See footnotes on page 18.
Financial Highlights (Unaudited)
CLASS D |
| | Six Months Ended 3/31/05 | | | | | | | | | | | |
| | Year Ended September 30, |
| | | 2004 | | 2003 | | 2002ø | | 2001 | | 2000 |
Per Share Data: |
Net Asset Value, Beginning of Period | | $ | 8.01 | | $ | 8.07 | | $ | 8.24 | | $ | 7.91 | | $ | 7.48 | | $ | 7.49 | |
Income from Investment Operations: |
Net investment income | | | 0.12 | | | 0.21 | | | 0.21 | | | 0.27 | | | 0.27 | | | 0.28 | |
Net realized and unrealized gain (loss) on investments | | | (0.13 | ) | | (0.05 | ) | | (0.08 | ) | | 0.33 | | | 0.43 | | | 0.04 | |
Total from Investment Operations | | | (0.01 | ) | | 0.16 | | | 0.13 | | | 0.60 | | | 0.70 | | | 0.32 | |
Less Distributions: |
Dividends from net investment income | | | (0.11 | ) | | (0.21 | ) | | (0.21 | ) | | (0.26 | ) | | (0.27 | ) | | (0.28 | ) |
Distributions from net realized capital gain | | | (0.01 | ) | | (0.01 | ) | | (0.09 | ) | | (0.01 | ) | | — | | | (0.05 | ) |
Total Distributions | | | (0.12 | ) | | (0.22 | ) | | (0.30 | ) | | (0.27 | ) | | (0.27 | ) | | (0.33 | ) |
Net Asset Value, End of Period | | $ | 7.88 | | $ | 8.01 | | $ | 8.07 | | $ | 8.24 | | $ | 7.91 | | $ | 7.48 | |
| | | | | | | | | | | | | | | | | | | |
Total Return | | | (0.11 | )% | | 1.96 | % | | 1.60 | % | | 7.79 | % | | 9.48 | % | | 4.42 | % |
| | | | | | | | | | | | | | | | | | | |
Ratios/Supplemental Data: |
Net assets, end of period (000s omitted) | | $ | 527 | | $ | 556 | | $ | 624 | | $ | 690 | | $ | 596 | | $ | 600 | |
Ratio of expenses to average net assets | | | 2.26 | %† | | 2.11 | % | | 2.05 | % | | 2.00 | % | | 2.07 | % | | 2.03 | % |
Ratio of net investment income to average net assets | | | 2.92 | %† | | 2.57 | % | | 2.63 | % | | 3.36 | % | | 3.45 | % | | 3.81 | % |
Portfolio turnover rate | | | 2.68 | % | | 5.34 | % | �� | 8.30 | % | | 16.73 | % | | 5.43 | % | | 12.11 | % |
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† | Annualized. |
ø | As required, effective October 1, 2001, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing market discounts on portfolio securities for financial reporting purposes. The effect of this change for the year ended September 30, 2002 was to increase net investment income and decrease net realized and unrealized gain on investments per share by $0.01 for each share class and to increase the ratios of net investment income to average net assets of each share class by 0.06%. The per share data and ratios for periods prior to October 1, 2002, have not been restated. |
See Notes to Financial Statements.
Matters Relating to the Trustees’ Consideration of the Continuance of the Management Agreement
The trustees unanimously approved the continuance of the Management Agreement between the Fund and the Manager at a meeting held on November 18, 2004.
In preparation for the meeting, the trustees had requested and evaluated extensive materials from the Manager, including performance and expense information for other investment companies with similar investment objectives derived from data compiled by Lipper Inc. (“Lipper”). Prior to voting, the trustees reviewed the proposed continuance of the Management Agreement with management and with experienced counsel who are independent of the Manager and received a memorandum from such counsel discussing the legal standards for their consideration of the proposed continuance. The independent trustees also discussed the proposed continuance in a private session with counsel at which no representatives of the Manager were present. In reaching their determination relating to continuance of the Management Agreement, the trustees considered all factors they believed relevant, including the following:
1. | information comparing the performance of the Fund to other investment companies with similar investment objectives; |
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2. | the nature, extent and quality of investment and administrative services rendered by the Manager; |
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3. | payments received by the Manager from all sources in respect of the Fund and all investment companies in the Seligman Group of Funds; |
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4. | the costs borne by, and profitability of, the Manager and its affiliates in providing services to the Fund and to all investment companies in the Seligman Group of Funds; |
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5. | comparative fee and expense data for the Fund and other investment companies with similar investment objectives; |
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6. | the extent to which economies of scale would be realized as the Fund grows and whether the fee level reflects any economies of scale for the benefit of investors; |
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7. | the Manager’s policies and practices regarding allocation of portfolio transactions of the Fund, including the extent to which the Manager benefits from soft dollar arrangements; |
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8. | information about “revenue sharing” arrangements that the Manager enters into in respect of the Fund; |
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9. | portfolio turnover rates of the Fund compared to other investment companies with similar investment objectives; |
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10. | fall-out benefits which the Manager and its affiliates receive from their relationships with the Fund; |
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11. | the professional experience and qualifications of the Fund’s portfolio management team and other senior personnel of the Manager; and |
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12. | the terms of the Management Agreement. |
The trustees also considered their knowledge of the nature and quality of the services provided by the Manager to the Fund gained from their experience as directors and/or trustees of the Seligman Group of Funds, their overall confidence in the Manager’s integrity and competence gained from that experience and the Manager’s responsiveness to concerns raised by them in the past, including the Manager’s willingness to consider and implement organizational and operational changes designed to improve investment results and the services provided to the Seligman Group of Funds.
In their deliberations, the trustees did not identify any particular information that was all-important or controlling, and each trustee attributed different weights to the various factors.
Matters Relating to the Trustees’ Consideration of the Continuance of the Management Agreement
The trustees determined that the overall arrangements between the Fund and the Manager, as provided in the Management Agreement, were fair and reasonable in light of the services performed, expenses incurred and such other matters as the trustees considered relevant in the exercise of their reasonable judgment.
The material factors and conclusions that formed the basis for the trustees’ reaching their determination to approve the continuance of the Management Agreement (including their determinations that the Manager should continue to be the investment adviser for the Fund and that the fees payable to the Manager pursuant to the Management Agreement are appropriate) were separately discussed by the trustees.
Nature, Extent and Quality of Services Provided by the Manager
The trustees noted that, under the Management Agreement, the Manager, subject to the control of the trustees, administers the Fund’s business and other affairs. The Manager manages the investment of the assets of the Fund, including making purchases and sales of portfolio securities consistent with the Fund’s investment objective and policies. The Manager also provides the Fund with such office space, administrative and other services (exclusive of, and in addition to, any such services provided by any others retained by the Fund) and executive and other personnel as are necessary for the Fund’s operations. The Manager pays all of the compensation of trustees of the Fund who are employees or consultants of the Manager and of the officers and employees of the Fund. The Manager also provides senior management for Seligman Data Corp. ("SDC"), a company owned by certain of the investment companies in the Seligman Group of Funds that provides shareholder services to the Fund and other investment companies in the Seligman Group of Funds at cost.
The trustees considered the scope and quality of services provided by the Manager under the Management Agreement and noted that the scope of services provided had expanded over time as a result of regulatory and other developments. The trustees noted that, for example, the Manager is responsible for maintaining and monitoring its own and the Fund’s compliance programs, and these compliance programs have recently been refined and enhanced in light of new regulatory requirements. The trustees considered the quality of the investment research capabilities of the Manager and the other resources they have dedicated to performing services for the Fund. The quality of administrative and other services, including the Manager’s role in coordinating the activities of the Fund’s other service providers, also were considered. The trustees also considered the Manager’s response to recent regulatory compliance issues affecting it and other investment companies in the Seligman Group of Funds. The trustees concluded that, overall, they were satisfied with the nature, extent and quality of services provided (and expected to be provided) to the Fund under the Management Agreement.
Costs of Services Provided and Profitability to the Manager
At the request of the trustees, the Manager provided information concerning profitability of the Manager’s investment advisory and investment company activities and its financial condition based on historical information for 2003 and 2004 (through September 30) and estimates for full-year 2004. The information considered by the trustees included operating profit margin information for the Manager’s investment company business alone (i.e., excluding results of its other businesses) and on a consolidated basis. The trustees also reviewed the Manager’s profitability data and estimated profitability data for the Fund. The trustees reviewed with the Manager’s chief financial officer assumptions and methods of allocation used by the Manager in preparing fund-specific profitability data. The Manager stated its belief that the methods of allocation used were reasonable, but it noted that there are limitations inherent in allocating costs to multiple individual advisory products served by an organization such as the Manager where each of the advisory products draws on, and benefits from, the research and other resources of the organization.
Matters Relating to the Trustees’ Consideration of the Continuance of the Management Agreement
The trustees recognized that it is difficult to make comparisons of profitability from fund management contracts because comparative information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocations and the adviser’s capital structure and cost of capital. In considering profitability information, the trustees considered the effect of fall-out benefits on the Manager’s expenses, as well as the "revenue sharing" arrangements the Manager has entered into with certain entities that distribute shares of the Fund. The trustees focused on profitability of the Manager’s relationships with the Fund before taxes and distribution expenses. The trustees recognized that the Manager should, in the abstract, be entitled to earn a reasonable level of profits for the services it provides to the Fund and, based on their review, concluded that they were satisfied that the Manager’s level of profitability from its relationship with the Fund was not excessive.
Fall-Out Benefits
The trustees considered that the Manager benefits from soft dollar arrangements whereby it receives brokerage and research services from brokers that execute the Seligman Group of Funds’ purchases and sales of securities. The trustees received and reviewed information concerning the Manager’s soft dollar arrangements, which included a description of the Manager’s policies with respect to allocating portfolio brokerage for brokerage and research services, fund-by-fund data for the twelve months ended September 30, 2004 on the dollar amount of commissions allocated for third-party research and brokerage services and for proprietary research and brokerage services, and a list of firms providing third-party research and brokerage to the Manager as of September 30, 2004.
The trustees also considered that a broker-dealer affiliate of the Manager receives 12b-1 fees from the Fund in respect of shares held in accounts for which there is no other broker of record, and that the Fund’s distributor (another affiliate of the Manager) retains a portion of the 12b-1 fees from the Fund and receives a portion of the sales charges on sales or redemptions of certain classes of shares.
The trustees recognized that the Manager’s profitability would be somewhat lower if it did not receive research and brokerage services for soft dollars or if its affiliates did not receive the other benefits described above. The trustees noted that the Manager derives reputational and other benefits from its association with the Fund.
Investment Results1
In addition to the information received by the trustees for the meeting, the trustees receive detailed performance information for the Fund at each regular Board meeting during the year. The trustees compared the Fund’s performance to the Lipper Pennsylvania Municipal Debt Funds Average and to 9 competitor funds selected by the Manager. The Manager explained that there was no appropriate benchmark index against which to compare the Fund. The comparative information showed that the Fund’s investment results were above the Lipper average for the five-year period and were substantially above both the Lipper average and the competitor average in 2000 and 2002, although they were somewhat below both benchmarks for the most recent ten-month period. The trustees noted that the Fund’s Lipper ranking was near or above the median for the three-, five- and ten-year periods but had declined to substantially below median for the one-year period. The Manager explained that the Fund’s performance in recent periods had been adversely affected by defensive positioning in anticipation of rising interest rates, which did not rise as quickly as the Manager anticipated. The Manager also noted that the Fund’s results were lowered somewhat by the Fund’s relatively high expense ratio, which resulted principally from its small size (approximately $21 million). Based upon their review, the trustees concluded that the Fund’s relative investment performance over time had been satisfactory.
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1 | In the discussion of Investment Results below, references to one-, three-, five-, or ten-year periods are for those periods ended September 30, 2004. References to the most recent ten-month period are for the period ended October 31, 2004. |
Matters Relating to the Trustees’ Consideration of the Continuance of the Management Agreement
Management Fees and Other Expenses
The trustees considered the management fee rate paid by the Fund to the Manager, which is 0.50%. The trustees noted that the Fund’s management fee rate was less than both the average and the median for its peer group, which consisted of all funds in its Lipper category. The trustees recognized that it is difficult to make comparisons of management fees because there are variations in the services that are included in the fees paid by other funds.
The trustees also considered the Fund’s total expense ratio for the most recent fiscal year, as compared to the expense ratios for other funds in its peer group. The trustees recognized that the expense ratio information for the Fund potentially reflected on the Manager’s provision of services, as the Manager is responsible for coordinating services provided to the Fund by others. The Manager explained that the expense ratios of some peer group funds were lowered by waivers or reimbursements by those funds’ investment advisers, which in some cases were voluntary and perhaps temporary. In considering the expense ratio of the Fund, the trustees noted that the Fund has elected to have shareholder services provided at cost by SDC and that the Manager provides senior management of SDC as part of the services covered by its management fees. SDC provides services exclusively to the investment companies in the Seligman Group of Funds, and the trustees noted that the arrangement with SDC has provided the Fund and its shareholders with a consistently high level of service.
The comparative information showed that the Fund’s expense ratio was the highest in its peer group, and would have been the highest even if other peer group funds had not benefited from reimbursements by their advisers. The Manager explained that the Fund’s small size (approximately $21 million) contributed to its relatively high expense ratio, and that the Fund was the third smallest of the 18 funds in its peer group. The Manager also explained that the Fund was organized as a Pennsylvania trust and had no other series, as a result of which the Fund incurred local counsel fees unique to it and was unable to allocate certain other expenses over multiple series as could most of the other Seligman Municipal Funds. On the basis of this review, the trustees concluded that the Fund’s expense ratio was acceptable.
Economies of Scale
The trustees noted that the management fee schedule for the Fund does not contain breakpoints that reduce the fee rate on assets above specified levels. The trustees recognized that breakpoints may be an appropriate way for the Manager to share its economies of scale with some funds that have substantial assets or that may grow materially over the next year. However, they also recognized that there is no direct relationship between the economies of scale realized by funds and those realized by the Manager as assets increase, largely because economies of scale are realized (if at all) by the Manager across a variety of products and services, and not only in respect of a single fund. The trustees do not believe there is a uniform methodology for establishing breakpoints that give effect to fund-specific services provided by the Manager and to the economies of scale that the Manager may realize in its overall mutual fund business or those components of it which directly or indirectly affect the Fund’s operations. The trustees observed that in the mutual fund industry as a whole, as well as among funds similar to the Fund, there is
Matters Relating to the Trustees’ Consideration of the Continuance of the Management Agreement