in the
Prospectuses and this Statement of Additional Information is based on tax laws
and regulations which are in effect on the date of the Prospectuses and this
Statement of Additional Information; such laws and regulations may be changed
by legislative or administrative action.
SPECIFIC INFORMATION REGARDING CTEMMF. An exempt-interest dividend
is any dividend or part thereof (other than a capital gain dividend) paid by
CTEMMF that is derived from interest received by CTEMMF that is excluded from
gross income for federal income tax purposes, net of certain deductions,
provided the dividend is designated as an exempt-interest dividend in a written
notice mailed to shareholders not later than sixty days after the close of
CTEMMF's taxable year. The percentage of the total dividends paid by CTEMMF
during any taxable year that qualifies as exempt-interest dividends will be the
same for all shareholders receiving dividends during such year.
Exempt-interest dividends shall be treated by CTEMMF's shareholders as items of
interest excludable from their gross income for Federal income tax purposes
under Section 103(a) of the Code. However, a shareholder is advised to consult
his tax adviser with respect to whether exempt-interest dividends retain the
exclusion under Section 103(a) of the Code if such shareholder is a
"substantial user" or a "related person" to such user under Section 147(a) of
the Code with respect to any of the Municipal Securities held by CTEMMF. If a
shareholder receives an exempt-interest dividend with respect to any Share and
such Share is held by the shareholder for six months or less, any loss on the
sale or exchange of such Share shall be disallowed to the extent of the amount
of such exempt-interest dividend.
In general, interest on indebtedness incurred or continued by a
shareholder to purchase or carry Shares of CTEMMF is not deductible for federal
income tax purposes if CTEMMF distributes exempt-interest dividends during the
shareholder's taxable year. A shareholder of CTEMMF that is a financial
institution may not deduct interest expense attributable to indebtedness
incurred or continued to purchase or carry Shares of CTEMMF if CTEMMF
distributes exempt-interest dividends during the shareholder's taxable year
(except that 80% in the case of interest expense attributable to tax-exempt
obligations acquired after December 31, 1982, and prior to August 7, 1986 may
be deducted). Certain federal income tax deductions of property and casualty
insurance companies holding Shares of CTEMMF and receiving exempt-interest
dividends may also be adversely affected. In certain limited instances, the
portion of Social Security benefits received by a shareholder which may be
subject to federal income tax may be affected by the amount of tax-exempt
interest income, including exempt-interest dividends received by shareholders
of CTEMMF.
B-38
<PAGE> 41
In the unlikely event CTEMMF realizes long-term capital gains, CTEMMF
intends to distribute any realized net long-term capital gains annually. If
CTEMMF distributes such gains, CTEMMF will have no tax liability with respect
to such gains, and the distributions will be taxable to shareholders as
long-term capital gains regardless of how long the shareholders have held the
Shares. Any such distributions will be designated as a capital gain dividend
in a written notice mailed by CTEMMF to the shareholders not later than sixty
days after the close of CTEMMF's taxable year. It should be noted, however,
that capital gains are taxed like ordinary income except that net capital gains
of individuals are subject to a maximum federal income tax rate of 28%. Net
capital gains are the excess of net long-term capital gains over net short-term
capital losses. Any net short-term capital gains are taxed at ordinary income
tax rates. If a shareholder receives a capital gain dividend with respect to
any Share and then sells the Share before he has held it for more than six
months, any loss on the sale of the Share is treated as long-term capital loss
to the extent of the capital gain dividend received.
Interest earned by individuals and corporations on certain municipal
obligations issued on or after August 8, 1986, to finance certain private
activities will be treated as a tax preference item in computing the
alternative minimum tax. It is likely that exempt-interest dividends received
by shareholders from CTEMMF will also be treated as tax preference items in
computing the alternative minimum tax to the extent that distributions by
CTEMMF are attributable to such obligations. Also, a portion of all other
interest excluded from gross income for federal income tax purposes earned by a
corporation may be subject to the alternative minimum tax as a result of the
inclusion in alternative minimum taxable income of 75% of the excess of
adjusted current earnings and profits over pre-book alternative minimum taxable
income. Adjusted current earnings and profits would include exempt-interest
dividends distributed by CTEMMF to corporate shareholders.
For taxable years of corporations beginning before 1996, the Superfund
Revenue Act of 1986 imposes an additional tax (which is deductible for federal
income tax purposes) on a corporation at a rate of 0.12 of one percent on the
excess over $2,000,000 of such corporation's "modified alternative minimum
taxable income," which would include a portion of the exempt-interest dividends
distributed by CTEMMF to such corporation, and exempt-interest dividends
distributed to certain foreign corporations doing business in the United States
could be subject to a branch profits tax imposed by Section 884 of the Code.
Distributions of exempt-interest dividends by CTEMMF may be subject to
state and local taxes even though a substantial portion of such distributions
may be derived from interest on obligations which, if received directly, would
be exempt from such taxes. CTEMMF will report to its shareholders annually
after the close of its taxable year the percentage and source, on a
state-by-state
B-39
<PAGE> 42
basis, of interest income earned on municipal obligations held by CTEMMF during
the preceding year. Shareholders are advised to consult their tax advisers
concerning the application of state and local taxes.
ADDITIONAL INFORMATION
DESCRIPTION OF SHARES
The Group is an Ohio business trust. The Group was organized on March
23, 1993, and the Group's Declaration of Trust was filed with the Secretary of
State of Ohio on March 23, 1993. The Declaration of Trust authorizes the Board
of Trustees to issue an unlimited number of Shares, which are units of
beneficial interest, without par value. The Group presently has six series of
Shares, four of which represent interests in the Funds. The Group's
Declaration of Trust authorizes the Board of Trustees to divide or redivide any
unissued Shares of the Group into one or more additional series by setting or
changing in any one or more respects their respective preferences, conversion
or other rights, voting power, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption.
Shares have no subscription or preemptive rights and only such
conversion or exchange rights as the Board of Trustees may grant in its
discretion. When issued for payment as described in the respective Prospectus
and this Statement of Additional Information, a Fund's Shares will be fully
paid and non-assessable. In the event of a liquidation or dissolution of the
Group, shareholders of a Fund are entitled to receive the assets available for
distribution belonging to that Fund, and a proportionate distribution, based
upon the relative asset values of the respective Fund, of any general assets
not belonging to any particular Fund which are available for distribution.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Group shall not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each series affected by the matter. For purposes of determining whether the
approval of a majority of the outstanding shares of a series will be required
in connection with a matter, a series will be deemed to be affected by a matter
unless it is clear that the interests of each series in the matter are
identical, or that the matter does not affect any interest of the series.
Under Rule 18f-2, the approval of any amendment to the Investment Advisory
Agreement or any change in investment policy submitted to shareholders would be
effectively acted upon with respect to a series only if approved by a majority
of the outstanding shares of such series. However, Rule 18f-2 also provides
that the ratification of independent public accountants and the election of
Trustees may be effectively acted upon by shareholders of the Group voting
without regard to series.
B-40
<PAGE> 43
VOTE OF A MAJORITY OF THE OUTSTANDING SHARES
As used in the Prospectuses and this Statement of Additional
Information, "vote of a majority of the outstanding Shares" of the Group or a
Fund, means the affirmative vote, at an annual or special meeting of
shareholders duly called, of the lesser of (a) 67% or more of the votes of
shareholders of the Group or that Fund present at such meeting at which the
holders of more than 50% of the votes attributable to the shareholders of
record of the Group or that Fund are represented in person or by proxy, or (b)
the holders of more than 50% of the outstanding votes of shareholders of the
Group or such Fund.
MISCELLANEOUS
Individual Trustees are elected by the Shareholders and, subject to
removal by the vote of two-thirds of the Board of Trustees, serve for a term
lasting until the next meeting of shareholders at which Trustees are elected.
Such meetings are not required to be held at any specific intervals.
Generally, shareholders owning not less than 20% of the outstanding shares of
the Group entitled to vote may cause the Trustees to call a special meeting.
However, the Group has represented to the Commission that the Trustees will
call a special meeting for the purpose of considering the removal of one or
more Trustees upon written request therefor from shareholders owning not less
than 10% of the outstanding votes of the Group entitled to vote and that the
Group will assist in communications with other shareholders as required by
Section 16(c) of the 1940 Act. At such a meeting, a quorum of shareholders
(constituting a majority of votes attributable to all outstanding shares of the
Group), by majority vote, has the power to remove one or more Trustees.
The Group is registered with the Commission as a management investment
company. Such registration does not involve supervision by the Commission of
the management or policies of the Group.
The Prospectuses and this Statement of Additional Information omit
certain of the information contained in the Registration Statement filed with
the Commission. Copies of such information may be obtained from the Commission
upon payment of the prescribed fee.
The Prospectuses and this Statement of Additional Information are not an
offering of the securities herein described in any state in which such offering
may not lawfully be made. No salesman, dealer, or other person is authorized
to give any information or make any representation other than those contained
in the Prospectuses and this Statement of Additional Information.
B-41
<PAGE> 44
PERFORMANCE INFORMATION
The following performance information as of September 30, 1995, for TCF,
CGOF, CGSMMF and CTEMMF includes the performance of their respective
predecessor funds for periods prior to the effective date of the
Reorganization. TCF and CGOF are subject to certain additional fees that, if
such fees had been imposed prior to the Reorganization, would have affected
such Funds' performance.
YIELDS
For the 30-day period ended September 30, 1995, the yields of CGOF and
CBF were 6.40% and 2.48%, respectively. The yields of CGOF and CBF are
computed by annualizing net investment income per share for a recent 30-day
period and dividing that amount by a Share's maximum offering price (as of the
date hereof, 4.5%) (reduced by any undeclared earned income expected to be
paid shortly as a dividend) on the last trading day of that period. Net
investment income will reflect amortization of any market value premium or
discount of fixed income securities (except for obligations backed by mortgages
or other assets) and may include recognition of a pro rata portion of the
stated dividend rate of dividend paying portfolio securities. The yield of
CGOF and CBF will vary from time to time depending upon market conditions, the
composition of such Fund's portfolio and operating expenses of the Group
allocated to that Fund. These factors and possible differences in the methods
used in calculating yield should be considered when comparing such a Fund's
yield to yields published for other investment companies and other investment
vehicles. Yield should also be considered relative to changes in the value of
CGOF's and CBF's Shares and to the relative risks associated with the
investment objectives and policies of those Funds.
For the seven-day period ended September 30, 1995, the current yields
for CGSMMF and CTEMMF were 5.11% and 3.45%, respectively, and their effective
yields were 5.24% and 3.51%, respectively. The current (average annualized)
yield of CGSMMF and CTEMMF for any seven-day period is calculated by dividing
the average daily net income per Share earned by that Fund during the seven-day
calendar period by such Fund's average price per Share over the same period and
annualizing this quotient on a 365 day basis. For purposes of this
calculation, the daily net income reflects dividends declared on the original
Share and dividends declared on any Shares purchased with dividends on that
Share. Capital changes that are excluded from the calculation are realized
gains and losses from the sale of securities as well as unrealized appreciation
and depreciation with respect to the Fund's portfolio.
The effective or compounded yield of CGSMMF and CTEMMF for any seven-day
period is computed by adding the number one to the daily net income per Share
earned by such Fund during the seven-day calendar period, raising the sum to a
power equal to 365 divided by seven, and subtracting the number one from the
result.
B-42
<PAGE> 45
For the seven-day period ended September 30, 1995, the tax equivalent
yield and the tax equivalent effective yield for CTEMMF were 5.71% and 5.81%,
respectively. CTEMMF's tax-equivalent yield is computed by dividing that
portion of CTEMMF's yield which is tax-exempt by 1 minus the stated income tax
rate and adding the result to that portion, if any, of CTEMMF's yield that is
not tax-exempt. CTEMMF's tax-equivalent effective yield is computed by
dividing that portion of the effective yield which is tax-exempt by 1 minus the
stated income tax rate and adding to that result the portion, if any, of
CTEMMF's effective yield that is not tax-exempt.
CALCULATION OF TOTAL RETURN
For the one year, five year and ten year periods ended September 30,
1995, and the respective periods from commencement of operations to September
30, 1995, the average annual returns and cumulative total returns for TCF,
CGOF, CBF and CAGF were as follows:
<TABLE>
<CAPTION>
Average Annual Cumulative
-------------- ----------
Fund 1 Year 5 Year 10 Year Since Inception 1 Year 5 Year 10 Year Since Inception
- - ---- ------ ----- ------- --------------- ------ ------ ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TCF(1) 9.67% 13.26% 12.16% 14.91% 9.67% 86.28% 215.05% 1,511.18%
CGOF(2) 6.20% 6.46% -- 7.27% 6.20% 36.75% -- 96.91%
CBF(3) 15.29% -- -- 7.32% 15.29% -- -- 17.39%
CAGF(3) 18.75% -- -- 7.75% 18.75% -- -- 18.45%
- - --------------------
<FN>
1 Commenced operations May 30, 1975.
2 Commenced operations February 3, 1986.
3 Commenced operations June 23, 1993.
</TABLE>
Each quotation of average annual total return will be computed by
finding the average annual compounded rate of return over that period which
would equate the value of an initial amount of $1,000 invested in a Fund equal
to the ending redeemable value, according to the following formula:
n
P(T + 1) = 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 at the beginning of the period at the end of the
period for which average annual total return is being calculated assuming a
complete redemption. The calculation of average annual total return assumes
the deduction of the maximum sales charge from the initial investment of
$1,000, assumes the reinvestment of all dividends and distributions at the
price stated in the then effective Prospectus on the reinvestment dates during
the period and includes all recurring fees that are charged to all shareholder
accounts assuming such Fund's average account size. Cumulative return is
B-43
<PAGE> 46
computed by using average annual total return, as calculated above, for each
year of the relevant period to determine the total return on a hypothetical
initial investment of $1,000 over such period.
In addition, as described in their respective Prospectuses, from time to
time CGOF and CBF may include in their sales literature and shareholder reports
a quote of a current "distribution" rate. For the 12-month period ended
September 30, 1995, CGOF's and CBF's distribution rates were 7.24% and 2.88%,
respectively. The current distribution rate is computed by dividing the total
amount of dividends per share paid by the Fund during the past twelve months by
a current maximum offering price. Under certain circumstances, such as when
there has been a change in the amount of dividend payout, or a fundamental
change in investment policies, it might be appropriate to annualize the
dividends paid over the period such changed policies were in effect, rather
than using the dividends during the past twelve months. The current
distribution rate differs from the current yield computation because it may
include distributions to shareholders from sources other than dividends and
interest, such as premium income from option writing, short-term capital gains
and net equalization credits and is calculated over a different period of time.
At any time in the future, yields and total return may be higher or
lower than past yields and total return and there can be no assurance that any
historical results will continue. Investors in the Funds are specifically
advised that Share prices of TCF, CGOF, CBF and CAGF expressed as the net asset
values per share, will vary just as yields and total return will vary.
PERFORMANCE COMPARISONS
Investors may also judge the performance of a Fund by comparing its
performance to the performance of other mutual funds or mutual fund portfolios
with comparable investment objectives and policies through various mutual fund
or market indices such as those prepared by Dow Jones & Co., Inc. and, Standard
& Poor's Corporation and to data prepared by Lipper Analytical Services, Inc.,
Morningstar, Inc. and CDA Investment Technologies, Inc. Comparisons may also
be made to indices or data published in Donoghue's MONEY FUND REPORT of
Holliston, Massachusetts, a nationally recognized money market fund reporting
service, Money Magazine, Forbes, Barron's, The Wall Street Journal, The New
York Times, The Columbus Dispatch, Business Week, U.S.A. Today and Consumer
Reports. In addition to performance information, general information about the
Funds that appears in a publication such as those mentioned above may be
included in advertisements and in reports to shareholders.
B-44
<PAGE> 47
- - -------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
B-45
<PAGE> 48
THE CARDINAL FUND INC.
- - --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS (MARKET VALUE IN THOUSANDS)
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
FACE/ MARKET
SHARES VALUE
------- --------
<S> <C> <C>
COMMON STOCK 91.28%
AEROSPACE/DEFENSE 3.33%
Harris Corporation........................................................ 75,200 $ 4,127
Raytheon Company.......................................................... 40,000 3,400
--------
7,527
--------
APPAREL/RETAILERS 2.69%
Jacobson Stores, Incorporated............................................. 79,000 770
May Department Stores Company............................................. 110,000 4,813
Shopko Stores, Incorporated............................................... 40,000 495
--------
6,078
--------
AUTOMOTIVE MANUFACTURING 1.79%
Ford Motor Company........................................................ 130,000 4,046
--------
AUTOMOTIVE PARTS 2.01%
Amcast Industrial Corporation............................................. 109,800 2,114
Cooper Tire & Rubber Company.............................................. 100,200 2,430
--------
4,544
--------
BEVERAGES 0.69%
Anheuser-Busch Companies Incorporated..................................... 25,000 1,559
--------
CENTRAL STATES BANKS 7.46%
Banc One Corporation...................................................... 130,500 4,763
Huntington Bancshares Incorporated........................................ 203,747 4,585
KeyCorp................................................................... 220,000 7,535
--------
16,883
--------
COMMODITY CHEMICALS 4.38%
Akzo Nobel N.V............................................................ 70,214 4,221
ARCO Chemical Company..................................................... 25,000 1,219
Dow Chemical Company...................................................... 60,000 4,470
--------
9,910
--------
</TABLE>
(continued)
B-46
<PAGE> 49
THE CARDINAL FUND INC.
- - --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS (CONTINUED)
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
FACE/ MARKET
SHARES VALUE
------- --------
<S> <C> <C>
COMMON STOCK (CONTINUED)
COMPUTERS 2.84%
Compaq Computer Corporation*.............................................. 70,000 $ 3,386
Tektronix Incorporated.................................................... 51,600 3,044
--------
6,430
--------
CONGLOMERATES 8.14%
Johnson Controls, Incorporated............................................ 100,000 6,325
Tenneco, Incorporated..................................................... 150,500 6,961
Textron, Incorporated..................................................... 75,000 5,118
--------
18,404
--------
CONSUMER SERVICES 0.59%
Scotts Company, Class A*.................................................. 60,000 1,328
--------
CONTAINERS/PACKAGING 0.40%
Liqui-Box Corporation..................................................... 30,390 900
--------
DIVERSIFIED FINANCIAL SERVICES 2.43%
Beneficial Corp........................................................... 105,000 5,486
--------
DIVERSIFIED INDUSTRIALS 3.45%
Minnesota Mining & Manufacturing Company.................................. 70,000 3,955
Myers Industries, Incorporated............................................ 181,802 2,772
Raven Industries, Incorporated............................................ 60,050 1,081
--------
7,808
--------
ELECTRIC 1.90%
Northern States Power Company............................................. 95,000 4,311
--------
ELECTRICAL COMPONENTS 6.59%
Asea Brown-Boveri, Incorporated........................................... 50,300 5,024
General Electric Company.................................................. 120,400 7,675
Houston Industries, Incorporated.......................................... 50,000 2,206
--------
14,905
--------
</TABLE>
*Non-income producing (continued)
B-47
<PAGE> 50
THE CARDINAL FUND INC.
- - --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS (CONTINUED)
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
FACE/ MARKET
SHARES VALUE
------- --------
<S> <C> <C>
COMMON STOCK (CONTINUED)
FOOD 2.40%
GoodMark Foods, Incorporated.............................................. 184,000 $ 3,404
Super Food Services, Incorporated......................................... 160,800 2,030
--------
5,434
--------
GAS 1.03%
Williams Companies Incorporated........................................... 60,000 2,340
--------
HEALTHCARE PROVIDERS 0.78%
U.S. HealthCare, Incorporated............................................. 50,000 1,769
--------
INDUSTRIAL SERVICES 1.57%
Graphic Industries, Incorporated.......................................... 123,500 1,266
New England Business Services, Incorporated............................... 110,500 2,279
--------
3,545
--------
INSURANCE 2.38%
Equitable of Iowa Companies............................................... 50,300 1,861
Marsh & McLennan Companies Incorporated................................... 40,000 3,515
--------
5,376
--------
INTEGRATED OILS 9.42%
Mobil Corporation......................................................... 75,000 7,471
Royal Dutch Petroleum Company............................................. 60,000 7,365
Texaco Incorporated....................................................... 100,000 6,463
--------
21,299
--------
MEDICAL SUPPLIES 0.43%
Fisher Scientific International, Incorporated............................. 30,000 971
--------
OTHER NONFERROUS METALS 2.24%
Worthington Industries, Incorporated...................................... 275,776 5,067
--------
PAPER 2.54%
Federal Paper Board Company............................................... 89,800 3,446
Union Camp Corporation.................................................... 40,000 2,305
--------
5,751
--------
</TABLE>
(continued)
B-48
<PAGE> 51
THE CARDINAL FUND INC.
- - --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS (CONTINUED)
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
FACE/ MARKET
SHARES VALUE
------- --------
<S> <C> <C>
COMMON STOCK (CONTINUED)
PHARMACEUTICALS 2.32%
American Home Products Corporation........................................ 50,000 $ 4,244
Mylan Laboratories, Incorporated.......................................... 50,000 1,000
--------
5,244
--------
PIPELINES 0.52%
Coastal Corporation....................................................... 35,000 1,177
--------
PROPERTY/CASUALTY INSURERS 3.91%
Cincinnati Financial Corporation.......................................... 162,750 8,850
--------
PUBLISHING 0.77%
Dun and Bradstreet Corporation............................................ 30,000 1,736
--------
SPECIALTY/RETAILERS 2.71%
Limited, Incorporated..................................................... 200,000 3,800
Stanley Works............................................................. 35,000 1,518
Sun Television and Appliances............................................. 70,000 429
Wolohan Lumber Company.................................................... 34,000 387
--------
6,134
--------
TELEPHONE 5.15%
GTE Corporation........................................................... 189,716 7,446
Sprint Corporation........................................................ 120,000 4,200
--------
11,646
--------
TOBACCO 2.77%
Philip Morris Companies, Incorporated..................................... 75,000 6,263
--------
TRANSPORTATION 1.65%
GATX Corporation.......................................................... 72,300 3,742
--------
TOTAL COMMON STOCK (COST $147,559,806)............................... 206,463
--------
REPURCHASE AGREEMENTS, FULLY COLLATERALIZED BY U.S.
GOVERNMENT OBLIGATIONS 7.30%
Fifth Third Bank, 6.25%, dated 9/29/95, due 10/02/95...................... 16,500
--------
TOTAL REPURCHASE AGREEMENTS (COST $16,500,000)....................... 16,500
--------
TOTAL INVESTMENTS (COST $164,059,806) 98.58%......................... $222,963
=========
</TABLE>
See accompanying notes to financial statements.
B-49
<PAGE> 52
THE CARDINAL FUND INC.
- - --------------------------------------------------------------------------------
STATEMENT OF ASSETS & LIABILITIES (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1995
ASSETS
<TABLE>
<S> <C>
Investments in securities, at value (cost $164,060)................................... $222,963
Cash.................................................................................. 206
Receivable for investment securities sold............................................. 2,999
Dividends and interest receivable..................................................... 825
Receivable for Fund shares sold....................................................... 102
Other assets.......................................................................... 111
--------
Total assets................................................................ 227,206
--------
LIABILITIES
Payable for Fund shares redeemed...................................................... 660
Accrued investment management and transfer agent fees (note 3)........................ 314
Other accrued expenses................................................................ 51
--------
Total liabilities........................................................... 1,025
--------
COMMITMENTS AND CONTINGENCIES (NOTE 4)
NET ASSETS -- applicable to 17,099,016 outstanding no par value shares of beneficial
interest (authorized 30,000,000).................................................... $226,181
=========
NET ASSET VALUE PER SHARE............................................................. $ 13.23
=========
</TABLE>
See accompanying notes to financial statements.
B-50
<PAGE> 53
THE CARDINAL FUND INC.
- - --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS (AMOUNTS IN THOUSANDS)
- - --------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends.............................................................................. $ 7,504
Interest............................................................................... 847
-------
Total income................................................................. 8,351
-------
EXPENSES:
Investment management fees (note 3).................................................... 1,159
Transfer agent fees and expenses (note 3).............................................. 256
-------
Total affiliated expenses.................................................... 1,415
-------
Custodian fees......................................................................... 25
Professional fees...................................................................... 60
Reports to shareholders................................................................ 37
Directors' fees........................................................................ 21
Registration fees...................................................................... 6
Other expenses......................................................................... 64
-------
Total non-affiliated expenses................................................ 213
-------
Total expenses............................................................... 1,628
-------
Net investment income........................................................ 6,723
-------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTE 2):
Net realized gain from security transactions........................................... 17,719
Increase in unrealized gain on investments............................................. 8,122
-------
Net realized gain and increase in unrealized gain on investments............. 25,841
-------
Net increase in net assets from operations................................... $32,564
========
</TABLE>
See accompanying notes to financial statements.
B-51
<PAGE> 54
THE CARDINAL FUND INC.
- - --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS (AMOUNTS IN THOUSANDS)
- - --------------------------------------------------------------------------------
YEARS ENDED SEPTEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income........................................... $ 6,723 $ 6,351
Net realized gain from security transactions.................... 17,719 17,362
Increase (decrease) in unrealized gain on investments........... 8,122 (14,821)
------------- -------------
Net increase in net assets from operations.................... 32,564 8,892
------------- -------------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Distributions of net investment income ($.35 and $.33 per share,
respectively)................................................. (6,566) (6,601)
Distribution of net realized gains from security transactions
($.83 and $.28 per share, respectively)....................... (15,750) (6,006)
------------- -------------
Total distributions to shareholders........................... (22,316) (12,607)
------------- -------------
FROM CAPITAL SHARE TRANSACTIONS (NOTE 5):
Proceeds from sale of Fund shares............................... 8,266 14,876
Net asset value of Fund shares issued in connection with
reinvestment of distributions to shareholders................. 20,894 11,831
------------- -------------
29,160 26,707
Cost of Fund shares redeemed.................................... (59,809) (58,535)
------------- -------------
Decrease in net assets derived from capital share
transactions............................................... (30,649) (31,828)
------------- -------------
Net decrease in net assets.................................... (20,401) (35,543)
NET ASSETS -- beginning of period............................... 246,582 282,125
------------- -------------
NET ASSETS -- end of period (undistributed net investment income
of $176 and $20, respectively)................................ $ 226,181 $ 246,582
============== ==============
</TABLE>
See accompanying notes to financial statements.
B-52
<PAGE> 55
THE CARDINAL FUND INC.
- - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1995
(1) -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Cardinal Fund Inc. (the "Fund") is registered under the Investment Company
Act of 1940, as a diversified, open-end management investment company. The
following is a summary of significant accounting policies followed by the Fund
in the preparation of its financial statements. The policies are in conformity
with generally accepted accounting principles for investment companies.
Security Valuation--Investments listed or traded on a national securities
exchange are valued at the last sale price or, if there has been no recent sale,
at the last bid price. Investments traded in the over-the-counter market are
valued at the last sale price. If no quotations are available, portfolio
securities are valued in good faith by the Board of Directors to reflect their
fair value.
Security Transactions and Investment Income--Security transactions are accounted
for on the trade date and dividend income is recorded on the ex-dividend date.
Interest income is recorded on the accrual basis. In determining the net
realized gain or loss on securities sold, the cost of the securities has been
determined on the first-in, first-out (FIFO) cost basis. It is the Fund's policy
for its Custodian, or a third-party bank, to take possession of all securities
pledged as collateral for repurchase agreements and monitor the market value of
the collateral to ensure that it remains sufficient to cover the repurchase
agreements.
Distributions to Shareholders--Distributions and dividends are recorded by the
Fund on the record date. Income dividends are declared quarterly and any capital
gain distribution is declared annually.
Federal Income Taxes--No provision has been made for Federal taxes on the Fund's
income, since it is the policy of the Fund to comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies and to make
sufficient distributions of taxable income and capital gains within the required
time to relieve it from all, or substantially all, Federal income taxes.
(2) -- PURCHASES AND SALES OF SECURITIES
The cost of purchases and proceeds from sales of investment securities
(excluding short-term obligations) during the year ended September 30, 1995
aggregated $43,227,000 and $91,217,776, respectively.
During the year ended September 30, 1995 the Fund realized on a FIFO cost basis
a net capital gain of $17,719,277 and $17,777,501 for book and tax purposes,
respectively.
At September 30, 1995, the book cost of investment securities was $164,059,806
and the tax cost was $164,085,672. The difference between book and tax cost is
attributable to securities acquired in the 1975 acquisition of the Ohio Capital
Fund, Inc. and remaining in the Fund's portfolio with a book cost of $68,235 and
a tax cost of $38,594.
As of September 30, 1995, for tax purposes, gross unrealized gains and gross
unrealized losses on investment securities were $60,316,804 and $1,439,149
respectively; resulting in a net unrealized gain of $58,877,655.
(3) -- TRANSACTIONS WITH AFFILIATES
As investment manager for the Fund, The Ohio Company (the Adviser), with whom
certain officers and directors of the Fund are affiliated is allowed an annual
fee of 0.5% of the average daily net assets of the Fund. For the year ended the
Fund paid or accrued $1,158,534 for investment management services. The Adviser
has agreed that if the aggregate expenses of the Fund, as defined, for any
fiscal year exceed the
(continued)
B-53
<PAGE> 56
THE CARDINAL FUND INC.
- - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1995
expense limitation of any state having jurisdiction over the Fund, the Adviser
will refund to the Fund, or otherwise bear, such excess. This limitation did not
affect the calculation of the management fee during the year ended September 30,
1995. In addition to providing management and advisory services, The Ohio
Company pays the compensation of all officers and employees of the Fund and
provides office space and certain related facilities required by the Fund.
The Ohio Company, acting as the General Distributor and Dealer, reported to the
Fund that it received commissions after discounts to dealers from the sale of
shares of the Fund of $170,827 for the year ended September 30, 1995. Cardinal
Management Corp., a wholly-owned subsidiary of The Ohio Company, provides
transfer agent services to the Fund. Transfer agent service fees are based on a
monthly charge per shareholder account plus out-of-pocket expenses. For the year
ended September 30, 1995 the Fund paid or accrued $255,882 for transfer agent
services provided by Cardinal Management Corp.
(4) -- COMMITMENTS AND CONTINGENCIES
The Fund has an available $5,000,000 line of credit with its custodian, Fifth
Third Bank, which was unused at September 30, 1995. When used, borrowings under
this arrangement are secured by portfolio securities and can be used only for
short term needs of the Fund. No compensating balances are required and the
arrangement bears an interest rate of 106% of the custodian's prime lending
rate.
Fidelity Bond and Errors and Omissions insurance coverage for the Fund and its
officers and directors has been obtained through ICI Mutual Insurance Company
(ICI Mutual), an industry-sponsored mutual insurance company. Included in other
assets of the Fund is a deposit of $28,588, for the initial capital of ICI
Mutual. The Fund is also committed to provide $85,764 should ICI Mutual
experience the need for additional capital contributions.
Included in other assets is a $56,000 certificate of deposit which
collateralizes a standby letter of credit in connection with the Fund's
participation in ICI Mutual. This amount is not available for investment.
(5) -- CAPITAL STOCK
At September 30, 1995, there were 30,000,000 shares of no par value capital
stock authorized and the capital amounts were as follows:
<TABLE>
<S> <C>
Paid in capital.................................................................... $147,820,440
Accumulated net realized gains on investments...................................... 19,280,863
Unrealized gain on investments..................................................... 58,903,521
Undistributed net investment income................................................ 176,409
------------
Net assets......................................................................... $226,181,233
=============
</TABLE>
(continued)
B-54
<PAGE> 57
THE CARDINAL FUND INC.
- - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1995
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
Shares sold........................................................ 677,512 1,161,378
Shares issued in connection with reinvestment of distributions
to shareholders.................................................. 1,830,954 936,172
Shares repurchased................................................. (4,782,671) (4,580,169)
---------- ----------
Net decrease....................................................... (2,274,205) (2,482,619)
Shares outstanding:
Beginning of period................................................ 19,373,221 21,855,840
---------- ----------
End of period...................................................... 17,099,016 19,373,221
========== ==========
</TABLE>
(6) -- SUBSEQUENT EVENT
On November 13, 1995 the Board of Directors approved an Agreement and Plan of
Reorganization and Liquidation between the Fund and The Cardinal Group ("TCG").
The plan calls for the transfer of all assets and liabilities of the Fund to a
series of TCG with the same basic investment objectives and restrictions. The
Trustees have determined that this action is in the best interests of the
shareholders of the Fund and TCG. Shareholder approval will be sought and is
needed to ratify the transaction.
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- - --------------------------------------------------------------------------------
Selected data for each share of capital stock outstanding throughout each
period:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, beginning............. $ 12.73 $ 12.91 $ 12.95 $ 11.88 $ 9.28
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income................ 0.36 0.31 0.32 0.35 0.35
Net realized and unrealized gains
(losses) on investments............ 1.32 0.12 0.55 1.37 2.70
-------- -------- -------- -------- --------
Total from investment operations....... 1.68 0.43 0.87 1.72 3.05
-------- -------- -------- -------- --------
Less distributions:
Dividends............................ (0.35) (0.33) (0.29) (0.36) (0.38)
Capital gain distribution............ (0.83) (0.28) (0.62) (0.29) (0.07)
-------- -------- -------- -------- --------
Total distributions.................... (1.18) (0.61) (0.91) (0.65) (0.45)
-------- -------- -------- -------- --------
Net Asset Value, ending................ $ 13.23 $ 12.73 $ 12.91 $ 12.95 $ 11.88
======== ======== ======== ======== ========
Ratios/Supplemental Data:
Total return........................... 14.84% 3.38% 6.98% 15.05% 33.54%
======== ======== ======== ======== ========
Net assets, ending (000)............... $226,181 $246,581 $282,125 $261,392 $221,428
======== ======== ======== ======== ========
Ratio of expenses to average net
assets............................... 0.70% 0.72% 0.68% 0.67% 0.67%
======== ======== ======== ======== ========
Ratio of net investment income to
average net assets................... 2.89% 2.40% 2.46% 2.83% 3.15%
======== ======== ======== ======== ========
Portfolio turnover rate................ 19.78% 23.20% 11.11% 6.22% 33.27%
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
B-55
<PAGE> 58
- - --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- - --------------------------------------------------------------------------------
The Shareholders and Board of Directors
The Cardinal Fund Inc.:
We have audited the accompanying statement of assets and liabilities of The
Cardinal Fund Inc. (the Fund), including the statement of investments, as of
September 30, 1995, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the years in the
two-year period then ended and the financial highlights for each of the years in
the five-year period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included verification of securities owned as of
September 30, 1995, by confirmation with the custodian and other appropriate
audit procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of The
Cardinal Fund Inc. as of September 30, 1995, the results of its operations for
the year then ended, the changes in its net assets for each of the years in the
two-year period then ended, and the financial highlights for each of the years
in the five-year period then ended, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Columbus, Ohio
November 17, 1995
B-56
<PAGE> 59
CARDINAL GOVERNMENT OBLIGATIONS FUND
- - --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS (AMOUNTS IN THOUSANDS)
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
PRINCIPAL VALUE
SECURITIES AMOUNT (NOTE 1)
- - ---------------------------------------------------------------------------- -------- ---------
<S> <C> <C>
DIRECT U.S. GOVERNMENT OBLIGATIONS 1.35%
U.S. Treasury Notes, 6.50% maturing 8/15/05................................. $ 2,000 $ 2,050
-------- ---------
TOTAL DIRECT U.S. GOVERNMENT OBLIGATIONS.............................. 2,000 2,050
-------- ---------
U.S. GOVERNMENT AGENCY OBLIGATIONS 99.44%
GNMA I PL Notes, 8.00% maturing 9/15/23 through 8/15/35..................... 4,692 4,757
GNMA I PL Notes, 8.15% maturing 1/15/24..................................... 2,334 2,411
GNMA I PL Notes, 8.25% maturing 11/15/96 through 11/15/34................... 11,903 12,171
GNMA I PL Notes, 8.50% maturing 6/15/22 through 12/15/30.................... 8,868 9,223
GNMA I PL Notes, 8.75% maturing 8/15/24 through 4/15/25..................... 3,614 3,777
GNMA I PL Notes, 9.00% maturing 10/15/21 through 12/15/34................... 7,997 8,336
GNMA I PL Notes, 9.25% maturing 3/15/30 through 2/15/33..................... 1,658 1,746
GNMA I PL Notes, 9.50% maturing 1/15/19 through 8/15/22..................... 1,309 1,343
GNMA I PL Notes, 9.75% maturing 12/15/25.................................... 1,879 1,981
GNMA I PL Notes, 10.25% maturing 2/15/17 through 12/15/22................... 1,644 1,705
GNMA I PL Notes, 10.50% maturing 7/15/14.................................... 1,039 1,080
GNMA I Notes, 8.00% maturing 10/15/24 through 5/15/25....................... 3,880 3,992
GNMA I Notes, 8.50% maturing 5/15/16 through 8/15/17........................ 11,463 12,032
GNMA I Notes, 8.75% maturing 12/15/16 through 1/15/25....................... 1,916 2,021
GNMA I Notes, 9.00% maturing 5/15/16 through 4/15/21........................ 23,411 24,837
GNMA I Notes, 9.50% maturing 4/15/16 through 3/15/20........................ 2,106 2,259
GNMA I Notes, 11.00% maturing 1/15/10 through 6/15/20....................... 6,775 7,605
GNMA II Notes, 9.00% maturing 10/20/15 through 10/20/19..................... 10,629 11,170
GNMA II Notes, 9.50% maturing 1/20/16 through 12/20/22...................... 5,331 5,649
GNMA II Notes, 10.00% maturing 1/20/14 through 12/20/21..................... 11,416 12,401
GNMA II Notes, 10.50% maturing 9/20/13 through 9/20/19...................... 2,421 2,639
GNMA II Notes, 11.00% maturing 10/20/13 through 1/20/21..................... 2,806 3,074
Fed. Home Loan Mtg. Corp., 7.00% maturing 9/01/10........................... 3,055 3,067
Fed. Home Loan Mtg. Corp., 7.50% maturing 5/01/09 through 6/01/10........... 5,318 5,414
Fed. Home Loan Mtg. Corp., 8.00% maturing 11/01/09 through 7/01/10.......... 6,000 6,171
-------- ---------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS.............................. 143,464 150,861
-------- ---------
REPURCHASE AGREEMENTS, FULLY COLLATERALIZED BY U.S. GOVERNMENT OBLIGATIONS 0.66%
Fifth Third Bank, 6.25%, dated 9/29/95, due 10/02/95........................ 1,000 1,000
-------- ---------
TOTAL REPURCHASE AGREEMENTS........................................... 1,000 1,000
-------- ---------
TOTAL INVESTMENTS (COST $152,787) 101.45%............................. $146,464 $153,911
======== =========
</TABLE>
GNMA -- Government National Mortgage Association
PL -- Project Loan
Cost also represents cost for Federal income tax purposes.
See accompanying notes to financial statements.
B-57
<PAGE> 60
CARDINAL GOVERNMENT OBLIGATIONS FUND
- - --------------------------------------------------------------------------------
STATEMENT OF ASSETS & LIABILITIES (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1995
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost $152,787)........................... $ 153,911
Cash.......................................................................... 338
Interest receivable........................................................... 1,101
Receivable for Fund shares sold............................................... 23
Other assets.................................................................. 112
---------
Total assets........................................................ 155,485
---------
LIABILITIES
Payable for investment securities purchased................................... 3,094
Dividends payable............................................................. 405
Payable for Fund shares redeemed.............................................. 152
Accrued investment management, accounting and transfer agent fees (note 3).... 83
Other accrued expenses........................................................ 40
---------
Total liabilities................................................... 3,774
---------
COMMITMENTS AND CONTINGENCIES (NOTE 4)
NET ASSETS--applicable to 18,543,620 outstanding no par value shares of
beneficial interest (unlimited number of shares authorized)................. $ 151,711
=========
NET ASSET VALUE PER SHARE..................................................... $ 8.18
=========
</TABLE>
See accompanying notes to financial statements.
B-58
<PAGE> 61
CARDINAL GOVERNMENT OBLIGATIONS FUND
- - --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS (AMOUNTS IN THOUSANDS)
- - --------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest......................................................................... $13,679
-------
EXPENSES:
Investment management fees (note 3).............................................. 784
Transfer agent fees and expenses (note 3)........................................ 174
Accounting fees (note 3)......................................................... 41
-------
Total affiliated expenses............................................ 999
-------
Custodian fees................................................................... 47
Professional fees................................................................ 51
Reports to shareholders.......................................................... 33
Directors' fees.................................................................. 19
Registration fees................................................................ 7
Other expenses................................................................... 50
-------
Total non-affiliated expenses........................................ 207
-------
Total expenses....................................................... 1,206
-------
Net investment income................................................ 12,473
-------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS (NOTE 2):
Net realized loss from security transactions..................................... (4,514)
Increase in unrealized gain on investments....................................... 8,934
-------
Net realized loss and increase in unrealized gain on investments..... 4,420
-------
Net increase in net assets from operations........................... $16,893
========
</TABLE>
See accompanying notes to financial statements.
B-59
<PAGE> 62
CARDINAL GOVERNMENT OBLIGATIONS FUND
- - --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS (AMOUNTS IN THOUSANDS)
- - --------------------------------------------------------------------------------
YEARS ENDED SEPTEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
FROM OPERATIONS:
Net investment income................................................ $ 12,473 $ 14,842
Net realized loss from security transactions......................... (4,514) (5,070)
Increase (decrease) in unrealized gain on investments................ 8,934 (10,125)
-------- --------
Net increase (decrease) in net assets from operations........... 16,893 (353)
-------- --------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Distributions of net investment income ($.64 and $.65 per share,
respectively)...................................................... (12,572) (14,708)
-------- --------
FROM CAPITAL SHARE TRANSACTIONS (NOTE 5):
Proceeds from sale of Fund shares.................................... 5,355 12,690
Net asset value of Fund shares issued in connection with reinvestment
of distributions to shareholders................................... 7,272 8,662
-------- --------
12,627 21,352
Cost of Fund shares redeemed......................................... (34,766) (45,645)
-------- --------
Decrease in net assets derived from capital share
transactions................................................... (22,139) (24,293)
-------- --------
Net decrease in net assets...................................... (17,818) (39,354)
NET ASSETS--beginning of period...................................... 169,529 208,883
-------- --------
NET ASSETS--end of period (overdistributed net investment income of
$100 and $2, respectively)......................................... $151,711 $169,529
========= =========
</TABLE>
See accompanying notes to financial statements.
B-60
<PAGE> 63
CARDINAL GOVERNMENT OBLIGATIONS FUND
- - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1995
(1) -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cardinal Government Obligations Fund (the "Fund") is a diversified, open-end
investment company created under the laws of Ohio by a Declaration of Trust
dated November 15, 1985 and is registered under the Investment Company Act of
1940. The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles for investment
companies.
Security Valuation -- Portfolio securities for which over-the-counter market
quotations are readily available are valued at the bid price. If no quotations
are available, portfolio securities are valued in good faith by the Board of
Trustees of the Fund to reflect their fair value.
Security Transactions and Investment Income -- Security transactions are
recorded on the trade date. Interest income is recorded on the accrual basis.
Premiums and discounts are recognized as realized gains or losses from security
transactions as securities are sold or as principal reductions are received. In
determining the net realized gain or loss on securities sold, the cost of the
securities has been determined on first-in, first-out (FIFO) cost basis.
Federal Income Taxes -- No provision has been made for Federal taxes on the
Fund's income, since it is the policy of the Fund to comply with the provisions
of the Internal Revenue Code applicable to regulated investment companies and to
make sufficient distributions of taxable income and capital gains within the
required time to relieve it from all, or substantially all, Federal income
taxes.
Dividends to Shareholders -- Dividends are declared and accrued daily and (for
those shareholders not electing cash distribution of dividends) automatically
reinvested monthly, at net asset value, in additional shares of the Fund.
(2) -- PURCHASES AND SALES OF SECURITIES
Purchases and sales of U.S. government agency obligations (excluding short-term
obligations) during the year ended September 30, 1995 aggregated $57,596,492 and
$60,730,057, respectively.
As of September 30, 1995, gross unrealized gains and gross unrealized losses on
investment securities were $2,136,800 and $1,012,380, respectively; resulting in
a net unrealized gain of $1,124,420 on investment securities with a cost basis
of $152,786,945.
(3) -- TRANSACTIONS WITH AFFILIATES
As investment manager for the Fund, Cardinal Management Corp. (CMC), an
affiliated company, is allowed an annual fee of 0.5% of the average daily net
assets of the Fund. CMC has agreed that if the aggregate expenses of the Fund,
as defined, for any fiscal year exceed the expense limitation of any state
having jurisdiction over the Fund, CMC will refund to the Fund, or otherwise
bear, such excess. This limitation did not affect the calculation of the
management fee during the year ended September 30, 1995.
(continued)
B-61
<PAGE> 64
CARDINAL GOVERNMENT OBLIGATIONS FUND
- - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1995
CMC also serves the Fund as transfer agent and fund accountant. Transfer agent
service fees are based on a monthly charge per shareholder account plus
out-of-pocket expenses. Accounting service fees are based on the monthly average
net assets of the Fund. For the year ended September 30, 1995 the Fund paid or
accrued $174,394 and $40,879 for transfer agent and fund accounting services,
respectively.
The Ohio Company, sole shareholder of CMC, acting as distributor for the Fund,
reported that it received commissions after discounts to dealers from the sale
of shares of the Fund of $147,536 for the year ended September 30, 1995.
(4) -- COMMITMENTS AND CONTINGENCIES
The Fund has an available $5,000,000 line of credit with its custodian, Fifth
Third Bank, which was unused at September 30, 1995. When used, borrowings under
this arrangement are secured by portfolio securities and can be used only for
short term needs of the Fund. No compensating balances are required and the
arrangement bears an interest rate of 106% of the custodian's prime lending
rate.
Fidelity Bond and Errors and Omissions insurance coverage for the Fund and its
officers and trustees has been obtained through ICI Mutual Insurance Company
(ICI Mutual), an industry-sponsored mutual insurance company. Included in other
assets of the Fund is a deposit of $30,644, for the initial capital of ICI
Mutual. The Fund is also committed to provide $91,932 should ICI Mutual
experience the need for additional capital contributions.
Included in other assets is a $61,000 certificate of deposit which
collateralizes a standby letter of credit in connection with the Fund's
participation in ICI Mutual. This amount is not available for investment.
(5) -- CAPITAL STOCK
At September 30, 1995, there were an unlimited number of shares of no par value
capital stock authorized and the capital amounts were as follows:
<TABLE>
<S> <C>
Paid in capital.................................................................... $ 173,076,183
Accumulated net realized loss on investments....................................... (22,389,694)
Unrealized gain on investments..................................................... 1,124,420
Overdistributed net investment income.............................................. (100,238)
-------------
Net assets......................................................................... $ 151,710,671
=============
</TABLE>
For tax purposes, the accumulated net realized loss on investments (capital loss
carryforwards) of approximately $22,800,000 expire throughout the next eight
years. Approximately $3,800,000 of capital loss carryforwards expired during the
year ended September 30, 1995. The Fund will not declare any capital gain
distributions until the carryforwards have been offset or expired.
B-62
<PAGE> 65
CARDINAL GOVERNMENT OBLIGATIONS FUND
- - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1995
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30,
---------------------------
1995 1994
----------- -----------
<S> <C> <C>
Shares sold.......................................................... 669,572 1,514,461
Shares issued in connection with reinvestment of distributions to
shareholders....................................................... 908,617 1,045,107
----------- -----------
1,578,189 2,559,568
Shares repurchased................................................... (4,320,495) (5,478,768)
----------- -----------
Net decrease......................................................... (2,742,306) (2,919,200)
Shares outstanding:
Beginning of period.................................................. 21,285,926 24,205,126
----------- -----------
End of period........................................................ 18,543,620 21,285,926
========== ==========
</TABLE>
(6) -- SUBSEQUENT EVENT
On November 13, 1995 the Board of Trustees approved an Agreement and Plan of
Reorganization and Liquidation between the Fund and The Cardinal Group ("TCG").
The plan calls for the transfer of all assets and liabilities of the Fund to a
series of TCG with the same basic investment objectives and restrictions. The
Trustees have determined that this action is in the best interests of the
shareholders of the Fund and TCG. Shareholder approval will be sought and is
needed to ratify the transaction.
B-63
<PAGE> 66
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- - --------------------------------------------------------------------------------
Selected data for each share of capital stock outstanding throughout each
period:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, beginning.............. $ 7.96 $ 8.63 $ 8.95 $ 8.99 $ 8.71
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income................. 0.64 0.66 0.74 0.80 0.81
Net realized and unrealized gains
(losses) on securities............. 0.22 (0.68) (0.32) (0.04) 0.28
-------- -------- -------- -------- --------
Total from investment operations........ 0.86 (0.02) 0.42 0.76 1.09
-------- -------- -------- -------- --------
Less distributions:
Dividends............................. (0.64) (0.65) (0.74) (0.80) (0.81)
-------- -------- -------- -------- --------
Net Asset Value, ending................. $ 8.18 $ 7.96 $ 8.63 $ 8.95 $ 8.99
========= ========= ========= ========= =========
Ratios/Supplemental Data:
Total return............................ 11.27% (0.27%) 4.83% 8.87% 13.07%
========= ========= ========= ========= =========
Net assets, ending (000)................ $151,711 $169,529 $208,883 $172,139 $128,569
========= ========= ========= ========= =========
Ratio of expenses to average net
assets................................ 0.76% 0.75% 0.73% 0.76% 0.76%
========= ========= ========= ========= =========
Ratio of net investment income to
average net assets.................... 7.93% 7.88% 8.32% 8.89% 9.20%
========= ========= ========= ========= =========
Portfolio turnover rate................. 36.71% 21.95% 24.94% 17.15% 34.81%
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
B-64
<PAGE> 67
- - --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- - --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
Cardinal Government Obligations Fund:
We have audited the accompanying statement of assets and liabilities of Cardinal
Government Obligations Fund (the Fund), including the statement of investments,
as of September 30, 1995, and the related statement of operations for the year
then ended, the statements of changes in net assets for each of the years in the
two-year period then ended and the financial highlights for each of the years in
the five-year period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included verification of securities owned as of
September 30, 1995, by confirmation with the custodian and other appropriate
audit procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Cardinal Government Obligations Fund as of September 30, 1995, the results of
its operations for the year then ended, the changes in its net assets for each
of the years in the two-year period then ended, and the financial highlights for
each of the years in the five-year period then ended, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Columbus, Ohio
November 17, 1995
B-65
<PAGE> 68
CARDINAL GOVERNMENT SECURITIES TRUST
- - --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS (AMOUNTS IN THOUSANDS)
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
MATURITY PRINCIPAL VALUE
SECURITIES DATE AMOUNT (NOTE 1)
- - ----------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
DIRECT U.S. GOVERNMENT OBLIGATIONS 34.50%
U.S. Treasury Bills.................................................... 10/19/95 $ 40,000 $ 39,894
U.S. Treasury Bills.................................................... 11/02/95 20,000 19,904
U.S. Treasury Bills.................................................... 11/16/95 20,000 19,864
U.S. Treasury Bills.................................................... 12/07/95 35,000 34,660
U.S. Treasury Bills.................................................... 01/18/96 20,000 19,687
U.S. Treasury Bills.................................................... 02/08/96 20,000 19,625
--------- ---------
TOTAL DIRECT U.S. GOVERNMENT OBLIGATIONS......................... 155,000 153,634
--------- ---------
REPURCHASE AGREEMENTS, FULLY COLLATERALIZED BY U.S. GOVERNMENT AND
FEDERAL AGENCY OBLIGATIONS 65.90%
Smith Barney Shearson, 5.80%, dated 9/25/95............................ 10/02/95 80,000 80,000
Paine Webber Inc., 5.80%, dated 9/25/95................................ 10/02/95 93,000 93,000
Merrill Lynch Securities, 6.35%, dated 9/29/95......................... 10/02/95 39,000 39,000
Fifth Third Bank, 6.25%, dated 9/29/95................................. 10/02/95 6,500 6,500
Fifth Third Bank, 5.75%, dated 9/26/95................................. 10/03/95 75,000 75,000
--------- ---------
TOTAL REPURCHASE AGREEMENTS...................................... 293,500 293,500
--------- ---------
TOTAL INVESTMENTS AT AMORTIZED COST 100.40%...................... $ 448,500 $ 447,134
======== ========
</TABLE>
Cost also represents cost for Federal income tax purposes.
See accompanying notes to financial statements.
B-66
<PAGE> 69
CARDINAL GOVERNMENT SECURITIES TRUST
- - --------------------------------------------------------------------------------
STATEMENT OF ASSETS & LIABILITIES (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1995
<TABLE>
<S> <C>
ASSETS
Investments in securities at amortized cost...................................... $ 447,134
Cash............................................................................. 401
Interest receivable.............................................................. 291
Other assets..................................................................... 314
---------
Total assets......................................................... 448,140
---------
LIABILITIES
Payable for Trust shares redeemed................................................ 2,360
Payable for shareholder distributions............................................ 26
Accrued investment management, accounting and transfer agent fees (note 2)....... 274
Other accrued expenses........................................................... 106
---------
Total liabilities.................................................... 2,766
---------
COMMITMENTS AND CONTINGENCIES (NOTE 3)
NET ASSETS -- applicable to 445,373,567 outstanding $.01 par value shares of
beneficial interest (unlimited number of shares authorized).................... $ 445,374
=========
NET ASSET VALUE PER SHARE........................................................ $1.00
=========
</TABLE>
See accompanying notes to financial statements.
B-67
<PAGE> 70
CARDINAL GOVERNMENT SECURITIES TRUST
- - --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS (AMOUNTS IN THOUSANDS)
- - --------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest............................................................. $ 23,311
--------
EXPENSES:
Investment management fees (note 2).................................. 2,032
Transfer agent fees and expenses (note 2)............................ 842
Accounting fees (note 2)............................................. 53
--------
Total affiliated expenses.................................. 2,927
--------
Custodian fees....................................................... 34
Professional fees.................................................... 90
Reports to shareholders.............................................. 65
Trustees' fees....................................................... 25
Registration fees.................................................... 9
Other expenses....................................................... 151
--------
Total non-affiliated expenses.............................. 374
--------
Total expenses............................................. 3,301
--------
Net increase in net assets from operations................. $ 20,010
========
</TABLE>
See accompanying notes to financial statements.
B-68
<PAGE> 71
CARDINAL GOVERNMENT SECURITIES TRUST
- - --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS (AMOUNTS IN THOUSANDS)
- - --------------------------------------------------------------------------------
YEARS ENDED SEPTEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- ------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income........................................... $ 20,010 $ 11,615
Net realized loss from security transactions.................... 0 (1,463)
----------- ------------
Net increase in net assets from operations................. 20,010 10,152
----------- ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Total distributions to shareholders............................. (20,010) (11,303)
----------- ------------
FROM CAPITAL SHARE TRANSACTIONS (NOTE 4):
Proceeds from sale of shares.................................... 1,052,266 987,709
Reinvestment of distributions to shareholders................... 19,567 11,027
Cost of shares redeemed......................................... (993,975) (1,033,978)
----------- ------------
Increase (decrease) in net assets derived from capital
share transactions....................................... 77,858 (35,242)
----------- ------------
FROM CAPITAL CONTRIBUTIONS (NOTE 2):
Capital contributed by Cardinal Management Corp................. 0 1,151
----------- ------------
Net increase (decrease) in net assets...................... 77,858 (35,242)
NET ASSETS -- beginning of period............................... 367,516 402,758
----------- ------------
NET ASSETS -- end of period..................................... $ 445,374 $ 367,516
========== ============
</TABLE>
See accompanying notes to financial statements.
B-69
<PAGE> 72
CARDINAL GOVERNMENT SECURITIES TRUST
- - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1995
(1) -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cardinal Government Securities Trust (the Trust) is a diversified, open-end
investment company created under the laws of Pennsylvania by a Declaration of
Trust dated March 21, 1980 and is registered under the Investment Company Act of
1940. According to the terms of the Declaration of Trust, Trust investments must
be obligations (or collateralized by obligations) of the U.S. Government or
agencies thereof. The following is a summary of significant accounting policies
followed by the Trust in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
Security Valuation -- Securities are valued at amortized cost which approximates
fair value (premiums and discounts are amortized on a straight-line basis). The
use of this method requires the Trust to maintain a dollar-weighted average
portfolio maturity of 90 days or less and purchase only securities having a
remaining maturity of thirteen months or less.
Security Transactions and Investment Income -- Security transactions are
recorded on the trade date. Interest income is recorded on the accrual basis. It
is the Trust's policy for its Custodian or a third-party bank to take possession
of all securities pledged as collateral for repurchase agreements and monitor
the market value of the collateral to ensure that it remains sufficient to cover
the repurchase agreements.
Federal Income Taxes -- No provision has been made for Federal taxes on the
Trust's income, since it is the policy of the Trust to comply with the
provisions of the Internal Revenue Code applicable to regulated investment
companies and to make sufficient distributions of taxable income and capital
gains within the required time to relieve it from all, or substantially all,
Federal income taxes.
Dividends to Shareholders -- Dividends are declared and accrued daily and (for
those shareholders not electing cash distribution of dividends) automatically
reinvested monthly in additional shares from the sum of net investment income
and net realized short-term gains.
(2) -- TRANSACTIONS WITH AFFILIATES
As investment manager for the Trust, Cardinal Management Corp. (CMC), an
affiliated company, is allowed an annual fee of 0.5% of the average daily net
assets of the Trust. CMC has agreed that if the aggregate expenses of the Trust,
as defined, for any fiscal year exceed the expense limitation of any state
having jurisdiction over the Trust, CMC will refund to the Trust, or otherwise
bear, such excess. This limitation did not affect the calculation of the
management fee during the year ended September 30, 1995.
CMC also serves the Trust as transfer agent and fund accountant. Transfer agent
service fees are based on a monthly charge per shareholder account plus
out-of-pocket expenses. Accounting service fees are based on the monthly average
net assets of the Trust. For the year ended September 30, 1995 the Trust paid or
accrued $842,187 and $53,283 for transfer agent and fund accounting services,
respectively.
To offset capital losses incurred by the Trust, CMC contributed $1,151,186 to
the Trust during the year ended September 30, 1994. The amount contributed was
equal to the investment management, transfer agent service and the fund
accounting fees for the period from May 1, 1994 through September 30, 1994.
(continued)
B-70
<PAGE> 73
CARDINAL GOVERNMENT SECURITIES TRUST
- - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1995
The Ohio Company, sole shareholder of CMC, serves as the Trust's distributor
and, in connection therewith receives purchase orders and redemption requests
relating to Trust shares. During the year ended September 30, 1995 the Trust
incurred no expenses related to the distribution of its shares.
(3) -- COMMITMENTS AND CONTINGENCIES
The Trust has an available $6,000,000 line of credit with its custodian, Fifth
Third Bank, which was unused at September 30, 1995. When used, borrowings under
this arrangement are secured by portfolio securities and can be used only for
short term needs of the Trust. No compensating balances are required and the
arrangement bears an interest rate of 106% of the custodian's prime lending
rate.
Fidelity Bond and Errors and Omissions insurance coverage for the Trust and its
officers and trustees has been obtained through ICI Mutual Insurance Company
(ICI Mutual), an industry-sponsored mutual insurance company. Included in other
assets of the Trust is a deposit of $87,459 for the initial capital of ICI
Mutual. The Trust is also committed to provide $262,377 should ICI Mutual
experience the need for additional capital contributions.
Included in other assets is a $175,000 certificate of deposit which
collateralizes a standby letter of credit in connection with the Trust's
participation in ICI Mutual. This amount is not available for investment.
(4) -- CAPITAL STOCK
At September 30, 1995, there were an unlimited number of $.01 par value shares
of capital stock and the capital amounts were as follows:
<TABLE>
<S> <C>
Paid in capital.................................................................. $446,524,753
Accumulated net realized loss on investments..................................... (1,463,438)
Undistributed net investment income.............................................. 312,252
------------
Net assets....................................................................... $445,373,567
=============
</TABLE>
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30,
--------------------------------
1995 1994
------------- --------------
<S> <C> <C>
Shares sold..................................................... 1,052,265,662 987,708,658
Shares issued in connection with reinvestment of distributions
to shareholders............................................... 19,567,048 11,026,622
------------- --------------
1,071,832,710 998,735,280
Shares repurchased.............................................. (993,975,623) (1,033,976,922)
------------- --------------
Net increase (decrease)......................................... 77,857,087 (35,241,642)
Shares outstanding:
Beginning of period............................................. 367,516,480 402,758,122
------------- --------------
End of period................................................... 445,373,567 367,516,480
============= ==============
</TABLE>
B-71
<PAGE> 74
(5) -- SUBSEQUENT EVENT
On November 13, 1995 the Board of Trustees approved an Agreement and Plan of
Reorganization and Liquidation between the Trust and The Cardinal Group ("TCG").
The plan calls for the transfer of all assets and liabilities of the Trust to a
series of TCG with the same basic investment objectives and restrictions. The
Trustees have determined that this action is in the best interests of the
shareholders of the Trust and TCG. Shareholder approval will be sought and is
needed to ratify the transaction.
B-72
<PAGE> 75
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- - --------------------------------------------------------------------------------
Selected data for each share of capital stock outstanding throughout each
period:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value, beginning............................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- --------- --------- --------- ---------
Income from investment operations:
Net investment income................................ 0.05 0.03 0.02 0.04 0.06
Less distributions:
Dividends............................................ (0.05) (0.03) (0.02) (0.04) (0.06)
--------- --------- --------- --------- ---------
Net Asset Value, ending................................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Ratios/Supplemental Data:
Total return*.......................................... 4.98% 2.84% 2.41% 3.58% 6.20%
======== ======== ======== ======== ========
Net assets, ending (000)............................... $ 445,374 $ 367,516 $ 402,758 $ 472,521 $ 567,841
======== ======== ======== ======== ========
Ratio of expenses to average net assets................ 0.81% 0.85% 0.79% 0.76% 0.72%
======== ======== ======== ======== ========
Ratio of net investment income to average net assets... 4.92% 2.94% 2.38% 3.52% 6.03%
======== ======== ======== ======== ========
</TABLE>
* Without the capital contribution discussed in note 2, the 1994 total return
would have been 2.55%.
See accompanying notes to financial statements.
- - --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- - --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
Cardinal Government Securities Trust:
We have audited the accompanying statement of assets and liabilities of Cardinal
Government Securities Trust (the Trust), including the statement of investments,
as of September 30, 1995, and the related statement of operations for the year
then ended, the statements of changes in net assets for each of the years in the
two-year period then ended and the financial highlights for each of the years in
the five-year period then ended. These financial statements and financial
highlights are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included verification of securities owned as of
September 30, 1995, by confirmation with the custodian and other appropriate
audit procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Cardinal Government Securities Trust as of September 30, 1995, the results of
its operations for the year then ended, the changes in its net assets for each
of the years in the two-year period then ended, and the financial highlights for
each of the years in the five-year period then ended, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Columbus, Ohio
November 17, 1995
B-73
<PAGE> 76
CARDINAL TAX EXEMPT MONEY TRUST
- - --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS (AMOUNTS IN THOUSANDS)
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
2A-7* FINAL PRINCIPAL VALUE
SECURITIES MATURITY MATURITY AMOUNT (NOTE 1)
- - ------------------------------------------------------------------------------ --------- --------- --------- --------
<S> <C> <C> <C> <C>
MUNICIPAL SECURITIES 98.95%
Ashtabula County, Ohio, Brighton Manor Project, VRN, currently 4.60%.......... 10/04/95 12/01/16 $ 2,200 $ 2,200
Connecticut Development (Light & Power Co.), VRN, currently 4.40%............. 10/04/95 9/01/28 3,400 3,400
Cornell Township, Michigan, Economic Development, IRB, currently 3.80%........ 10/02/95 3/01/15 3,100 3,100
Erie County, Ohio, Brighton Manor Project, VRN, currently 4.60%............... 10/04/95 11/01/16 600 600
Florida Housing Agency, VRN, currently 4.35%.................................. 10/04/95 12/01/11 3,400 3,400
Grand Prairie, Texas Housing Finance Authority, VRN, currently 4.35%.......... 10/04/95 6/01/10 1,800 1,800
Greater East Texas Higher Education, VRN, currently 4.30%..................... 10/05/95 9/01/02 2,300 2,300
Hillsborough County, Florida, VRN, currently 4.50%............................ 10/02/95 9/01/25 3,300 3,300
Hockley County, Texas, PCRB, currently 3.65%.................................. 3/01/96 3/01/14 1,750 1,750
Jackson County, Mississippi, PCRB, currently 4.40%............................ 10/02/95 12/01/16 1,800 1,800
Jackson County, Mississippi, PCRB, currently 4.40%............................ 10/02/95 6/01/23 300 300
Lincoln County, Wyoming, PCRB, currently 4.60%................................ 10/02/95 11/01/14 3,000 3,000
Lisle, Illinois, VRN, currently 4.30%......................................... 10/05/95 12/15/25 2,500 2,500
Louisiana Public Facilities Authority (Kenner Hotels), IRB, currently 4.60%... 10/02/95 12/01/15 2,000 2,000
Louisiana Public Facilities Authority, VRN, currently 4.35%................... 10/04/95 10/01/22 1,000 1,000
Marion County, West Virginia Waste Disposal, RB, currently 4.55%.............. 10/04/95 10/01/17 1,000 1,000
Marion County, West Virginia Waste Disposal, RB, currently 4.50%.............. 10/04/95 10/01/17 2,200 2,200
Marion County, West Virginia Waste Disposal, RB, currently 4.50%.............. 10/04/95 10/01/17 1,000 1,000
Muldrow, Oklahoma Public Wks. Authority, IRB, currently 4.45%................. 10/03/95 2/01/15 3,000 3,000
New York City Municipal Water Finance Agency, VRN, currently 4.60%............ 10/02/95 6/15/23 2,000 2,000
New York State Energy Research & Development Authority, VRN, currently
4.10%....................................................................... 10/04/95 6/01/27 3,000 3,000
Ohio, Higher Education, RB, currently 4.40%................................... 10/05/95 12/01/06 1,280 1,280
Platte County, Wyoming, VRN, currently 4.60%.................................. 10/02/95 7/01/14 1,800 1,800
Port of Anacortes, Washington, IRB, currently 3.50%........................... 10/05/95 6/15/19 3,000 3,000
Private College & University, Georgia, RB, currently 3.60%.................... 10/16/95 10/01/15 3,000 3,000
Saint Charles, Louisiana, PCRB, currently 4.20%............................... 10/04/95 6/01/05 3,200 3,200
Sandusky County, Ohio, Brighton Manor Project, IRB, currently 4.60%........... 10/04/95 12/01/16 500 500
Springfield, Illinois, Second and Adams Project, RB, currently 4.45%.......... 10/03/95 12/01/15 1,170 1,170
Washington State Fin. Commiss. Rev., RB, currently 4.55%...................... 10/03/95 1/01/10 4,000 4,000
West Feliciana, Louisiana, VRN, currently 4.50%............................... 10/02/95 12/01/15 1,500 1,500
--------- --------
TOTAL INVESTMENTS AT AMORTIZED COST 98.95%.................................. $64,100 $64,100
======== =========
</TABLE>
VRN -- Variable Rate Notes
IRB -- Variable Rate Industrial Revenue Bonds
RB -- Variable Rate Revenue Bonds
PCRB -- Variable Rate Pollution Control Revenue Bonds
* Rule 2a-7, of the Investment Company Act of 1940, defines maturity as the
longer of the period remaining until the next readjustment of the interest
rate or the period remaining until the principal amount can be recovered
through demand.
Cost also represents cost for Federal income tax purposes.
See accompanying notes to financial statements.
B-74
<PAGE> 77
CARDINAL TAX EXEMPT MONEY TRUST
- - --------------------------------------------------------------------------------
STATEMENT OF ASSETS & LIABILITIES (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1995
<TABLE>
<S> <C>
ASSETS
Investments in securities at amortized cost...................................... $64,100
Cash............................................................................. 974
Interest receivable.............................................................. 228
Receivable for Trust shares sold................................................. 2
Other assets..................................................................... 55
-----------------
Total assets........................................................... 65,359
-----------------
LIABILITIES
Payable for Trust shares redeemed................................................ 510
Payable for shareholder distributions............................................ 9
Accrued investment management, accounting and transfer agent fees (note 2)....... 35
Other accrued expenses........................................................... 25
-----------------
Total liabilities...................................................... 579
-----------------
COMMITMENTS AND CONTINGENCIES (NOTE 3)
NET ASSETS -- applicable to 64,779,828 outstanding $.10 par value shares of
beneficial interest (unlimited number of shares authorized).................... $64,780
=================
NET ASSET VALUE PER SHARE........................................................ $ 1.00
=================
</TABLE>
See accompanying notes to financial statements.
B-75
<PAGE> 78
CARDINAL TAX EXEMPT MONEY TRUST
- - --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS (AMOUNTS IN THOUSANDS)
- - --------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest................................................................. $2,608
------
EXPENSES:
Investment management fees (note 2)...................................... 344
Transfer agent fees and expenses (note 2)................................ 63
Accounting fees (note 2)................................................. 17
------
Total affiliated expenses...................................... 424
------
Custodian fees........................................................... 17
Professional fees........................................................ 41
Reports to shareholders.................................................. 30
Trustees' fees........................................................... 17
Registration fees........................................................ 8
Other expenses........................................................... 28
------
Total non-affiliated expenses.................................. 141
------
Total expenses................................................. 565
------
Net increase in net assets from operations..................... $2,043
======
</TABLE>
See accompanying notes to financial statements.
B-76
<PAGE> 79
CARDINAL TAX EXEMPT MONEY TRUST
- - --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS (AMOUNTS IN THOUSANDS)
- - --------------------------------------------------------------------------------
YEARS ENDED SEPTEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
FROM OPERATIONS:
Net increase in net assets from operations...................... $ 2,043 $ 1,601
-------- --------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Total distributions to shareholders............................. (2,043) (1,601)
-------- --------
FROM CAPITAL SHARE TRANSACTIONS (NOTE 4):
Proceeds from sale of shares.................................... 154,643 164,948
Reinvestment of distributions to shareholders................... 1,917 1,510
Cost of shares redeemed......................................... (172,311) (177,086)
-------- --------
Decrease in net assets derived from capital share
transactions............................................... (15,751) (10,628)
-------- --------
Net decrease in net assets.................................... (15,751) (10,628)
NET ASSETS -- beginning of period............................... 80,531 91,159
-------- --------
NET ASSETS -- end of period..................................... $ 64,780 $ 80,531
========= =========
</TABLE>
See accompanying notes to financial statements.
B-77
<PAGE> 80
CARDINAL TAX EXEMPT MONEY TRUST
- - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1995
(1) -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cardinal Tax Exempt Money Trust (the Trust) is a diversified, open-end
investment company created under the laws of Ohio by a Declaration of Trust
dated January 13, 1983 and is registered under the Investment Company Act of
1940. The following is a summary of significant accounting policies followed by
the Trust in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles for investment
companies.
Security Valuation--Securities are valued at amortized cost which approximates
fair value (premiums and discounts are amortized on a straight-line basis). The
use of this method requires the Trust to maintain a dollar-weighted average
portfolio maturity of 90 days or less and purchase only securities having a
remaining maturity of thirteen months or less.
Variable Rate Demand Municipal Securities--Variable and adjustable rate demand
municipal securities are tax-exempt obligations that provide for a periodic
adjustment in the interest rate paid on the securities and permit the holder to
demand payment of the unpaid principal balance, plus accrued interest, at
redemption dates provided by contract upon a specified number of days notice
either from the issuer or by drawing on a bank letter of credit or comparable
guarantee issued with respect to such security. The interest rates shown for
variable rate securities are the rates in effect on September 30, 1995.
Security Transactions and Investment Income--Security transactions are recorded
on the trade date. Interest income is recorded on the accrual basis.
Federal Income Taxes--No provision has been made for Federal taxes on the
Trust's income, since it is the policy of the Trust to comply with the
provisions of the Internal Revenue Code applicable to regulated investment
companies and to make sufficient distributions of taxable income and capital
gains within the required time to relieve it from all, or substantially all,
Federal income taxes.
Dividends to Shareholders--Dividends are declared and accrued daily and (for
those shareholders not electing cash distribution of dividends) automatically
reinvested monthly in additional shares from the sum of net investment income
and net realized short-term gains.
(2) -- TRANSACTIONS WITH AFFILIATES
As investment manager for the Trust, Cardinal Management Corp. (CMC), an
affiliated company, is allowed an annual fee of 0.5% of the average daily net
assets of the Trust. CMC has agreed that if the aggregate expenses of the Trust,
as defined, for any fiscal year exceed the expense limitation of any state
having jurisdiction over the Trust, CMC will refund to the Trust, or otherwise
bear, such excess. This limitation did not affect the calculation of the
management fee during the year ended September 30, 1995.
CMC also serves as the Trust's transfer agent and fund accountant. Transfer
agent service fees are based on a monthly charge per shareholder account plus
out-of-pocket expenses. Accounting service fees are based on the monthly average
net assets of the Trust. For the year ended September 30, 1995 the Trust paid or
accrued $62,542 and $17,235 for transfer agent and fund accounting services,
respectively.
(continued)
B-78
<PAGE> 81
CARDINAL TAX EXEMPT MONEY TRUST
- - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1995
The Ohio Company, sole shareholder of CMC, serves as the Trust's distributor
and, in connection therewith receives purchase orders and redemption requests
relating to Trust shares. During the year ended September 30, 1995 the Trust
incurred no expenses relating to the distribution of its shares.
(3) -- COMMITMENTS AND CONTINGENCIES
The Trust has an available $5,000,000 line of credit with its custodian, Fifth
Third Bank, which was unused at September 30, 1995. When used, borrowings under
this arrangement are secured by portfolio securities and can be used only for
short term needs of the Trust. No compensating balances are required and the
arrangement bears an interest rate of 106% of the custodian's prime lending
rate.
Fidelity Bond and Errors and Omissions insurance coverage for the Trust and its
officers and trustees has been obtained through ICI Mutual Insurance Company
(ICI Mutual), an industry-sponsored mutual insurance company. Included in other
assets of the Trust is a deposit of $13,291 for the initial capital of ICI
Mutual. The Trust is also committed to provide $39,873 should ICI Mutual
experience the need for additional capital contributions.
Included in other assets is a $27,000 certificate of deposit which
collateralizes a standby letter of credit in connection with the Trust's
participation in ICI Mutual. This amount is not available for investment.
(4) -- CAPITAL STOCK
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30,
------------------------------
1995 1994
------------ -------------
<S> <C> <C>
Shares sold..................................................... 154,643,119 164,947,710
Shares issued in connection with reinvestment of distributions
to shareholders............................................... 1,916,504 1,509,540
------------ -------------
156,559,623 166,457,250
Shares repurchased.............................................. (172,310,841) (177,085,583 )
------------ -------------
Net decrease.................................................... (15,751,218) (10,628,333 )
Shares outstanding:
Beginning of period............................................. 80,531,046 91,159,379
------------ -------------
End of period................................................... 64,779,828 80,531,046
============= ==============
</TABLE>
(5) -- SUBSEQUENT EVENT
On November 13, 1995 the Board of Trustees approved an Agreement and Plan of
Reorganization and Liquidation between the Trust and The Cardinal Group ("TCG").
The plan calls for the transfer of all assets and liabilities of the Trust to a
series of TCG with the same basic investment objectives and restrictions. The
Trustees have determined that this action is in the best interests of the
shareholders of the Trust and TCG. Shareholder approval will be sought and is
needed to ratify the transaction.
B-79
<PAGE> 82
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- - --------------------------------------------------------------------------------
Selected data for each share of capital stock outstanding throughout each
period:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value, beginning................ $1.00 $1.00 $1.00 $1.00 $1.00
--------- --------- --------- --------- ---------
Income from investment operations:
Net investment income................... 0.03 0.02 0.02 0.03 0.04
Less distributions:
Dividends............................... (0.03) (0.02) (0.02) (0.03) (0.04)
--------- --------- --------- --------- ---------
Net Asset Value, ending................... $1.00 $1.00 $1.00 $1.00 $1.00
========== ========== ========== ========== ==========
Ratios/Supplemental Data:
Total return.............................. 3.02% 1.78% 1.81% 2.62% 4.40%
========== ========== ========== ========== ==========
Net assets, ending (000).................. $64,780 $80,531 $91,159 $70,054 $85,488
========== ========== ========== ========== ==========
Ratio of expenses to average net assets... 0.83% 0.76% 0.77% 0.76% 0.72%
========== ========== ========== ========== ==========
Ratio of net investment income to average
net assets.............................. 2.99% 1.78% 1.80% 2.59% 4.31%
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
- - --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- - --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
Cardinal Tax Exempt Money Trust:
We have audited the accompanying statement of assets and liabilities of Cardinal
Tax Exempt Money Trust (the Trust), including the statement of investments, as
of September 30, 1995, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the years in the
two-year period then ended and the financial highlights for each of the years in
the five-year period then ended. These financial statements and financial
highlights are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included verification of securities owned as of
September 30, 1995, by confirmation with the custodian and other appropriate
audit procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Cardinal Tax Exempt Money Trust as of September 30, 1995, the results of its
operations for the year then ended, the changes in its net assets for each of
the years in the two-year period then ended, and the financial highlights for
each of the years in the five-year period then ended, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Columbus, Ohio
November 17, 1995
B-80
<PAGE> 83
CARDINAL BALANCED FUND
- - --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS (MARKET VALUE IN THOUSANDS)
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
FACE/ MARKET
SHARES VALUE
--------- -----------
<S> <C> <C>
COMMON STOCK 44.23%
America West Airlines Class B*...................................................... 12,000 $ 186
American Express Company............................................................ 8,000 355
American Health Properties.......................................................... 10,000 216
Arco Chemical Company............................................................... 7,500 366
Banc One Corporation................................................................ 8,000 292
Cinergy Corporation................................................................. 10,000 279
Commerce Bancshares Incorporated.................................................... 5,250 207
Dow Chemical Company................................................................ 4,500 335
Excel Industries Incorporated....................................................... 15,000 210
Forest Laboratories*................................................................ 3,000 133
GTE Corporation..................................................................... 7,500 294
Glendale Federal Savings Bank*...................................................... 5,000 82
IntelCom Group Incorporated*........................................................ 15,000 191
Mellon Bank Corporation............................................................. 7,500 335
Monsanto Company.................................................................... 3,500 353
Mutual Risk Management.............................................................. 5,000 197
National Semiconductor Company*..................................................... 5,000 138
J.C. Penney Company Incorporated.................................................... 6,000 298
Progress Software Corporation*...................................................... 4,000 268
Reliastar Financial Corporation..................................................... 1,000 41
Southern Indiana Gas and Electric................................................... 6,000 202
Structural Dynamics Research*....................................................... 15,000 278
Tribune Company..................................................................... 5,000 332
Trinova Corporation................................................................. 6,000 202
Universal Foods Corporation......................................................... 4,000 139
U.S. Healthcare Incorporated........................................................ 5,000 177
Viewlogic Systems Incorporated*..................................................... 4,000 56
Willamette Industries Incorporated.................................................. 4,000 267
-----------
TOTAL COMMON STOCK (COST $4,982,002).............................................. 6,429
-----------
CONVERTIBLE PREFERRED STOCK 3.24%
California Federal Bank............................................................. 6,000 145
Ford Motor Company, 8.40%, Series A................................................. 1,500 154
Glendale Federal, 8.75%, Series E................................................... 4,000 172
-----------
TOTAL CONVERTIBLE PREFERRED STOCK (COST $471,349)................................. 471
-----------
PREFERRED STOCK 5.95%
American General Capital, 8.45%..................................................... 7,500 189
American Health Psychiatric Group Preferred......................................... 8,250 134
Chase Manhattan Corporation, 8.40%, Cumulative Series M............................. 7,500 193
Enron Capital Resources, 9.00%, Series A, LP........................................ 6,000 157
Utilicorp Capital, 8.875%........................................................... 7,500 192
-----------
TOTAL PREFERRED STOCK (COST $864,463)............................................. 865
-----------
*Non-income producing
(continued)
</TABLE>
B-81
<PAGE> 84
CARDINAL BALANCED FUND
- - --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS (CONTINUED)
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
FACE/ MARKET
SHARES VALUE
--------- -----------
<S> <C> <C>
CONVERTIBLE CORPORATE BONDS 6.02%
Ashland Oil, Inc., 6.75%, due 7-01-2014............................................. 150,000 $ 147
Beverly Enterprises, 7.625%, due 3-15-2003.......................................... 100,000 98
Cabot Medical Co., 7.50%, due 3-01-1999............................................. 100,000 101
Enserch Corporation, 6.375%, due 4-01-2002.......................................... 150,000 147
Federated Department Stores, 9.72%, due 2-15-2004................................... 150,000 151
Gran Care Incorporated, 6.50%, due 1-15-2003........................................ 100,000 95
Masco Corporation, 5.25%, due 2-15-2012............................................. 150,000 136
-----------
TOTAL CONVERTIBLE CORPORATE BONDS (COST $888,296)................................. 875
-----------
U.S. GOVERNMENT AGENCY OBLIGATIONS 8.41%
GNMA I # 368080, 7.00%, due 11-15-2008.............................................. 268,378 271
GNMA I # 251959, 7.50%, due 6-15-2023............................................... 260,649 263
GNMA II # 1213, 7.50%, due 6-20-2023................................................ 337,135 338
GNMA II # 1268, 8.00%, due 7-20-2023................................................ 343,197 351
-----------
TOTAL U.S. GOVERNMENT AGENCIES (COST $1,268,259).................................. 1,223
-----------
CORPORATE BONDS 14.90%
American Airlines, Series 91A, 10.18%, due 1-02-2013................................ 250,000 289
Consumers Power Co., 7.50%, due 6-01-2002........................................... 300,000 306
Dole Foods Inc., 7.00%, due 5-15-2003............................................... 200,000 198
First USA Bank, Wilmington, 5.75%, due 1-15-1999.................................... 300,000 293
General Motors Acceptance Corp., 7.00%, due 9-15-2002............................... 200,000 204
Kemper Corp., 6.875%, due 9-15-2003................................................. 250,000 246
Pulte Homes Corp., 7.00%, due 12-15-2003............................................ 150,000 143
Tele-Communications Inc., 7.25%, due 8-01-2005...................................... 250,000 244
Time Warner, 7.25%, due 9-01-2008................................................... 250,000 243
-----------
TOTAL CORPORATE BONDS (COST $2,129,904)........................................... 2,166
-----------
COMMERCIAL PAPER 13.76%
Ford Motor Credit Corporation, 5.75%, due 10-02-1995................................ 500,000 500
Sears Acceptance Corporation, 5.74%, due 10-03-1995................................. 500,000 500
General Motors Acceptance Corporation, 5.80%, due 10-04-1995........................ 500,000 500
Cigna Corporation, 5.88%, due 10-10-1995............................................ 500,000 500
-----------
TOTAL COMMERCIAL PAPER (COST $1,999,839).......................................... 2,000
-----------
REPURCHASE AGREEMENTS, FULLY COLLATERALIZED BY U.S. GOVERNMENT OBLIGATIONS 3.10%
The Fifth Third Bank, 5.95%, dated 9-29-95, due 10-04-95............................ 450,000 450
-----------
TOTAL REPURCHASE AGREEMENTS (COST $450,000)....................................... 450
-----------
TOTAL INVESTMENTS (COST $13,054,112) 99.61%....................................... $ 14,479
===========
</TABLE>
GNMA -- Government National Mortgage Association
Cost also represents cost for Federal income tax purposes.
See accompanying notes to financial statements.
B-82
<PAGE> 85
CARDINAL BALANCED FUND
- - --------------------------------------------------------------------------------
STATEMENT OF ASSETS & LIABILITIES (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1995
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost $13,054)............................... $ 14,479
Cash............................................................................. 42
Receivable for Fund shares sold.................................................. 113
Interest receivable.............................................................. 56
Dividends receivable............................................................. 16
Prepaid expenses................................................................. 7
Deferred organizational cost..................................................... 27
--------
Total assets........................................................... 14,740
--------
LIABILITIES
Payable for investment securities purchased...................................... 125
Payable for Fund shares redeemed................................................. 47
Accrued investment management, shareholder service, accounting and transfer agent
fees (note 3).................................................................. 14
Other accrued expenses........................................................... 19
--------
Total liabilities...................................................... 205
--------
COMMITMENTS AND CONTINGENCIES (NOTE 4)
NET ASSETS -- applicable to 1,261,727 outstanding no par value shares of
beneficial interest (unlimited number of shares authorized).................... $ 14,535
========
NET ASSET VALUE PER SHARE........................................................ $ 11.52
========
</TABLE>
See accompanying notes to financial statements.
B-83
<PAGE> 86
CARDINAL BALANCED FUND
- - --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS (AMOUNTS IN THOUSANDS)
- - --------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends........................................................................ $ 245
Interest......................................................................... 461
-------
Total income................................................................ 706
-------
EXPENSES:
Investment management fees (note 3).............................................. 102
Transfer agent fees and expenses (note 3)........................................ 26
Shareholder service fees (note 3)................................................ 32
Accounting fees (note 3)......................................................... 5
-------
Total affiliated expenses.............................................. 165
-------
Custodian fees................................................................... 13
Professional fees................................................................ 26
Reports to shareholders.......................................................... 21
Directors' fees.................................................................. 8
Registration fees................................................................ 13
Other expenses................................................................... 9
Amortization of organizational cost (note 1)..................................... 10
-------
Total non-affiliated expenses.......................................... 100
-------
Total expenses......................................................... 265
-------
Net investment income.................................................. 441
-------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTE 2):
Net realized gain from security transactions..................................... 307
Increase in unrealized gain on investments....................................... 1,810
-------
Net realized gain and increase in unrealized gain on investments............ 2,117
-------
Net increase in net assets from operations.................................. $ 2,558
======
</TABLE>
See accompanying notes to financial statements.
B-84
<PAGE> 87
CARDINAL BALANCED FUND
- - --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS (AMOUNTS IN THOUSANDS)
- - --------------------------------------------------------------------------------
YEARS ENDED SEPTEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
FROM OPERATIONS:
Net investment income..................................................... $ 441 $ 335
Net realized gain from security transactions.............................. 307 158
Increase (decrease) in unrealized gain on investments..................... 1,810 (462)
-------- --------
Net increase in net assets from operations........................... 2,558 31
-------- --------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Distribution of net investment income ($.35 and $.23 per share,
respectively)........................................................... (453) (333)
Distribution of net realized gains from security transactions ($.04 and
$.03 per share, respectively)........................................... (49) (36)
-------- --------
Total distributions to shareholders.................................. (502) (369)
-------- --------
FROM CAPITAL SHARE TRANSACTIONS (NOTE 5):
Proceeds from sales of Fund shares........................................ 1,485 5,251
Net asset value of Fund shares issued in connection with reinvestment of
distributions to shareholders........................................... 458 335
-------- --------
1,943 5,586
Cost of Fund shares redeemed.............................................. (3,437) (2,086)
-------- --------
Increase (decrease) in net assets derived from capital share
transactions........................................................ (1,494) 3,500
-------- --------
Net increase in net assets........................................... 562 3,162
NET ASSETS -- beginning of period......................................... 13,973 10,811
-------- --------
NET ASSETS -- end of period (undistributed net investment income of $3 and
$15, respectively)...................................................... $ 14,535 $ 13,973
======== ========
</TABLE>
See accompanying notes to financial statements.
B-85
<PAGE> 88
CARDINAL BALANCED FUND
- - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1995
(1) -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cardinal Balanced Fund (the "Fund") is one of two portfolios of The Cardinal
Group (the "Group"), a diversified open-end management investment company
established as an Ohio Business Trust on March 23, 1993. The Group currently
consists of Cardinal Aggressive Growth Fund and Cardinal Balanced Fund. Before
June 24, 1993 the Fund had no operations other than those relating to
organizational matters, including the issuance of 5,000 shares of beneficial
interest for cash at $10.00 per share on June 4, 1993 to Cardinal Management
Corp. ("CMC"), the Group's investment adviser. The following is a summary of
significant accounting policies followed by the Fund in preparation of its
financial statements. The policies are in conformity with generally accepted
accounting principles for investment companies.
Security Valuation -- Investments listed or traded on a national securities
exchange are valued at the last sale price or, if there has been no recent sale,
at the last bid price. Investments traded in the over-the-counter market are
valued at either the mean between the bid and ask prices or the last sale price.
If no quotations are available, portfolio securities are valued in good faith by
the Board of Trustees to reflect their fair value.
Security Transactions and Investment Income -- Security transactions are
accounted for on the trade date and dividend income is recorded on the
ex-dividend date. Interest income is recorded on the accrual basis and includes,
when applicable, the pro rata amortization of premium or accretion of discount.
In determining the net realized gain or loss on securities sold, the cost of the
securities will be determined by the first-in, first-out (FIFO) basis. It is the
Group's policy for its Custodian, or a third-party bank, to take possession of
all securities pledged as collateral for repurchase agreements and monitor the
market value of the collateral to ensure that it remains sufficient to cover the
repurchase agreements.
Deferred Organizational Cost -- Costs incurred with the organization and
registration of the Fund have been deferred and are being amortized on a
straight-line basis over a 60 month period from the commencement of public
offering of its shares. In the event that any of the initial shares of the Fund
are redeemed by the Fund's investment adviser or any subsequent holders thereof
during the 60 month amortization period, the Fund will reduce the redemption
proceeds otherwise payable by any unamortized organizational costs of the Fund
in the same proportion as the number of initial shares of the Fund being
redeemed bears to the number of initial shares of the Fund outstanding at the
time of redemption.
Distributions to Shareholders -- Distributions and dividends will be recorded on
the record date. The Fund intends to declare income dividends quarterly and any
capital gain distributions annually.
Federal Income Tax -- The Fund intends to comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies and to make
sufficient distributions of taxable income and capital gains within the required
time to relieve it from all, or substantially all, Federal income taxes.
(continued)
B-86
<PAGE> 89
CARDINAL BALANCED FUND
- - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1995
(2) -- PURCHASES AND SALES OF SECURITIES
The cost of purchases and proceeds from sales of investment securities
(excluding short-term obligations) during the period ended September 30, 1995
aggregated $4,318,959 and $6,447,176, respectively.
During the period ended September 30, 1995 the Fund realized on a FIFO cost
basis a net capital gain of $306,446 for both book and tax purposes.
As of September 30, 1995, for both book and tax purposes, gross unrealized gains
and gross unrealized losses on investment securities were $1,612,056 and
$186,699, respectively; resulting in a net unrealized gain of $1,425,357.
(3) -- TRANSACTIONS WITH AFFILIATES
As investment adviser for the Fund, CMC, an affiliated company, is allowed an
annual fee of 0.75% of the average daily net assets of the Fund. CMC has agreed
that if the aggregate expenses of the Fund, as defined, for any fiscal year
exceed the expense limitation of any state having jurisdiction over the Fund,
CMC will refund to the Fund, or otherwise bear, such excess. This limitation did
not affect the calculation of the management fee during the period ended
September 30, 1995. CMC also serves the Fund as transfer agent and fund
accountant. Under the terms of the Group's Transfer Agency and Fund Accounting
Agreement, the transfer agent is entitled to receive fees based on a monthly
charge per shareholder account plus out-of-pocket expenses and the fund
accountant is entitled to receive fees based on a percentage of the average net
assets of the Fund. For the period ended September 30, 1995 the Fund paid or
accrued $25,950 and $4,697 for transfer agent and fund accounting services,
respectively.
The Ohio Company ("TOC") serves the Group as distributor. TOC receives fees from
the Fund for providing services under the Distribution and Shareholder Service
Plan (the "Plan") pursuant to Rule 12b-1 of the Investment Company Act of 1940.
Under the Plan, the Fund pays TOC a fee not to exceed, on an accrual basis,
0.25% of the average daily net assets of the Fund for payments it makes to
banks, broker/dealers, including TOC, and other institutions for providing
shareholder services. The Fund paid or accrued shareholder service fees of
$32,534 for the period ended September 30, 1995. The Ohio Company reported to
the Fund that it had received commissions after discounts to dealers from the
sale of shares of the Fund of $66,772 for the period ended September 30, 1995.
(4) -- COMMITMENTS AND CONTINGENCIES
The Fund has an available $2,000,000 line of credit with its custodian, Fifth
Third Bank, which was unused at September 30, 1995. When used, borrowings under
this arrangement are secured by portfolio securities and can be used only for
short term needs of the Fund. No compensating balances are required and the
arrangement bears an interest rate of 106% of the custodian's prime lending
rate.
(continued)
B-87
<PAGE> 90
CARDINAL BALANCED FUND
- - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1995
(5) -- CAPITAL STOCK
At September 30, 1995, there were an unlimited number of no par value shares of
capital stock and the capital amounts were as follows:
<TABLE>
<S> <C>
Paid in capital............................................................... $12,716,361
Accumulated net realized gain on investments.................................. 390,571
Unrealized gain on investments................................................ 1,425,357
Undistributed net investment income........................................... 3,201
-----------
Net assets.................................................................... $14,535,490
============
</TABLE>
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30,
----------------------------
1995 1994
----------- -----------
<S> <C> <C>
Shares sold.......................................................... 140,750 519,358
Shares issued in connection with reinvestment of distributions
to shareholders.................................................... 44,785 33,364
----------- -----------
185,535 552,722
Shares repurchased................................................... (335,102) (208,912)
----------- -----------
Net increase (decrease).............................................. (149,567) 343,810
Shares outstanding:
Beginning of period.................................................. 1,411,294 1,067,484
----------- -----------
End of period........................................................ 1,261,727 1,411,294
========== ==========
</TABLE>
(6) -- SUBSEQUENT EVENT
On November 13, 1995 the Board of Trustees approved an Agreement and Plan of
Reorganization and Liquidation between the Group and The Cardinal Fund Inc.,
Cardinal Government Securities Trust, Cardinal Tax Exempt Money Trust, and
Cardinal Government Obligations Fund (collectively the "Old Funds"). The plan
calls for the transfer of all assets and liabilities of each of the Old Funds to
newly created series of the Group with the same basic investment objectives and
restrictions. The Trustees have determined that this action is in the best
interests of the shareholders of the Old Funds and the Group. Shareholders of
the Old Funds must approve the transaction before any transfer can take place.
B-88
<PAGE> 91
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- - --------------------------------------------------------------------------------
Selected data for each share of capital stock outstanding throughout each
period:
<TABLE>
<CAPTION>
PERIOD
FROM JUNE
YEARS ENDED 24, 1993*
SEPTEMBER 30, THROUGH
---------------------- SEPTEMBER
1995 1994 30, 1993
-------- -------- ---------
<S> <C> <C> <C>
Net Asset Value, beginning............................................ $ 9.90 $ 10.13 $ 10.00
-------- -------- ---------
Income from investment operations:
Net investment income............................................... 0.34 0.23 0.02
Net realized and unrealized gain (loss) on securities............... 1.67 (0.20) 0.12
-------- -------- ---------
Total from investment operations...................................... 2.01 0.03 0.14
-------- -------- ---------
Less distributions:
Dividends........................................................... (0.35) (0.23) (0.01)
Capital gain distribution........................................... (0.04) (0.03) 0
-------- -------- ---------
Total distributions................................................... (0.39) (0.26) (0.01)
-------- -------- ---------
Net Asset Value, ending............................................... $ 11.52 $ 9.90 $ 10.13
======= ======= ========
Ratios/Supplemental Data:
Total return (aggregate return for period)**.......................... 20.76% 0.37% 1.40%
======= ======= ========
Net assets, ending (000).............................................. $ 14,535 $ 13,973 $10,811
======= ======= ========
Ratio of expenses to average net assets**............................. 1.94% 2.07% 0.70%
======= ======= ========
Ratio of net investment income to average net assets**................ 3.24% 2.44% 0.35%
======= ======= ========
Portfolio turnover rate............................................... 37.62% 59.09% 60.67%
======= ======= ========
<FN>
*Commencement of operations
**Effective September 15, 1995, The Ohio Company began waiving payments under
the Distribution and Shareholder Service Plan. Had the payments been charged,
total return, the ratio of expenses to average net assets, and the ratio of
net investment income to average net assets would have been 20.75%, 1.95%, and
3.23%, respectively.
</TABLE>
See accompanying notes to financial statements.
B-89
<PAGE> 92
INDEPENDENT AUDITORS' REPORT
- - --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
Cardinal Balanced Fund:
We have audited the accompanying statement of assets and liabilities of Cardinal
Balanced Fund (the Fund), including the statement of investments, as of
September 30, 1995, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the years in the
two-year period then ended, and the financial highlights for each of the periods
indicated herein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included verification of securities owned as of
September 30, 1995, by confirmation with the custodian and other appropriate
audit procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Cardinal Balanced Fund as of September 30, 1995, the results of its operations
for the year then ended, the changes in its net assets for each of the years in
the two-year period then ended, and the financial highlights for each of the
periods indicated herein, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Columbus, Ohio
November 17, 1995
B-90
<PAGE> 93
CARDINAL AGGRESSIVE GROWTH FUND
- - --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS (MARKET VALUE IN THOUSANDS)
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
FACE/ MARKET
SHARES VALUE
-------- ----------
<S> <C> <C>
COMMON STOCK 79.22%
ADVANCED MEDICAL DEVICES 2.48%
Biomet, Inc.*....................................................... 15,000 $ 259
----------
BIO TECHNOLOGY 6.43%
Alkermes, Inc.*..................................................... 8,000 52
Cytel Corporation*.................................................. 15,000 105
Magainin Pharmaceuticals*........................................... 12,000 131
Matrix Pharmaceuticals*............................................. 14,000 196
Vertex Pharmaceuticals*............................................. 10,000 187
----------
671
----------
BROADLINE RETAILERS 2.66%
Consolidated Stores Corp.*.......................................... 12,000 278
----------
COMMERCIAL SERVICES 1.61%
Medaphis Corporation*............................................... 6,000 168
----------
COMMUNICATIONS 20.49%
Airtouch Communications*............................................ 10,000 306
Arch Communications Group*.......................................... 10,000 262
BroadBand Technologies*............................................. 5,000 108
DSC Communications Corp.*........................................... 4,000 237
General DataComm Industries*........................................ 12,500 184
MFS Communications Co., Inc.*....................................... 9,000 394
Metricom, Inc.*..................................................... 11,000 248
Motorola, Inc....................................................... 3,000 229
Tellabs, Inc.*...................................................... 4,000 169
----------
2,137
----------
COMPUTERS/INFORMATION 5.47%
Compaq Computer Corp.*.............................................. 9,000 435
E M C Corporation*.................................................. 7,500 136
----------
571
----------
CONSUMER SERVICES 4.99%
Banta Corporation................................................... 6,000 255
Block, H&R, Inc..................................................... 7,000 266
----------
521
----------
DIVERSIFIED FINANCIAL SERVICES 3.25%
Bear Stearns Companies, Inc......................................... 15,750 339
----------
EDUCATIONAL 1.45%
Westcott Communications, Inc.*...................................... 10,000 151
----------
<FN>
*Non-income producing
</TABLE>
(continued)
B-91
<PAGE> 94
CARDINAL AGGRESSIVE GROWTH FUND
- - --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS (CONTINUED)
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1995
COMMON STOCK (CONTINUED)
<TABLE>
<CAPTION>
FACE/ MARKET
SHARES VALUE
-------- ------------
<S> <C> <C>
ELECTRICAL COMPONENTS 0.92%
GenRad, Inc.*...................................................... 10,000 $ 96
------------
HEALTH-CARE PROVIDERS 4.39%
Humana, Inc.*...................................................... 10,000 201
Mariner Health Group, Inc.*........................................ 5,000 71
Maxicare Healthplans, Inc.*........................................ 10,000 186
------------
458
------------
INTEGRATED OILS 2.32%
Triton Energy Corp.*............................................... 5,000 242
------------
PHARMACEUTICALS 2.87%
Mylan Laboratories, Inc............................................ 15,000 300
------------
SEMICONDUCTORS 11.47%
Advanced Micro Devices*............................................ 9,000 262
Analog Devices, Inc.*.............................................. 8,000 277
Intel Corporation.................................................. 4,500 270
National Semiconductor*............................................ 14,000 387
------------
1,196
------------
SOFTWARE/PROCESSING 8.42%
Computer Sciences Corp.*........................................... 4,500 290
Optical Data Systems Corp.*........................................ 6,000 234
Sybase Incorporated*............................................... 10,000 321
Telescan, Inc.*.................................................... 5,000 34
------------
879
------------
TOTAL COMMON STOCK (COST $7,254,464)............................. 8,266
------------
REPURCHASE AGREEMENTS, FULLY COLLATERALIZED BY U.S. GOVERNMENT
OBLIGATIONS 16.29%
Fifth Third Bank, 5.75%, dated 9/28/95, due 10/02/95............... 1,700,000 1,700
------------
TOTAL REPURCHASE AGREEMENTS (COST $1,700,000).................... 1,700
------------
TOTAL INVESTMENTS (COST $8,954,464) 95.51%....................... $ 9,966
==========
<FN>
*Non-income producing
Cost also represents cost for Federal income tax purposes.
</TABLE>
See accompanying notes to financial statements.
B-92
<PAGE> 95
CARDINAL AGGRESSIVE GROWTH FUND
- - --------------------------------------------------------------------------------
STATEMENT OF ASSETS & LIABILITIES (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1995
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost $8,954)................................ $ 9,966
Cash............................................................................. 375
Receivable for Fund shares sold.................................................. 125
Dividends receivable............................................................. 6
Interest receivable.............................................................. 1
Deferred organizational cost..................................................... 27
Prepaid expenses................................................................. 7
--------
Total assets................................................................ 10,507
--------
LIABILITIES
Payable for investment securities purchased...................................... 45
Accrued investment management, shareholder service, accounting and transfer agent
fees (note 3).................................................................. 11
Other accrued expenses........................................................... 17
--------
Total liabilities........................................................... 73
--------
COMMITMENTS AND CONTINGENCIES (NOTE 4)
NET ASSETS -- applicable to 843,808 outstanding no par value shares of beneficial
interest (unlimited number of shares authorized)............................... $ 10,434
========
NET ASSET VALUE PER SHARE........................................................ $ 12.37
========
</TABLE>
See accompanying notes to financial statements.
B-93
<PAGE> 96
CARDINAL AGGRESSIVE GROWTH FUND
- - --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS (AMOUNTS IN THOUSANDS)
- - --------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends........................................................................ $ 71
Interest......................................................................... 58
--------
Total income......................................................... 129
--------
EXPENSES:
Investment management fees (note 3).............................................. 71
Transfer agent fees and expenses (note 3)........................................ 25
Shareholder service fees (note 3)................................................ 23
Accounting fees (note 3)......................................................... 3
--------
Total affiliated expenses............................................ 122
--------
Custodian fees................................................................... 10
Professional fees................................................................ 23
Reports to shareholders.......................................................... 23
Directors' fees.................................................................. 8
Registration fees................................................................ 14
Other expenses................................................................... 5
Amortization of organizational cost (note 1)..................................... 10
--------
Total non-affiliated expenses........................................ 93
--------
Total expenses....................................................... 215
--------
Net loss from investment activities.................................. (86)
--------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTE 2):
Net realized gain from security transactions..................................... 999
Increase in unrealized gain on investments....................................... 1,158
--------
Net realized gain and increase in unrealized gain on investments..... 2,157
--------
Net increase in net assets from operations........................... $ 2,071
========
</TABLE>
See accompanying notes to financial statements.
B-94
<PAGE> 97
CARDINAL AGGRESSIVE GROWTH FUND
- - --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS (AMOUNTS IN THOUSANDS)
- - --------------------------------------------------------------------------------
YEARS ENDED SEPTEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
FROM OPERATIONS:
Net loss from investment activities......................................... $ (86) $ (136)
Net realized gain from security transactions................................ 999 118
Increase (decrease) in unrealized gain on investments....................... 1,158 (444)
-------- -------
Net increase (decrease) in net assets from operations..................... 2,071 (462)
-------- -------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Distribution of net realized gains from security transactions ($0 and $.04
per share, respectively).................................................. 0 (30)
-------- -------
Total distributions to shareholders.................................... 0 (30)
-------- -------
FROM CAPITAL SHARE TRANSACTIONS (NOTE 5):
Proceeds from sale of Fund shares........................................... 1,809 5,108
Net asset value of Fund shares issued in connection with reinvestment of
distributions to shareholders............................................. 0 30
-------- -------
1,809 5,138
Cost of Fund shares redeemed................................................ (2,906) (1,506)
-------- -------
Increase (decrease) in net assets derived from capital share
transactions........................................................... (1,097) 3,632
-------- -------
Net increase in net assets................................................ 974 3,140
NET ASSETS -- beginning of period........................................... 9,460 6,320
-------- -------
NET ASSETS -- end of period (undistributed net investment loss of $113 and
$113, respectively)....................................................... $ 10,434 $ 9,460
======== ======
</TABLE>
See accompanying notes to financial statements.
B-95
<PAGE> 98
CARDINAL AGGRESSIVE GROWTH FUND
- - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1995
(1) -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cardinal Aggressive Growth Fund (the "Fund") is one of two portfolios of The
Cardinal Group (the "Group"), a diversified open-end management investment
company established as an Ohio Business Trust on March 23, 1993. The Group
currently consists of Cardinal Aggressive Growth Fund and Cardinal Balanced
Fund. Before June 24, 1993 the Fund had no operations other than those relating
to organizational matters, including the issuance of 5,000 shares of beneficial
interest for cash at $10.00 per share on June 4, 1993 to Cardinal Management
Corp. ("CMC"), the Group's investment adviser. The following is a summary of
significant accounting policies followed by the Fund in preparation of its
financial statements. The policies are in conformity with generally accepted
accounting principles for investment companies.
Security Valuation -- Investments listed or traded on a national securities
exchange are valued at the last sale price or, if there has been no recent sale,
at the last bid price. Investments traded in the over-the-counter market are
valued at either the mean between the bid and ask prices or the last sale price.
If no quotations are available, portfolio securities are valued in good faith by
the Board of Trustees to reflect their fair value.
Security Transactions and Investment Income -- Security transactions are
accounted for on the trade date and dividend income is recorded on the
ex-dividend date. Interest income is recorded on the accrual basis and includes,
when applicable, the pro rata amortization of premium or accretion of discount.
In determining the net realized gain or loss on securities sold, the cost of the
securities is determined by the first-in, first-out (FIFO) basis. It is the
Group's policy for its Custodian, or a third-party bank, to take possession of
all securities pledged as collateral for repurchase agreements and monitor the
market value of the collateral to ensure that it remains sufficient to cover the
repurchase agreements.
Deferred Organizational Cost -- Costs incurred with the organization and
registration of the Fund have been deferred and are being amortized on a
straight-line basis over a 60 month period from the commencement of public
offering of its shares. In the event that any of the initial shares of the Fund
are redeemed by the Fund's investment adviser or any subsequent holders thereof
during the 60 month amortization period, the Fund will reduce the redemption
proceeds otherwise payable by any unamortized organizational costs of the Fund
in the same proportion as the number of initial shares of the Fund being
redeemed bears to the number of initial shares of the Fund outstanding at the
time of redemption.
Distributions to Shareholders -- Distributions and dividends will be recorded on
the record date. The Fund intends to declare income dividends quarterly and any
capital gain distributions annually.
Federal Income Tax -- The Fund intends to comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies and to make
sufficient distributions of taxable income and capital gains within the required
time to relieve it from all, or substantially all, Federal income taxes.
(continued)
B-96
<PAGE> 99
CARDINAL AGGRESSIVE GROWTH FUND
- - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1995
(2) -- PURCHASES AND SALES OF SECURITIES
The cost of purchases and proceeds from sales of investment securities
(excluding short-term obligations) during the period ended September 30, 1995
aggregated $6,912,244 and $10,041,187, respectively.
During the period ended September 30, 1995 the Fund realized on a FIFO cost
basis a net capital gain of $999,587 for both book and tax purposes.
As of September 30, 1995, for both book and tax purposes, gross unrealized gains
and gross unrealized losses on investment securities were $1,268,610 and
$257,136, respectively; resulting in a net unrealized gain of $1,011,474.
(3) -- TRANSACTIONS WITH AFFILIATES
As investment adviser for the Fund, CMC, an affiliated company, is allowed an
annual fee of 0.75% of the average daily net assets of the Fund. CMC has agreed
that if the aggregate expenses of the Fund, as defined, for any fiscal year
exceed the expense limitation of any state having jurisdiction over the Fund,
CMC will refund to the Fund, or otherwise bear, such excess. This limitation did
not affect the calculation of the management fee during the period ended
September 30, 1995. CMC also serves the Fund as transfer agent and fund
accountant. Under the terms of the Group's Transfer Agency and Fund Accounting
Agreement, the transfer agent is entitled to receive fees based on a monthly
charge per shareholder account plus out-of-pocket expenses and the fund
accountant is entitled to receive fees based on a percentage of the average net
assets of the Fund. For the period ended September 30, 1995 the Fund paid or
accrued $25,079 and $3,255 for transfer agent and fund accounting services,
respectively.
The Ohio Company ("TOC") serves the Group as distributor. TOC receives fees from
the Fund for providing services under the Distribution and Shareholder Service
Plan (the "Plan") pursuant to Rule 12b-1 of the Investment Company Act of 1940.
Under the Plan, the Fund pays TOC a fee not to exceed, on an accrual basis,
0.25% of the average daily net assets of the Fund for payments it makes to
banks, broker/dealers, including TOC, and other institutions for providing
shareholder services. The Fund paid or accrued shareholder service fees of
$22,594 for the period ended September 30, 1995. The Ohio Company reported to
the Fund that it had received commissions after discounts to dealers from the
sale of shares of the Fund of $54,055 for the period ended September 30, 1995.
(4) -- COMMITMENTS AND CONTINGENCIES
The Fund has an available $2,000,000 line of credit with its custodian, Fifth
Third Bank, which was unused at September 30, 1995. When used, borrowings under
this arrangement are secured by portfolio securities and can be used only for
short term needs of the Fund. No compensating balances are required and the
arrangement bears an interest rate of 106% of the custodian's prime lending
rate.
(continued)
B-97
<PAGE> 100
CARDINAL AGGRESSIVE GROWTH FUND
- - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1995
(5) -- CAPITAL STOCK
At September 30, 1995, there were an unlimited number of no par value shares of
capital stock and the capital amounts were as follows:
<TABLE>
<S> <C>
Paid in capital.................................................................. $ 8,618,852
Accumulated net realized gain on investments..................................... 916,812
Unrealized gain on investments................................................... 1,011,474
Undistributed net investment loss................................................ (112,926)
---------------
Net assets....................................................................... $10,434,212
===============
</TABLE>
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30,
------------------------
1995 1994
--------- ---------
<S> <C> <C>
Shares sold............................................................. 160,511 499,598
Shares issued in connection with reinvestment of distributions to
shareholders.......................................................... 0 2,836
--------- ---------
160,511 502,434
Shares repurchased...................................................... (268,141) (154,659)
--------- ---------
Net increase (decrease)................................................. (107,630) 347,775
Shares outstanding:
Beginning of period..................................................... 951,438 603,663
--------- ---------
End of period........................................................... 843,808 951,438
========= =========
</TABLE>
(6) -- SUBSEQUENT EVENT
On November 13, 1995 the Board of Trustees approved an Agreement and Plan of
Reorganization and Liquidation between the Group and The Cardinal Fund Inc.,
Cardinal Government Securities Trust, Cardinal Tax Exempt Money Trust, and
Cardinal Government Obligations Fund (collectively the "Old Funds"). The plan
calls for the transfer of all assets and liabilities of each of the Old Funds to
newly created series of the Group with the same basic investment objectives and
restrictions. The Trustees have determined that this action is in the best
interests of the shareholders of the Old Funds and the Group. Shareholders of
the Old Funds must approve the transaction before any transfer can take place.
B-98
<PAGE> 101
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- - --------------------------------------------------------------------------------
Selected data for each share of capital stock outstanding throughout each
period:
<TABLE>
<CAPTION>
PERIOD FROM
YEARS ENDED JUNE 24, 1993*
SEPTEMBER 30, THROUGH
---------------------- SEPTEMBER 30,
1995 1994 1993
-------- -------- ---------------
<S> <C> <C> <C>
Net Asset Value, beginning.............................. $ 9.94 $ 10.47 $ 10.00
-------- -------- ---------------
Income from investment operations:
Net investment loss................................... (0.10) (0.13) (0.03)
Net realized and unrealized gain (loss) on
securities......................................... 2.53 (0.36) 0.50
-------- -------- ---------------
Total from investment operations........................ 2.43 (0.49) 0.47
-------- -------- ---------------
Less distributions:
Capital gain distribution............................. 0 (0.04) 0
-------- -------- ---------------
Total distributions..................................... 0 (0.04) 0
-------- -------- ---------------
Net Asset Value, ending................................. $ 12.37 $ 9.94 $ 10.47
======== ======== ===============
Ratios/Supplemental Data:
Total return (aggregate return for period)**............ 24.35% (4.74%) 4.70%
======== ======== ===============
Net assets, ending (000)................................ $ 10,434 $ 9,460 $ 6,320
======== ======== ===============
Ratio of expenses to average net assets**............... 2.24% 2.51% 0.91%
======== ======== ===============
Ratio of net investment loss to average net assets**.... (0.92%) (1.50%) (0.53%)
======== ======== ===============
Portfolio turnover rate................................. 80.35% 95.70% 31.15%
======== ======== ===============
<FN>
*Commencement of operations
**Effective September 15, 1995, The Ohio Company began waiving payments under
the Distribution and Shareholder Service Plan. Had the payments been charged,
total return, the ratio of expenses to average net assets, and the ratio of
net investment loss to average net assets would have been 24.34%, 2.25%, and
(0.93%), respectively.
</TABLE>
See accompanying notes to financial statements.
- - --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- - --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
Cardinal Aggressive Growth Fund:
We have audited the accompanying statement of assets and liabilities of Cardinal
Aggressive Growth Fund (the Fund), including the statement of investments, as of
September 30, 1995, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the years in the
two-year period then ended, and the financial highlights for each of the periods
indicated herein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included verification of securities owned as of
September 30, 1995, by confirmation with the custodian and other appropriate
audit procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Cardinal Aggressive Growth Fund as of September 30, 1995, the results of its
operations for the year then ended, the changes in its net assets for each of
the years in the two-year period then ended, and the financial highlights for
each of the periods indicated herein, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Columbus, Ohio
November 17, 1995
B-99
<PAGE> 102
APPENDIX
COMMERCIAL PAPER RATINGS. Commercial paper ratings of Standard & Poor's
Corporation ("S&P") are current assessments of the likelihood of timely payment
of debts having original maturities of no more than 365 days. Commercial paper
rated A-1 by S&P indicates that the degree of safety regarding timely payment
is either overwhelming or very strong. Those issues determined to possess
overwhelming safety characteristics are denoted A-1+. Commercial paper rated
A-2 by S&P indicates that capacity for timely payment on issues is strong.
However, the relative degree of safety is not as high as for issues designated
A-1.
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's Investors Service, Inc. ("Moody's"). Issuers rated Prime-1 (or related
supporting institutions) are considered to have a superior capacity for
repayment of short-term promissory obligations. Issuers rated Prime-2 (or
related supporting institutions) have a strong capacity for repayment of
short-term promissory obligations. This will normally be evidenced by many of
the characteristics of Prime-1 rated issuers, but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to variations.
Capitalization characteristics, while still appropriate, may be more affected
by external conditions. Ample alternative liquidity is maintained.
Commercial paper rated F-1 by Fitch Investors Service ("Fitch") is
regarded as having the strongest degree of assurance for timely payments.
Commercial paper rated F-2 by Fitch is regarded as having an assurance of
timely payment only slightly less than the strongest rating, I.E., F-1.
The plus (+) sign is used after a rating symbol to designate the
relative position of an issuer within the rating category.
CORPORATE DEBT RATINGS. A S&P corporate debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. Debt rated AAA has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong. Debt rated AA has a
very strong capacity to pay interest and to repay principal and differs from
the highest rated issues only in small degree. Debt rated A has a strong
capacity to pay interest and repay principal although it is somewhat more
susceptible to 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
A-1
<PAGE> 103
B is regard as having predominantly speculative characteristics with respect to
capacity to pay interest and repay principal. BB indicates the lease degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major exposures
to adverse conditions. Debt rated BB has less near-term vulnerability to
default than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or economic
conditions which 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 rated B
has a greater vulnerability to default but currently has the capacity to meet
interest payments and principal repayments. Adverse business, financial or
economic conditions will likely impair capacity or willingness to pay interest
and repay principal. The B rating category is also used for debt subordinated
to senior debt that is assigned an actual or implied BB or BB- rating.
The following summarizes the six highest ratings used by Moody's for
corporate debt. Bonds that are rated Aaa by Moody's are judged to be of the
best quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edged." Interest payments are protected by a
large or by 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 that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, 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 that are rated A by Moody's 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 some time in the future. Bonds that are rated Baa by Moody's 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 that 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
A-2
<PAGE> 104
B generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
Moody's applies numerical modifiers (1, 2, and 3) with respect to bonds
rated Aa through B. The modifier 1 indicates that the bond being rated ranks
in the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the bond ranks in the
lower end of its generic rating category.
The following summarizes the six highest long-term debt ratings by Duff.
Debt rated AAA has the highest credit quality. The risk factors are negligible
being only slightly more than for risk-free U.S. Treasury debt. Debt rated AA
has a high credit quality and protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions. Debt
rated A has protection factors that are average but adequate. However, risk
factors are more variable and greater in periods of economic stress. Debt
rated BBB has below average protection factors but is still considered
sufficient for prudent investment. However, there is considerable variability
in risk during economic cycles. Debt rated BB is 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.
Debt rated B is below investment grade and possesses 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.
To provide more detailed indications of credit quality, the ratings from
AA to B may be modified by the addition of a plus or minus sign to show
relative standing within this major rating category.
The following summarizes the six highest long-term debt ratings by Fitch
(except for AAA ratings, plus or minus signs are used with a rating symbol to
indicate the relative position of the credit within the rating category).
Bonds rated AAA are considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events. Bonds rated AA are considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA." Because bonds
rated in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issues is generally
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rated "F-1+." Bonds rated as 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 for
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.
The following summarizes IBCA's six highest long-term debt ratings.
Obligations rated AAA are those for which there is 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
rated AA are those for which there is a very low expectation of investment
risk. 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. Obligations rated A are those
for which there is a low expectation of investment risk. Capacity for timely
repayment of principal and interest is strong, although adverse changes in
business, economic or financial conditions may lead to increased investment
risk. Obligations rated BBB are those 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. Obligations rated BB are those 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. Obligations
rated B are those for which investment risk exists. Timely repayment of
principal and interest is not sufficiently protected against adverse changes in
business, economic or financial conditions.
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The following summarizes Thomson's description of its six highest
long-term debt ratings (Thomson may include a plus (+) or minus (-) designation
to indicate where within the respective category the issue is placed). AAA is
the highest category and indicates that the ability to repay principal and
interest on a timely basis is very high. AA is the second highest category and
indicates a superior ability to repay principal and interest on a timely basis
with limited incremental risk versus issues rated in the highest category. A
is the third highest category and indicates 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.
BBB is the lowest investment grade category and indicates 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. Issuer rated B show
a higher degree of uncertainty and therefore greater likelihood of default that
higher-rated issuers. Adverse developments could well negatively affect the
payment of interest and principal on a timely basis.
DEFINITIONS OF CERTAIN MONEY MARKET INSTRUMENTS
Commercial Paper
Commercial paper consists of unsecured promissory notes issued by
corporations. Issues of commercial paper normally have maturities of less than
nine months and fixed rates of return.
Certificates of Deposit
Certificates of Deposit are negotiable certificates issued against funds
deposited in a commercial bank or a savings and loan association for a definite
period of time and earning a specified return.
Bankers' Acceptances
Bankers' acceptances are negotiable drafts or bills of exchange,
normally drawn by an importer or exporter to pay for specific merchandise,
which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
U.S. Treasury Obligations
U.S. Treasury Obligations are obligations issued or guaranteed as to
payment of principal and interest by the full faith and credit of the U.S.
Government. These obligations may include
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Treasury bills, notes and bonds, and issues of agencies and instrumentalities
of the U.S. Government, provided such obligations are guaranteed as to payment
of principal and interest by the full faith and credit of the U.S. Government.
U.S. Government Agency and Instrumentality Obligations
Obligations of the U.S. Government include Treasury bills, certificates
of indebtedness, notes and bonds, and issues of agencies and instrumentalities
of the U.S. Government, such as the Government National Mortgage Association,
the Export-Import Bank of the United States, the Tennessee Valley Authority,
the Farmers Home Administration, the Federal Home Loan Banks, the Federal
Intermediate Credit Banks, the Federal Farm Credit Banks, the Federal Land
Banks, the Federal Housing Administration, the Federal National Mortgage
Association, the Federal Home Loan Mortgage Corporation, and the Student Loan
Marketing Association. Some of these obligations, such as those of the
Government National Mortgage Association and the Export-Import Bank of the
United States, are supported by the full faith and credit of the U.S. Treasury;
others, such as those of the Federal National Mortgage Association, are
supported by the right of the issuer to borrow from the Treasury; others, such
as those of the Student Loan Marketing Association, are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; still others, such as those of the Federal Farm Credit Banks, are
supported only by the credit of the instrumentality. No assurance can be given
that the U.S. Government would provide financial support to U.S.
Government-sponsored instrumentalities if it is not obligated to do so by law.
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