<PAGE> 1
T-Fund
Plus Shares
An Investment Portfolio Offered By
Trust for Federal Securities
<TABLE>
<S> <C>
Bellevue Park Corporate Center For purchase and redemption orders only call:
400 Bellevue Parkway 800-441-7450 (in Delaware: 302-791-5350).
Suite 100 For yield information call: 800-821-6006
Wilmington, DE 19809 (T-Fund Plus shares code: 32).
For other information call: 800-821-7432.
</TABLE>
Trust for Federal Securities (the "Company") is a no-load, diversified,
open-end investment company that currently offers shares in six separate
investment portfolios. This Prospectus describes one class of shares ("T-Fund
Plus Shares") in the T-Fund portfolio (the "Fund"), a money market portfolio.
The Fund's investment objective is to seek current income with liquidity
and security of principal. The Fund invests in a portfolio consisting of U.S.
Treasury bills, notes and direct obligations of the U.S. Treasury and repurchase
agreements relating to direct Treasury obligations.
Fund shares may not be purchased by individuals directly, but institutional
investors may purchase shares for accounts maintained by individuals. T-Fund
Plus Shares bear fees payable by the Fund to the institutional investors for
certain services they provide to the beneficial owners of those shares. T-Fund
Plus Shares also bear distribution fees payable by the Fund to the distributor
for distribution and sales support services. (See "Management of the
Fund -- Distribution and Service Plan.")
PNC Institutional Management Corporation ("PIMC") and PNC Bank, National
Association ("PNC Bank") serve as the Fund's adviser and sub-adviser,
respectively. PFPC Inc. ("PFPC") and Provident Distributors, Inc. ("PDI") serve
as the Fund's administrators. PDI also serves as the Fund's distributor.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF OR GUARANTEED,
ENDORSED, OR OTHERWISE SUPPORTED BY PNC BANK CORP. OR ITS AFFILIATES, OR
THE U.S. GOVERNMENT, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY
OTHER AGENCY. AN INVESTMENT IN THE FUND INVOLVES INVESTMENT
RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. THERE
CAN BE NO ASSURANCE THAT IT WILL BE ABLE TO
MAINTAIN ITS NET ASSET VALUE OF $1.00 PER
SHARE.
This Prospectus briefly sets forth certain information about the Fund that
investors should know before investing. Investors are advised to read this
Prospectus and retain it for future reference. Additional information about the
Fund, contained in a Statement of Additional Information currently dated May 31,
1996 has been filed with the Securities and Exchange Commission and is available
to investors without charge by calling the Fund at 800-821-7432. The Statement
of Additional Information, as amended from time to time, is incorporated in its
entirety by reference into this Prospectus.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
May 31, 1996
<PAGE> 2
BACKGROUND AND EXPENSE INFORMATION
Three classes of shares are offered by the Fund: T-Fund Plus Shares, T-Fund
Shares and T-Fund Dollar Shares. Shares of each class represent equal, pro rata
interests in the Fund and accrue daily dividends in the same manner, except that
T-Fund Plus Shares (as well as T-Fund Dollar Shares) bear fees payable by the
Fund (at the rate of .25% of average daily net assets per annum) to
institutional investors for services they provide to the beneficial owners of
such shares, and T-Fund Plus Shares also bear distribution fees (at the rate of
.15% of average daily net assets per annum) payable by the Fund to PDI for
distribution and sales support services. (See "Management of the
Fund -- Distribution and Service Plan.")
EXPENSE SUMMARY
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<CAPTION>
T-FUND
PLUS SHARES
--------------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES
- -------------------------------------------------------------------------
(as a percentage of average net assets)
Management Fees (net of waivers).................................... .07 %
12b-1 Fees.......................................................... .15 %
Other Expenses...................................................... .38 %
Administration Fees (net of waivers)........................... .07 %
Shareholder Servicing Fees..................................... .25 %
Miscellaneous.................................................. .06 %
----
Total Fund Operating Expenses (net of waivers)...................... .60 %
===
</TABLE>
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<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) a 5% annual return and
(2) redemption at the end of each time period with
respect to T-Fund Plus Shares: $6 $19 $33 $ 75
</TABLE>
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR RATE OF RETURN. ACTUAL EXPENSES AND RATE OF RETURN MAY BE GREATER OR
LESSER THAN THOSE SHOWN.
The purpose of the foregoing table is to assist an investor in
understanding the various costs and expenses that an investor in the Fund will
bear directly or indirectly. The table is based on expenses incurred by the Fund
during the last fiscal year, restated to reflect the expenses which are expected
to be incurred by T-Fund Plus Shares during the current fiscal year. In
addition, institutional investors may charge fees for providing administrative
services in connection with their customers' investment in T-Fund Plus Shares.
Absent fee waivers, Management Fees, Administration Fees and Total Fund
Operating Expenses for T-Fund Plus Shares would be .13%, .13% and .69%,
respectively. (For more complete descriptions of the various costs and expenses,
see "Management of the Fund" in this Prospectus and the Statement of Additional
Information and the financial statements and related notes contained in the
Statement of Additional Information.) The investment adviser and administrators
may from time to time waive the advisory and administration fees otherwise
payable to them or may reimburse the Fund for its operating expenses. The
foregoing table has not been audited by the Fund's independent accountants.
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<PAGE> 3
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to seek current income with liquidity
and security of principal. The Fund invests solely in direct obligations of the
U.S. Treasury, such as Treasury bills and notes and repurchase agreements
relating to direct Treasury obligations. Portfolio obligations held by the Fund
have remaining maturities of 397 days (thirteen months) or less (with certain
exceptions), subject to the quality, diversification, and other requirements of
Rule 2a-7 under the Investment Company Act of 1940, as amended (the "1940 Act")
and other rules of the Securities and Exchange Commission (the "SEC").
Securities issued or guaranteed by the U.S. Government have historically
involved little risk of loss of principal if held to maturity. However, due to
fluctuations in interest rates, the market value of such securities may vary
during the period a shareholder owns shares of the Fund. To the extent
consistent with its investment objectives, the Fund may invest in Treasury
receipts and other "stripped" securities issued or guaranteed by the U.S.
Government, where the principal and interest components are traded independently
under the Separate Trading of Registered Interest and Principal of Securities
program ("STRIPS"). Under the STRIPS program, the principal and interest
components are individually numbered and separately issued by the U.S. Treasury
at the request of depository financial institutions, which then trade the
component parts independently. Currently, the Fund only invests in "stripped"
securities issued or guaranteed by the U.S. Government which are registered
under the STRIPS program. The principal and interest components may exhibit
greater price volatility than ordinary debt securities because of the manner in
which their principal and interest are returned to investors.
The Fund may purchase government securities from primary dealers of the
Federal Reserve Bank of New York, subject to the seller's agreement to
repurchase them at an agreed upon time and price ("repurchase agreements"). The
securities subject to a repurchase agreement may bear maturities exceeding
thirteen months, provided the repurchase agreement itself matures in one year or
less. The Fund will not invest more than 10% of the value of its net assets in
repurchase agreements which do not provide for settlement within seven days. The
seller under a repurchase agreement will be required to maintain the value of
the underlying securities subject to the agreement at not less than 102% of the
repurchase price. Default by or bankruptcy of the seller would, however, expose
the Fund to possible loss because of adverse market action or delay in
connection with the disposition of the underlying obligations.
The Fund may purchase securities on a "when-issued" basis. When-issued
securities are securities purchased for delivery beyond the normal settlement
date at a stated price and yield. The Fund will generally not pay for such
securities or start earning interest on them until they are received. Securities
purchased on a when-issued basis are recorded as an asset and are subject to
changes in value based upon changes in the general level of interest rates. The
Fund expects that commitments to purchase when-issued securities will not exceed
25% of the value of its total assets absent unusual market conditions. The Fund
does not intend to purchase when-issued securities for speculative purposes or
as a means of leverage, but only in furtherance of its investment objective.
INVESTMENT LIMITATIONS
The Fund's investment objective and policies described above are not
fundamental and may be changed by the Company's Board of Trustees without a vote
of shareholders. If there is a
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<PAGE> 4
change in the investment objective, shareholders should consider whether the
Fund remains an appropriate investment in light of their then current financial
position and needs. The Fund's investment limitations summarized below may not
be changed without the affirmative vote of the holders of a majority of its
outstanding shares. (A full list of the complete investment limitations that
cannot be changed without a vote of shareholders is contained in the Statement
of Additional Information under "Investment Objectives and Policies.")
The Fund may not:
1. Purchase securities other than direct obligations of the U.S. Treasury
such as Treasury bills and notes, some of which may be subject to repurchase
agreements.
2. Borrow money except from banks for temporary purposes and then in an
amount not exceeding 10% of the value of the Fund's total assets, or mortgage,
pledge or hypothecate its assets except in connection with any such borrowing
and in amounts not in excess of the lesser of the dollar amounts borrowed or 10%
of the value of the Fund's total assets at the time of such borrowing.
3. Make loans except that the Fund may purchase or hold debt obligations in
accordance with its investment objective and policies and may enter into
repurchase agreements for securities.
PURCHASE AND REDEMPTION OF SHARES
PURCHASE PROCEDURES
T-Fund Plus Shares are sold exclusively to institutional investors, such as
brokers or dealers, banks, savings and loan associations and other financial
institutions, and other industry professionals ("Service Organizations"), acting
on behalf of themselves or their customers and customers of their affiliates
("customers"). The customers, which may include individuals, trusts,
partnerships and corporations, must maintain accounts (such as demand deposit,
custody, trust or escrow accounts) with the Service Organization. Service
Organizations (or their nominees) will normally be the holders of record of
T-Fund Plus Shares, and will reflect their customers' beneficial ownership of
shares in the account statements provided by them to their customers. The
exercise of voting rights and the delivery to customers of shareholder
communications from the Fund will be governed by the customers' account
agreements with the Service Organizations. Investors wishing to purchase T-Fund
Plus Shares should contact their account representatives.
Purchase orders must be transmitted by a Service Organization directly to
PFPC, the Fund's transfer agent. All such transactions are effected pursuant to
procedures established by the Service Organization in connection with a
customer's account. T-Fund Plus Shares are sold at the net asset value per share
next determined after receipt of a purchase order by PFPC.
Purchase orders for shares are accepted only on days on which both the New
York Stock Exchange and the Federal Reserve Bank of Philadelphia, are open for
business (a "Business Day") and must be transmitted to PFPC in Wilmington,
Delaware, by telephone (800-441-7450; in Delaware: 302-791-5350) or through the
Fund's computer access program. Orders received before 12:00 noon, Eastern time,
for which payment has been received by PNC Bank, the Fund's custodian, will be
executed at 12:00 noon. Orders received after 12:00 noon and before 3:00 P.M.,
4
<PAGE> 5
Eastern time (or orders received earlier in the same day for which payment has
not been received by 12:00 noon), will be executed at 4:00 P.M., Eastern time,
if payment has been received by PNC Bank by that time. Orders received at other
times, and orders for which payment has not been received by 4:00 P.M., Eastern
time, will not be accepted, and notice thereof will be given to the institution
placing the order. (Payment for orders which are not received or accepted will
be returned after prompt inquiry to the sending institution.) The Fund may in
its discretion reject any order for shares.
Payment for T-Fund Plus Shares may be made only in federal funds or other
funds immediately available to PNC Bank. The minimum initial investment by a
Service Organization is $3 million for T-Fund Plus Shares; however, Service
Organizations may set a higher minimum for their customers. There is no minimum
subsequent investment. The Fund, at its discretion, may reduce the minimum
initial investment for T-Fund Plus Shares for specific Service Organizations
whose aggregate relationship with the Provident Institutional Funds is
substantially equivalent to this $3 million minimum and warrants this reduction.
Conflict of interest restrictions may apply to an institution's receipt of
compensation paid by the Fund in connection with the investment of fiduciary
funds in T-Fund Plus Shares. (See also "Management of the Fund -- Distribution
and Service Plan.") Institutions, including banks regulated by the Comptroller
of the Currency and investment advisers and other money managers subject to the
jurisdiction of the SEC, the Department of Labor or state securities
commissions, should consult their legal advisors before investing fiduciary
funds in T-Fund Plus Shares. (See also "Management of the Fund -- Banking
Laws.")
REDEMPTION PROCEDURES
Redemption orders must be transmitted to PFPC in Wilmington, Delaware, in
the manner described under "Purchase Procedures." Shares are redeemed at the net
asset value per share next determined after PFPC's receipt of the redemption
order. While the Fund intends to use its best efforts to maintain its net asset
value per share at $1.00, the proceeds paid to a shareholder upon redemption may
be more or less than the amount invested depending upon a share's net asset
value at the time of redemption.
Payment for redeemed shares for which a redemption order is received by
PFPC by 3:00 P.M., Eastern time, on a Business Day is normally made in federal
funds wired to the redeeming shareholder on the same business day. Payment for
redemption orders which are received between 3:00 P.M. and 4:00 P.M., Eastern
time, or on a day when PNC Bank is closed, is normally wired in federal funds on
the next day following redemption that PNC Bank is open for business.
The Fund shall have the right to redeem shares in any account if, as a
result of redemptions, the value of the account is less than $1,000 after
sixty-days' prior written notice to the shareholder. Any such redemption shall
be effected at the net asset value per share next determined after the
redemption order is entered. If during the sixty-day period the shareholder
increases the value of its account to $1,000 or more, no such redemption shall
take place. Moreover, if a shareholder's T-Fund Plus Shares account falls below
an average of $100,000 in any particular calendar month, the account may be
charged an account maintenance fee with respect to that month. In addition, the
Fund may also redeem shares involuntarily or suspend the right of
5
<PAGE> 6
redemption under certain special circumstances described in the Statement of
Additional Information under "Additional Purchase and Redemption Information."
OTHER MATTERS
The Fund's net asset value per share for purposes of pricing purchase and
redemption orders is determined by PIMC as of 12:00 noon and 4:00 P.M., Eastern
time, on each day on which both the Federal Reserve Bank of Philadelphia and the
New York Stock Exchange are open for business. Currently, one or both of these
institutions are closed on the customary national business holidays of New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day (observed), Independence Day, Labor Day, Columbus Day (observed), Veteran's
Day, Thanksgiving Day and Christmas Day. The net asset value per share of each
class of the Fund is calculated by adding the value of all securities and other
assets belonging to the Fund, subtracting liabilities attributable to each
class, and dividing the result by the total number of the outstanding shares of
each class. In computing net asset value, the Fund uses the amortized cost
method of valuation as described in the Statement of Additional Information
under "Additional Purchase and Redemption Information." The Fund's net asset
value per share for purposes of pricing purchase and redemption orders is
determined independently of the net asset values of the shares of the Company's
other investment portfolios.
Fund shares are sold and redeemed without charge by the Fund. Service
Organizations purchasing or holding T-Fund Plus Shares for their customer
accounts may charge customer fees for cash management and other services
provided in connection with their accounts. In addition, if a customer has
agreed with a particular Service Organization to maintain a minimum balance in
its account with the Service Organization and the balance in such account falls
below that minimum, the customer may be obliged by the Service Organization to
redeem all or part of its shares in the Fund to the extent necessary to maintain
the required minimum balance in such account. A customer should, therefore,
consider the terms of its account with a Service Organization before purchasing
T-Fund Plus Shares. A Service Organization purchasing or redeeming Fund shares
on behalf of its customers is responsible for transmitting orders to the Fund in
accordance with its customer agreements.
MANAGEMENT OF THE FUND
BOARD OF TRUSTEES
The business and affairs of the Fund are managed under the direction of the
Company's Board of Trustees. The trustees of the Company are as follows:
G. Nicholas Beckwith, III is President and Chief Executive Officer of
Beckwith Machinery Company.
Philip E. Coldwell is an economic consultant and a former Member of
the Board of Governors of the Federal Reserve System.
Robert R. Fortune is a financial consultant and former Chairman,
President and Chief Executive Officer of Associated Electric & Gas
Insurance Services Limited.
Jerrold B. Harris is President and Chief Executive Officer of VWR
Corporation.
Rodney D. Johnson is President of Fairmount Capital Advisors, Inc.
6
<PAGE> 7
G. Willing Pepper, Chairman of the Board and President of the Company,
is a retired President of Scott Paper Company.
Mr. Pepper is considered by the Company to be an "interested person" of the
Company as defined in the 1940 Act.
The other officers of the Company are as follows:
Edward J. Roach is Vice President and Treasurer of the Company.
W. Bruce McConnel, III, Secretary of the Company, is a partner of the
law firm of Drinker Biddle & Reath, Philadelphia, Pennsylvania.
INVESTMENT ADVISER AND SUB-ADVISER
PIMC, a wholly-owned, indirect subsidiary of PNC Bank, serves as the Fund's
investment adviser. PIMC was organized in 1977 by PNC Bank to perform advisory
services for investment companies and has its principal offices at 400 Bellevue
Parkway, Wilmington, Delaware 19809. PNC Bank serves as the Fund's sub-adviser.
PNC Bank is one of the largest bank managers of investments for individuals in
the United States, and together with its predecessors has been in the business
of managing the investments of fiduciary and other accounts since 1847. PNC Bank
is a wholly-owned, indirect subsidiary of PNC Bank Corp. and has its principal
offices at Broad and Chestnut Streets, Philadelphia, Pennsylvania 19102. PNC
Bank Corp. is a multi-bank holding company. PIMC and PNC Bank also serve as
adviser and sub-adviser, respectively, to the Company's FedFund, FedCash,
T-Cash, Federal Trust Fund and Treasury Trust Fund portfolios.
PNC Bank Corp., headquartered in Pittsburgh, Pennsylvania, is one of the
largest financial services organizations in the United States with banking
subsidiaries in Pennsylvania, New Jersey, Delaware, Ohio, Kentucky, Indiana,
Massachusetts and Florida. Its major businesses include corporate banking,
consumer banking, mortgage banking and asset management.
PNC Financial Services Group is PNC Bank Corp.'s mutual fund complex,
headquartered in Wilmington, Delaware. This group includes PIMC, PFPC and PNC
Bank. In 1973, Provident National Bank (predecessor to PNC Bank) commenced
advising the first institutional money market mutual fund -- a U.S.
dollar-denominated constant net asset value fund -- offered in the United
States.
The PNC Financial Services Group is one of the largest U.S. bank managers
of mutual funds with assets currently under management in excess of $30 billion.
This group, through PFPC and PFPC International Ltd, is also a leading mutual
fund service provider having contractual relationships with approximately 370
mutual funds with 3.5 million shareholders and in excess of $101 billion in
assets, including some $2 billion in non-U.S. assets. This group, through its
PNC Institutional Investment Service, provides investment research to some 250
financial institutions located in the United States and abroad. PNC Bank
provides custodial services for approximately $210 billion in assets, including
$160 billion in mutual fund assets.
As adviser, PIMC manages the Fund's portfolio and is responsible for all
purchases and sales of the Fund's portfolio securities. PIMC also maintains
certain of the Fund's financial accounts and records and computes the Fund's net
asset value and net income. For the advisory services provided and expenses
assumed by it, PIMC is entitled to receive a fee, computed daily and payable
monthly, based on the Fund's average net assets. PIMC and the administrators may
from
7
<PAGE> 8
time to time reduce the advisory and administration fees otherwise payable to
them or may reimburse the Fund for its operating expenses. Any fees waived by
PIMC with respect to a particular fiscal year are not recoverable. For the
fiscal year ended October 31, 1995, the Fund paid investment advisory fees
aggregating .07% of its average net assets.
As sub-adviser, PNC Bank provides research, credit analysis and
recommendations with respect to the Fund's investments, and supplies PIMC with
certain computer facilities, personnel and other services. For its sub-advisory
services, PNC Bank is entitled to receive from PIMC an amount equal to 75% of
the advisory fee paid by the Fund to PIMC (subject to adjustment in certain
circumstances). The sub-advisory fees paid by PIMC to PNC Bank have no effect on
the advisory fees payable by the Fund to PIMC. PNC Bank also serves as the
Fund's custodian. The services provided by PNC Bank and PIMC and the fees
payable by the Fund for these services are described further in the Statement of
Additional Information under "Management of the Funds."
ADMINISTRATOR
PFPC, whose principal business address is 400 Bellevue Parkway, Wilmington,
Delaware 19809, and PDI whose principal business address is 259 Radnor-Chester
Road, Suite 120, Radnor, Pennsylvania 19087, serve as administrators. PFPC is an
indirect wholly-owned subsidiary of PNC Bank Corp. A majority of the outstanding
stock of PDI is owned by its officers. The administrative services provided by
the administrators, which are described more fully in the Statement of
Additional Information, include providing and supervising the operation of an
automated data processing system to process purchase and redemption orders;
assisting in maintaining the Fund's Wilmington, Delaware office; performing
administrative services in connection with the Fund's computer access program
maintained to facilitate shareholder access to the Fund; accumulating
information for and coordinating the preparation of reports to the Fund's
shareholders and the SEC; and maintaining the registration or qualification of
the Fund's shares for sale under state securities laws. PFPC and PDI are each
responsible for carrying out the duties undertaken pursuant to the
Administration Agreement with the Fund.
For their administrative services, the administrators are entitled jointly
to receive a fee computed daily and payable monthly. (For information regarding
the administrators' waivers and expense reimbursements, see "Investment Adviser
and Sub-Adviser" above.) The Fund also reimburses each administrator for its
reasonable out-of-pocket expenses incurred in connection with the Funds'
computer access program. For the fiscal year ended October 31, 1995, the Fund
paid administration fees aggregating .07% of its average net assets.
PFPC also serves as transfer agent, registrar and dividend disbursing
agent. PFPC's address is P.O. Box 8950, Wilmington, Delaware 19885-9628. The
services provided by PFPC and PDI and the fees payable by the Fund for these
services are described further in the Statement of Additional Information under
"Management of the Funds."
DISTRIBUTOR
PDI serves as distributor of the Fund's shares. Its principal offices are
located at 259 Radnor-Chester Road, Suite 120, Radnor, Pennsylvania 19087. Fund
shares are sold on a continuous basis by the distributor as agent.
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<PAGE> 9
DISTRIBUTION AND SERVICE PLAN
Under the Fund's Distribution and Service Plan (the "Plan"), T-Fund Plus
Shares bear the expense of distribution fees of up to .25% and shareholder
servicing fees of up to .25%, on an annualized basis, of the average daily net
asset value of the outstanding T-Fund Plus Shares.
The distribution fees consist of payments made to PDI for distribution and
sales support services. The distribution fees will be used to compensate PDI for
distribution services and sales support services provided in connection with the
offering and sale of T-Fund Plus Shares. The distribution fees may also be used
to reimburse PDI for related expenses, including payments to Service
Organizations for sales support services and related expenses. The Fund
currently intends to limit the distribution fees to no more than .15% (on an
annualized basis) of the average daily net asset value of the outstanding T-Fund
Plus Shares. Payments under the Plan are not tied directly to out-of-pocket
expenses and therefore may be used by the recipients as they choose (for
example, to defray their overhead expenses).
The shareholder servicing fees are paid to Service Organizations which
enter into service agreements with the Fund to render certain support services
to their customers who are the beneficial owners of T-Fund Plus Shares. In
consideration for a shareholder servicing fee of up to .25% (annualized) of the
average daily net asset value of T-Fund Plus Shares owned by their customers,
Service Organizations provide services to their customers including: responding
to customer inquiries relating to the services performed by the Service
Organization and to customer inquiries concerning their investments in T-Fund
Plus Shares; providing information periodically to customers showing their
positions in T-Fund Plus Shares; and other similar shareholder liaison services.
Service Organizations may charge their clients additional fees for account
services. As previously noted, customers who are beneficial owners of T-Fund
Plus Shares should read this Prospectus in light of the terms and fees governing
their accounts with Service Organizations.
EXPENSES
Except as noted above and in the Statement of Additional Information, the
Fund's service contractors bear all expenses in connection with the performance
of their services. Similarly, the Fund bears the expenses incurred in its
operations. With regard to fees paid exclusively by T-Fund Plus Shares, see
"Distribution and Service Plan" above.
BANKING LAWS
Banking laws and regulations presently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing or controlling a
registered, open-end investment company engaged continuously in the issuance of
its shares, and prohibit banks generally from issuing, underwriting, selling or
distributing securities such as Fund shares. Such banking laws and regulations
do not prohibit such a holding company or affiliate or banks generally from
acting as investment adviser, transfer agent or custodian to such an investment
company, or from purchasing shares of such a company for or upon the order of
customers. PNC Bank, PIMC and PFPC, as well as some Service Organizations, are
subject to such banking laws and regulations, but believe they may perform the
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<PAGE> 10
services for the Fund contemplated by their respective agreements, this
Prospectus and the Statement of Additional Information without violating
applicable banking laws or regulations.
Should future legislative, judicial or administrative action prohibit or
restrict the activities of bank Service Organizations in connection with the
provision of support services to their customers, the Fund might be required to
alter or discontinue its arrangements with Service Organizations and change its
method of operations with respect to T-Fund Plus Shares. It is not anticipated,
however, that any change in the Fund's method of operations would affect its net
asset value per share or result in a financial loss to any customer.
DIVIDENDS
Shareholders of the Fund are entitled to dividends and distributions
arising only from the net investment income and capital gains, if any, earned on
investments held by the Fund. The Fund's net investment income is declared daily
as a dividend to its shareholders of record at the close of business on the day
of declaration. Shares begin accruing dividends on the day the purchase order
for the shares is executed and continue to accrue dividends through the day
before such shares are redeemed. Dividends are paid monthly by check, or by wire
transfer if requested in writing by the shareholder, within five business days
after the end of the month or within five business days after a redemption of
all of a shareholder's shares of a particular class. The Fund does not expect to
realize net long-term capital gains.
Dividends are determined in the same manner for each class of shares of the
Fund but may differ in amount because of the difference in the expenses paid by
the different classes.
Institutional shareholders may elect to have their dividends reinvested in
additional full and fractional shares of T-Fund Plus Shares at the net asset
value of such shares on the payment date. Reinvested dividends receive the same
tax treatment as dividends paid in cash. Such election, or any revocation
thereof, must be made in writing to PFPC at P.O. Box 8950, Wilmington, Delaware
19885-9628, and will become effective after its receipt by PFPC with respect to
dividends paid.
PFPC, as transfer agent, will send each Fund shareholder or its authorized
representative an annual statement designating the amount, if any, of any
dividends and distributions made during each year and their federal tax
qualification.
TAXES
The Fund qualified in its last taxable year and intends to qualify in
future years as a "regulated investment company" under the Internal Revenue Code
of 1986, as amended (the "Code"). A regulated investment company is generally
exempt from federal income tax on amounts distributed to its shareholders.
Qualification as a regulated investment company under the Code for a
taxable year requires, among other things, that the Fund distribute to its
shareholders at least 90% of its investment company taxable income for such
year. In general, the Fund's investment company taxable income will be its
taxable income (including interest and short-term capital gains, if any),
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. The Fund intends to distribute substantially all of its
investment company taxable income each year. Such distributions will be
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<PAGE> 11
taxable as ordinary income to the Fund's shareholders that are not currently
exempt from federal income taxes, whether such income is received in cash or
reinvested in additional shares. (Federal income taxes for distributions to an
IRA or a qualified retirement plan are deferred under the Code.) It is
anticipated that none of the Fund's distributions will be eligible for the
dividends received deduction for corporations. The Fund does not expect to
realize long-term capital gains and, therefore, does not contemplate payment of
any "capital gain dividends," as described in the Code.
Dividends declared in October, November or December of any year payable to
shareholders of record on a specified date in such months will be deemed to have
been received by the shareholders and paid by the Fund on December 31 of such
year, in the event such dividends are actually paid during January of the
following year.
The foregoing discussion is only a brief summary of some of the important
federal tax considerations generally affecting the Fund and its shareholders. As
indicated above, IRAs receive special tax treatment. No attempt is made to
present a detailed explanation of the federal, state or local income tax
treatment of the Fund or its shareholders, and this discussion is not intended
as a substitute for careful tax planning. Accordingly, potential investors in
the Fund should consult their tax advisors with specific reference to their own
tax situations.
YIELDS
From time to time, in advertisements or reports to shareholders, "yields"
and "effective yields" for T-Fund Plus Shares may be quoted. Yield quotations
are computed separately for T-Fund Plus Shares, T-Fund Shares and T-Fund Dollar
Shares. The "yield" for T-Fund Plus Shares refers to the income generated by an
investment in such shares over a specified period (such as a seven-day period).
This income is then "annualized"; that is, the amount of income generated by the
investment during that period is assumed to be generated for each such period
over a 52-week or one year period and is shown as a percentage of the
investment. The "effective yield" is calculated similarly but, when annualized,
the income earned by an investment in T-Fund Plus Shares is assumed to be
reinvested. The "effective yield" will be slightly higher than the "yield"
because of the compounding effect of this assumed reinvestment.
The Fund's yields may be compared to those of other mutual funds with
similar objectives, to stock or other relevant indices, or to rankings prepared
by independent services or other financial or industry publications that monitor
the performance of mutual funds. For example, such data are reported in national
financial publications such as IBC/Donoghue's Money Fund Report(R), The Wall
Street Journal, and The New York Times, reports prepared by Lipper Analytical
Services, Inc., and publications of a local or regional nature.
The Fund's yield figures for T-Fund Plus Shares represent the Fund's past
performance, will fluctuate, and should not be considered as representative of
future results. The yield of any investment is generally a function of portfolio
quality and maturity, type of investment and operating expenses. Any fees
charged by Service Organizations directly to their customers in connection with
investments in T-Fund Plus Shares are not reflected in the Fund's yield for
those shares; and, such fees, if charged, would reduce the actual return
received by customers on their investments. The methods used to compute the
Fund's yields are described in more detail in
11
<PAGE> 12
the Statement of Additional Information. Investors may call 800-821-6006 (T-Fund
Plus Shares code: 32) to obtain current yield information.
DESCRIPTION OF SHARES AND MISCELLANEOUS
The Company is a Pennsylvania business trust established on May 14, 1975.
Effective March 2, 1987, the Company's name was changed from Trust for
Short-Term Federal Securities to Trust for Federal Securities. The Company
commenced operations of the Fund in March, 1980.
The Company's Declaration of Trust authorizes the Board of Trustees to
issue an unlimited number of full and fractional shares of beneficial interest
in the Company and to classify or reclassify any unissued shares into one or
more additional classes of shares. Pursuant to such authority, the Board of
Trustees has authorized the issuance of thirteen classes of shares designated as
FedFund, FedFund Dollar, T-Fund, T-Fund Dollar, T-Fund Plus, FedCash, FedCash
Dollar, T-Cash, T-Cash Dollar, Federal Trust, Federal Trust Dollar, Treasury
Trust and Treasury Trust Dollar. The Declaration of Trust further authorizes the
trustees to classify or reclassify any class of shares into one or more
sub-classes.
THIS PROSPECTUS AND THE STATEMENT OF ADDITIONAL INFORMATION INCORPORATED
HEREIN RELATE PRIMARILY TO THE FUND AND DESCRIBE ONLY THE INVESTMENT OBJECTIVE
AND POLICIES, OPERATIONS, CONTRACTS AND OTHER MATTERS RELATING TO T-FUND PLUS
SHARES OF THE FUND. INVESTORS WISHING TO OBTAIN SIMILAR INFORMATION REGARDING
THE FUND'S OTHER CLASSES OF SHARES OR THE COMPANY'S FEDFUND, FEDCASH, T-CASH,
FEDERAL TRUST FUND AND TREASURY TRUST FUND PORTFOLIOS MAY OBTAIN SEPARATE
PROSPECTUSES DESCRIBING THOSE PORTFOLIOS BY CALLING THE DISTRIBUTOR AT
800-998-7633.
The Company does not presently intend to hold annual meetings of
shareholders except as required by the 1940 Act or other applicable law. The
Company will call a meeting of shareholders for the purpose of voting upon the
question of removal of a member of the Board of Trustees upon written request of
shareholders owning at least 10% of the outstanding shares of the Company
entitled to vote.
Each Fund share represents an equal proportionate interest in the assets
belonging to the Fund. Each share is without par value and has no preemptive or
conversion rights. When issued for payment as described in this Prospectus,
shares will be fully paid and non-assessable.
Holders of the Company's T-Fund Plus Shares, T-Fund Shares and T-Fund
Dollar Shares will vote in the aggregate and not by class or sub-class on all
matters, except (i) where otherwise required by law, (ii) only T-Fund Dollar
Shares will be entitled to vote on matters submitted to a vote of shareholders
pertaining to certain organizations providing services to those shares, (iii)
only T-Fund Plus Shares will be entitled to vote on matters submitted to a vote
of shareholders pertaining to the Fund's arrangements with Service Organizations
and (iv) only T-Fund Plus Shares will be entitled to vote on matters submitted
to a vote of shareholders pertaining to distribution fees. Further, shareholders
of all of the Company's portfolios will vote in the aggregate and not by
portfolio except as otherwise required by law or when the Board of Trustees
determines that the matter to be voted upon affects only the interests of the
shareholders of a particular portfolio. (See the Statement of Additional
Information under "Additional Description Concerning Fund Shares" for examples
where the 1940 Act requires
12
<PAGE> 13
voting by portfolio.) Shareholders of the Company are entitled to one vote for
each full share held (irrespective of class, sub-class, or portfolio) and
fractional votes for fractional shares held. Voting rights are not cumulative
and, accordingly, the holders of more than 50% of the aggregate shares of the
Company may elect all of the trustees.
For information concerning the redemption of Fund shares and possible
restrictions on their transferability, see "Purchase and Redemption of Shares."
As stated above, the Company is organized as a trust under the laws of the
Commonwealth of Pennsylvania. Shareholders of such a trust may, under certain
circumstances, be held personally liable (as if they were partners) for the
obligations of the trust. The Company's Declaration of Trust provides for
indemnification out of the trust property of any shareholder of the Fund held
personally liable solely by reason of being or having been a shareholder and not
because of any acts or omissions or some other reason.
13
<PAGE> 14
NO PERSON HAS BEEN AUTHORIZED
TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATIONS NOT
CONTAINED IN THIS PROSPECTUS,
OR IN THE FUND'S STATEMENT OF
ADDITIONAL INFORMATION
INCORPORATED HEREIN BY
REFERENCE, IN CONNECTION WITH
THE OFFERING MADE BY THIS
PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR
ITS DISTRIBUTOR. THIS
PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY THE
COMPANY OR BY THE DISTRIBUTOR
IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Background and Expense
Information................... 2
Investment Objective and
Policies...................... 3
Purchase and Redemption of
Shares........................ 4
Management of the Fund.......... 6
Dividends....................... 10
Taxes........................... 10
Yields.......................... 11
Description of Shares and
Miscellaneous................. 12
</TABLE>
PIF-P-047
T-FUND
PLUS SHARES
AN INVESTMENT PORTFOLIO
OFFERED BY
TRUST FOR FEDERAL SECURITIES
Prospectus
May 31, 1996
<PAGE> 15
FEDFUND and T-FUND
Investment Portfolios Offered By
Trust for Federal Securities
Statement of Additional Information
May 31, 1996
TABLE OF CONTENTS
Page
THE COMPANY................................................................. 1
INVESTMENT OBJECTIVES AND POLICIES.......................................... 1
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION.............................. 5
MANAGEMENT OF THE FUNDS..................................................... 8
ADDITIONAL INFORMATION CONCERNING TAXES..................................... 20
DIVIDENDS................................................................... 21
ADDITIONAL YIELD INFORMATION................................................ 21
ADDITIONAL DESCRIPTION CONCERNING FUND SHARES............................... 25
COUNSEL..................................................................... 26
AUDITORS.................................................................... 26
MISCELLANEOUS............................................................... 26
FINANCIAL STATEMENTS........................................................ 28
APPENDIX A.................................................................. 1
This Statement of Additional Information is meant to be read in conjunction
with the Prospectuses for FedFund dated February 28, 1996 and for T-Fund dated
February 28, 1996 and May 31, 1996 and is incorporated by reference in its
entirety into those Prospectuses. Because this Statement of Additional
Information is not itself a prospectus, no investment in shares of FedFund or
T-Fund should be made solely upon the information contained herein. Copies of
the Prospectuses for FedFund and T-Fund may be obtained by calling 800-821-7432.
Capitalized terms used but not defined herein have the same meanings as in the
Prospectuses.
<PAGE> 16
THE COMPANY
Trust for Federal Securities (Trust for Short-Term Federal Securities
prior to March 2, 1987) is a no-load, diversified, open-end investment company
designed primarily as a vehicle by which institutional investors can invest cash
reserves in a choice of portfolios consisting of government securities. Trust
for Federal Securities (the "Company") consists of six separate investment
portfolios--FedFund, T-Fund, FedCash, T-Cash, Federal Trust Fund and Treasury
Trust Fund. This Statement of Additional Information relates primarily to the
Company's FedFund and T-Fund portfolios (the "Funds").
The securities held by FedFund consist of obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities and
repurchase agreements relating to such obligations. Securities held by T-Fund
are limited to U.S. Treasury bills, notes and other direct obligations of the
U.S. Treasury and repurchase agreements relating to direct Treasury obligations.
Although both Funds have the same investment adviser and have comparable
investment objectives, their yields normally will differ due to their differing
cash flows and differences in the specific portfolio securities held.
THIS STATEMENT OF ADDITIONAL INFORMATION AND THE FUNDS' PROSPECTUSES
RELATE PRIMARILY TO THE FUNDS AND DESCRIBE ONLY THE INVESTMENT OBJECTIVE AND
POLICIES, OPERATIONS, CONTRACTS, AND OTHER MATTERS RELATING TO THE FUNDS.
INVESTORS WISHING TO OBTAIN SIMILAR INFORMATION REGARDING THE COMPANY'S FEDCASH,
T-CASH, FEDERAL TRUST FUND OR TREASURY TRUST FUND PORTFOLIOS MAY OBTAIN SEPARATE
PROSPECTUSES DESCRIBING THOSE PORTFOLIOS BY CALLING THE DISTRIBUTOR AT
800-998-7633.
INVESTMENT OBJECTIVES AND POLICIES
As stated in the Funds' Prospectuses, the investment objective of each
Fund is to seek current income with liquidity and security of principal. The
following policies supplement the description in the Prospectuses of the
investment objectives and policies of the Funds.
PORTFOLIO TRANSACTIONS
Subject to the general control of the Company's Board of Trustees, PNC
Institutional Management Corporation ("PIMC"), the Funds' investment adviser, is
responsible for, makes decisions with respect to and places orders for all
purchases and sales of portfolio securities for the Funds. Purchases and sales
of portfolio securities are usually principal transactions without brokerage
commissions. In making portfolio investments, PIMC seeks to obtain the best net
price and the most favorable
<PAGE> 17
execution of orders. To the extent that the execution and price offered by more
than one dealer are comparable, PIMC may, in its discretion, effect transactions
in portfolio securities with dealers who provide the Company with research
advice or other services. Although the Funds will not seek profits through
short-term trading, PIMC may, on behalf of the Funds, dispose of any portfolio
security prior to its maturity if it believes such disposition is advisable.
Investment decisions for the Funds are made independently from those
for other investment company portfolios or accounts advised or managed by PIMC.
Such other portfolios may invest in the same securities as the Funds. When
purchases or sales of the same security are made at substantially the same time
on behalf of such other portfolios, transactions are averaged as to price, and
available investments allocated as to amount, in a manner which PIMC believes to
be equitable to each portfolio, including either Fund. In some instances, this
investment procedure may adversely affect the price paid or received by a Fund
or the size of the position obtained for a Fund. To the extent permitted by
law, PIMC may aggregate the securities to be sold or purchased for a Fund with
those to be sold or purchased for such other investment company portfolios in
order to obtain best execution.
Portfolio securities will not be purchased from or sold to and the
Funds will not enter into repurchase agreements or reverse repurchase agreements
with PIMC, PNC Bank, National Association ("PNC Bank"), PFPC Inc. ("PFPC"),
Provident Distributors, Inc. ("PDI") or any affiliated person (as such term is
defined in the Investment Company Act of 1940 (the "1940 Act") of any of them,
except to the extent permitted by the Securities and Exchange Commission (the
"SEC"). Furthermore, with respect to such transactions, securities and
repurchase agreements, the Funds will not give preference to Service
Organizations with whom the Funds enter into agreements concerning the provision
of support services to their customers. (See the Prospectuses, "Management of
the Fund--Service Organizations" and "Distribution and Service Plan.")
The Funds do not intend to seek profits through short- term trading.
The Funds' annual portfolio turnover rates will be relatively high but the
Funds' portfolio turnover is not expected to have a material effect on its net
incomes. The portfolio turnover rate for each of the Funds is expected to be
zero for regulatory reporting purposes.
ADDITIONAL INFORMATION ON INVESTMENT PRACTICES
The repurchase price under the repurchase agreements described in the
Funds' Prospectuses generally equals the price
-2-
<PAGE> 18
paid by a Fund plus interest negotiated on the basis of current short-term rates
(which may be more or less than the rate on the securities underlying the
repurchase agreement). Securities subject to repurchase agreements will be held
by the Funds' custodian, sub-custodian or in the Federal Reserve/Treasury book-
entry system. Repurchase agreements are considered to be loans by the Funds
under the 1940 Act.
Whenever FedFund enters into reverse repurchase agreements as described
in its Prospectus, it will place in a segregated custodial account liquid assets
having a value equal to the repurchase price (including accrued interest) and
will subsequently monitor the account to ensure such equivalent value is
maintained. Reverse repurchase agreements are considered to be borrowings by
FedFund under the 1940 Act.
As stated in the Funds' Prospectuses, the Funds may purchase securities
on a "when-issued" basis (i.e., for delivery beyond the normal settlement date
at a stated price and yield). When a Fund agrees to purchase when-issued
securities, its custodian will set aside cash or liquid portfolio securities
equal to the amount of the commitment in a separate account. Normally, the
custodian will set aside portfolio securities to satisfy a purchase commitment,
and in such a case such Fund may be required subsequently to place additional
assets in the separate account in order to ensure 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. Because the Funds will set aside cash or liquid assets to satisfy their
respective purchase commitments in the manner described, such a Fund's liquidity
and ability to manage its portfolio might be affected in the event its
commitments to purchase when-issued securities ever exceeded 25% of the value of
its assets. Neither Fund intends to purchase when-issued securities for
speculative purposes but only in furtherance of its investment objectives. The
Funds reserve the right to sell the securities before the settlement date if it
is deemed advisable.
When a Fund engages in when-issued transactions, it relies on the
seller to consummate the trade. Failure of the seller to do so may result in a
Fund's incurring a loss or missing an opportunity to obtain a price considered
to be advantageous.
With respect to loans by FedFund of its portfolio securities as
described in its Prospectus, the Fund would continue to accrue interest on
loaned securities and would also earn income on loans. Any cash collateral
received by FedFund in connection with such loans would be invested in
short-term U.S.
-3-
<PAGE> 19
government obligations to the extent permitted by the Fund's investment
limitations, below.
Neither Fund will invest more than 10% of the value of its assets in
investments which are not readily marketable if such investment occurs
immediately after the purchase of a security which is not a readily marketable
security. Securities for purposes of this limitation do not include securities
which have been determined to be liquid by the Fund's Board of Trustees based
upon the trading markets for such securities.
INVESTMENT LIMITATIONS
The Funds' Prospectuses summarize certain investment limitations that
may not be changed without the affirmative vote of the holders of a "majority of
the outstanding shares" of the respective Fund (as defined below under
"Miscellaneous"). Below is a complete list of the Funds' investment limitations
that may not be changed without such a vote of shareholders.
1. FedFund may not purchase securities other than U.S. Treasury
bills, notes and other obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities, some of which may be subject to repurchase
agreements. There is no limit on the amount of FedFund's assets which may be
invested in the securities of any one issuer of such obligations.
2. T-Fund may not purchase securities other than direct
obligations of the U.S. Treasury such as Treasury bills and notes, some of which
may be subject to repurchase agreements. There is no limit on the amount of
T-Fund's assets which may be invested in securities of any one issuer of such
obligations.
FedFund and T-Fund may not:
3. Borrow money except from banks for temporary purposes and then
in an amount not exceeding 10% of the value of the particular Fund's total
assets, or mortgage, pledge or hypothecate its assets except in connection with
any such borrowing and in amounts not in excess of the lesser of the dollar
amounts borrowed or 10% of the value of the particular Fund's total assets at
the time of such borrowing. (This borrowing provision is not for investment
leverage, but solely to facilitate management of each Fund by enabling the
Company to meet redemption requests where the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous.) Borrowing may take
the form of a sale of portfolio securities accompanied by a simultaneous
agreement as to their repurchase. Interest paid on borrowed funds will not be
available for investment.
-4-
<PAGE> 20
4. Act as an underwriter.
5. Make loans except that the Funds may purchase or hold debt
obligations in accordance with their respective investment objective and
policies, may enter into repurchase agreements for securities, and may lend
portfolio securities against collateral consisting of cash or securities which
are consistent with the lending Fund's permitted investments, which is equal at
all times to at least 100% of the value of the securities loaned. There is no
investment restriction on the amount of securities that may be loaned, except
that payments received on such loans, including amounts received during the loan
on account of interest on the securities loaned, may not (together with all
non-qualifying income) exceed 10% of the Fund's annual gross income (without
offset for realized capital gains) unless, in the opinion of counsel to the
Company, such amounts are qualifying income under federal income tax provisions
applicable to regulated investment companies.
6. The Company will not purchase or sell real estate or
commodities or commodity contracts.
Although Investment Limitation No. 5 above would permit each Fund to
lead its portfolio securities, T-Fund has no current policy permitting such
activity.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
IN GENERAL
Information on how to purchase and redeem a Fund's shares is included
in its Prospectus. The issuance of shares is recorded on the books of the
Funds, and share certificates are not issued unless expressly requested in
writing. Certificates are not issued for fractional shares.
The regulations of the Comptroller of the Currency provide that funds
held in a fiduciary capacity by a national bank approved by the Comptroller to
exercise fiduciary powers must be invested in accordance with the instrument
establishing the fiduciary relationship and local law. The Company believes
that the purchase of FedFund shares and T-Fund shares by such national banks
acting on behalf of their fiduciary accounts is not contrary to applicable
regulations if consistent with the particular account and proper under the law
governing the administration of the account.
Prior to effecting a redemption of shares represented by certificates,
PFPC, the Funds' transfer agent, must have received such certificates at its
principal office. All such
-5-
<PAGE> 21
certificates must be endorsed by the redeeming shareholder or accompanied by a
signed stock power, in each instance with the signature guaranteed by a
commercial bank, a member of a major stock exchange or other eligible guarantor
institution, unless other arrangements satisfactory to the Funds have previously
been made. The Funds may require any additional information reasonably
necessary to evidence that a redemption has been duly authorized.
Under the 1940 Act, the Funds may suspend the right of redemption or
postpone the date of payment upon redemption for any period during which the New
York Stock Exchange is closed, other than customary weekend and holiday
closings, or during which trading on said Exchange is restricted, or during
which (as determined by the SEC by rule or regulation) an emergency exists as a
result of which disposal or valuation of portfolio securities is not reasonably
practicable, or for such other periods as the SEC may permit. (The Funds may
also suspend or postpone the recordation of the transfer of their shares upon
the occurrence of any of the foregoing conditions.)
In addition, the Funds may redeem shares involuntarily in certain other
instances if the Board of Trustees determines that failure to redeem may have
material adverse consequences to a Fund's shareholders in general. Each Fund is
obligated to redeem shares solely in cash up to $250,000 or 1% of the Fund's net
asset value, whichever is less, for any one shareholder within a 90-day period.
Any redemption beyond this amount will also be in cash unless the Board of
Trustees determines that conditions exist which make payment of redemption
proceeds wholly in cash unwise or undesirable. In such a case, the Fund may
make payment wholly or partly in securities or other property, valued in the
same way as the Fund determines net asset value. (See "Net Asset Value" below
for an example of when such redemption or form of payment might be appropriate.)
Redemption in kind is not as liquid as a cash redemption. Shareholders who
receive a redemption in kind may incur transaction costs if they sell such
securities or property, and may receive less than the redemption value of such
securities or property upon sale, particularly where such securities are sold
prior to maturity.
Any institution purchasing shares on behalf of separate accounts will
be required to hold the shares in a single nominee name (a "Master Account").
Institutions investing in more than one of the Company's portfolios or classes
of shares must maintain a separate Master Account for each portfolio and class
of shares. Sub-accounts may be established by name or number either when the
Master Account is opened or later.
-6-
<PAGE> 22
NET ASSET VALUE
The manner in which each Fund's net asset value per share is calculated
is stated in each Fund's Prospectus. "Assets belonging to" a Fund consist of
the consideration received upon the issuance of shares together with all income,
earnings, profits and proceeds derived from the investment thereof, including
any proceeds from the sale, exchange or liquidation of such investments, any
funds or payments derived from any reinvestment of such proceeds, and a portion
of any general assets of the Company not belonging to a particular portfolio.
Assets belonging to a particular Fund are charged with the direct liabilities of
that Fund and with a share of the general liabilities of the Company allocated
in proportion to the relative net assets of such Fund and the Company's other
portfolios. Determinations made in good faith and in accordance with generally
accepted accounting principles by the Board of Trustees as to the allocations of
any assets or liabilities with respect to a Fund are conclusive.
As stated in the Funds' Prospectuses, in computing the net asset value
of shares of the Funds for purposes of sales and redemptions, the Funds use the
amortized cost method of valuation. Under this method, the Funds value each of
their portfolio securities at cost on the date of purchase and thereafter assume
a constant proportionate amortization of any discount or premium until maturity
of the security. As a result, the value of a portfolio security for purposes of
determining net asset value normally does not change in response to fluctuating
interest rates. While the amortized cost method provides certainty in portfolio
valuation, it may result in valuations for the Funds' securities which are
higher or lower than the market value of such securities.
In connection with their use of amortized cost valuation, each of the
Funds limits the dollar-weighted average maturity of its portfolio to not more
than 90 days and does not purchase any instrument with a remaining maturity of
more than thirteen months (with certain exceptions). In determining the average
weighted portfolio maturity of each Fund, a variable rate obligation that is
issued or guaranteed by the U.S. Government, or an agency or instrumentality
thereof, is deemed to have a maturity equal to the period remaining until the
obligation's next interest rate adjustment. The Company's Board of Trustees has
also established procedures, pursuant to rules promulgated by the SEC, that are
intended to stabilize the net asset value per share of each Fund for purposes of
sales and redemptions at $1.00. Such procedures include the determination at
such intervals as the Board deems appropriate, of the extent, if any, to which
each Fund's net asset value per share calculated by using available market
quotations or a matrix believed to provide
-7-
<PAGE> 23
reliable values deviates from $1.00 per share. In the event such deviation
exceeds 1/2 of 1% with respect to either Fund, the Board will promptly consider
what action, if any, should be initiated. If the Board believes that the amount
of any deviation from the $1.00 amortized cost price per share of a Fund may
result in material dilution or other unfair results to investors or existing
shareholders, it will take such steps as it considers appropriate to eliminate
or reduce to the extent reasonably practicable any such dilution or unfair
results. These steps may include selling portfolio instruments prior to
maturity; shortening the Fund's average portfolio maturity; withholding or
reducing dividends; redeeming shares in kind; or utilizing a net asset value per
share determined by using available market quotations.
MANAGEMENT OF THE FUNDS
TRUSTEES AND OFFICERS
The Company's trustees and executive officers, their addresses,
principal occupations during the past five years and other affiliations are
provided below. In addition to the information set forth below, the trustees
serve in the following capacities:
Each trustee of the Company serves as a director of Temporary
Investment Fund, Inc. ("Temp") and as a trustee of Municipal Fund for Temporary
Investment ("Muni"). In addition, Messrs. Fortune and Pepper are directors of
Independence Square Income Securities, Inc. ("ISIS") and Managing General
Partners of Chestnut Street Exchange Fund ("Chestnut"); Messrs. Pepper and
Johnson are directors of Municipal Fund for California Investors, Inc. ("Cal
Muni"); and Mr. Johnson is a director of Municipal Fund for New York Investors,
Inc. ("New York Muni") and a director of the International Dollar Reserve Fund
("IDR").
Each of the Company's officers, with the exception of Mr. McConnel,
holds like offices with Temp and Muni. In addition, Mr. McConnel is Secretary
of Temp. Mr. Roach is Treasurer of Chestnut, President and Treasurer of The RBB
Fund, Inc. and New York Muni, and Vice President and Treasurer of ISIS and Cal
Muni; and Mr. Pepper is President and Chairman of the Board of Muni and Cal
Muni; and Mr. Fortune is President and Chairman of the Board of ISIS and
Chestnut.
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<PAGE> 24
<TABLE>
<CAPTION>
Principal Occupations
Position with the During Past 5 Years
Name and Address Company and Other Affiliations
- ---------------- ----------------- ----------------------
<S> <C> <C>
G. NICHOLAS BECKWITH, III Trustee President and Chief Executive Officer, Beckwith Machinery
Beckwith Machinery Company Company; Chairman of the Board of Trustees, Shadyside
Post Office Box 8718 Hospital; Vice Chairman of the Board of Trustees, Shadyside
Pittsburgh, PA 15221 Academy; Trustee, Claude Washington Benedum Foundation;
Age 51 Trustee, Chatham College.
PHILIP E. COLDWELL (3,4) Trustee Economic Consultant; Chairman, Coldwell Financial Consultants,
Coldwell Financial Member of the Board of Governors of the Federal Reserve System,
Consultants 1974 to 1980; President, Federal Reserve Bank of Dallas, 1968 to
3330 Southwestern Blvd. 1974; Director, Maxus Energy Corporation (energy products) (1989
Dallas, Texas 75225 - 1993); Director, Diamond Shamrock Corp. (energy and chemical
Age 73 products) until 1987.
ROBERT R. FORTUNE (2,3,4) Trustee Financial Consultant; Chairman, President and Chief Executive
2920 Ritter Lane Officer of Associated Electric & Gas Insurance Services Limited,
Allentown, PA 18104 1984-1993; Member of the Financial Executives Institute and
Age 79 American Institute of Certified Public Accountants; Director,
Prudential Utility Fund, Inc. and Prudential Structured Maturity
Fund, Inc.
JERROLD B. HARRIS Trustee President and Chief Executive Officer, VWR Corporation 1990
706 Haldane Drive to present.
Kennett Square, PA 19348
Age 53
RODNEY D. JOHNSON Trustee President, Fairmount Capital Advisors, Inc. (financial advising)
Fairmount Capital since 1987; Treasurer, North Philadelphia Health System (formerly
Advisors, Inc. Girard Medical Center), 1988 to 1992; Member, Board of Education,
1435 Walnut Street School District of Philadelphia, 1983 to 1988; Treasurer, Cascade
Drexel Building Aphasia Center, 1984 to 1988.
Philadelphia, PA 19102
Age 54
G. WILLING PEPPER (1,2) Chairman of the Retired; Chairman of the Board, The Institute for Cancer Research
128 Springton Lake Road Board, President until 1979; Director, Philadelphia National Bank until 1978;
Media, PA 19063 and Trustee President, Scott Paper Company, 1971 to 1973; Chairman of the
Age 87 Board, Specialty Composites Corp. until May 1984.
</TABLE>
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<PAGE> 25
<TABLE>
<CAPTION>
Principal Occupations
Position with the During Past 5 Years
Name and Address Company and Other Affiliations
- ---------------- ----------------- ----------------------
<S> <C> <C>
EDWARD J. ROACH President Certified Public Accountant; Vice Chairman of the Board, Fox
Bellevue Park Corporate and Treasurer Chase Cancer Center; Trustee Emeritus, Pennsylvania School for
Center the Deaf; Trustee Emeritus, Immaculata College; Officer of
400 Bellevue Parkway various investment companies advised by PNC Institutional
Suite 100 Management Corporation.
Wilmington, DE 19809
Age 71
W. BRUCE McCONNEL, III Secretary Partner of the law firm of Drinker Biddle & Reath Philadelphia,
PNB Building Pennsylvania.
1345 Chestnut Street
Philadelphia, PA 19107-3496
Age 53
- -----------------------
</TABLE>
(1) This trustee is considered by the Company to be an "interested person"
of the Company as defined in the 1940 Act.
(2) Executive Committee Member.
(3) Audit Committee Member.
(4) Nominating Committee Member.
During intervals between meetings of the Board, the Executive Committee
may exercise the authority of the Board of Trustees in the management of the
Company's business to the extent permitted by law.
Each of the investment companies named above receives various advisory
and other services from PIMC and PNC. Of the above-mentioned funds, PDI
provides distribution services to Temp, Muni, Cal Muni and New York Muni. Of
the above-mentioned funds, the administrators provide administration services to
Temp, Muni, Cal Muni and New York Muni.
For the fiscal year ended October 31, 1995, the Company paid a total of
$100,887 to its officers and trustees in all capacities of which $53,147 was
allocated to the Funds. In addition, the Company contributed $2,715 during its
last fiscal year to its retirement plan for employees (which included Mr. Roach)
of which $1,452 was allocated to the Funds. Drinker Biddle & Reath, of which
Mr. McConnel is a partner, receives legal fees as counsel to the Company. No
employee of PDI, PIMC,
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<PAGE> 26
PFPC or PNC Bank receives any compensation from the Company for acting as an
officer or trustee of the Company. The trustees and officers of the Company as
a group beneficially own less than 1% of the shares of the Company's FedFund,
T-Fund, FedCash, T-Cash, Federal Trust Fund and Treasury Trust Fund portfolios.
By virtue of the responsibilities assumed by PDI, PIMC, PFPC and PNC
Bank under their respective agreements with the Company, the Company itself
requires only one part-time employee in addition to its officers.
The table below sets forth the compensation actually received from the
Fund Complex of which the Fund is a part by the trustees for the fiscal year
ended October 31, 1995:
<TABLE>
<CAPTION>
Total
Compensation
from Registrant
Aggregate and Fund
Compensation Complex(1) Paid to
Name of Person, Position from Registrant Trustees
<S> <C> <C>
G. Nicholas Beckwith, III (5), Trustee N/A (3)(2) N/A
Philip E. Coldwell, Trustee $10,800.00 (3)(2) $43,600.00
Robert R. Fortune, Trustee 10,800.00 (5)(2) 63,600.00
Jerrold B. Harris, (5), Trustee N/A (3)(2) N/A
Rodney D. Johnson, Trustee 10,800.00 (5)(2) 55,850.00
G. Willing Pepper, Trustee and 19,100.00 (6)(2) 96,250.00
Chairman
David R. Wilmerding, Jr., (3) 12,466.68 (5)(2) 60,600.04
Trustee
Anthony M. Santomero, (4) Trustee 10,800.00 (4)(2) 49,900.00
---------- -----------
$74,766.68 $369,800.04
</TABLE>
- --------
1. A Fund Complex means two or more investment companies that hold
themselves out to investors as related companies for purposes of
investment and investor services, or have a common investment adviser or
have an investment adviser that is an affiliated person of the investment
adviser of any of the other investment companies.
2. Total number of such other investment companies trustee serves on within
the Fund Complex.
3. Mr. Wilmerding resigned as trustee of the Company on January 4, 1996.
4. Mr. Santomero resigned as trustee of the Company on January 4, 1996.
5. Messrs. Beckwith and Harris were elected to the Board of Trustees
of the Company on March 22, 1996.
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<PAGE> 27
INVESTMENT ADVISER AND SUB-ADVISER
The advisory and sub-advisory services provided by PIMC and PNC Bank
are described in the Funds' Prospectuses. For the advisory services provided
and expenses assumed by it, PIMC is entitled to receive a fee, computed daily
and payable monthly, based on the combined average net assets of the Funds as
follows:
<TABLE>
<CAPTION>
Annual Fee The Funds' Combined
---------- Average Net Assets
-------------------
<S> <C>
.175%................................... of the first $1 billion
.150%................................... of the next $1 billion
.125%................................... of the next $1 billion
.100%................................... of the next $1 billion
.095%................................... of the next $1 billion
.090%................................... of the next $1 billion
.085%................................... of the next $1 billion
.080%........................ of amounts in excess of $7 billion.
</TABLE>
The advisory fee is allocated between these Funds in proportion to their
relative net assets.
PIMC and the administrators have each agreed that if, in any fiscal
year, the expenses borne by a Fund exceed the applicable expense limitations
imposed by the securities regulations of any state in which shares of the
particular Fund are registered or qualified for sale to the public, they will
each reimburse such Fund for one-half of any excess to the extent required by
such regulations. Unless otherwise required by law, such reimbursement would be
accrued and paid on the same basis that the advisory and administration fees are
accrued and paid by such Fund. To the Funds' knowledge, of the expense
limitations in effect on the date of this Statement of Additional Information,
none is more restrictive than two and one-half percent (2-1/2%) of the first $30
million of a Fund's average annual net assets, two percent (2%) of the next $70
million of the average annual net assets and one and one-half percent (1- 1/2%)
of the remaining average annual net assets.
For the fiscal years ended October 31, 1993, 1994 and 1995, the Company
paid fees (net of waivers) for advisory services aggregating $1,488,938,
$924,760 and $1,136,719 with respect to FedFund, and $1,081,025, $819,525 and
$911,096 with respect to T-Fund, respectively. For the same fiscal years, PIMC
voluntarily waived advisory fees aggregating $630,847, $807,814 and $855,806
with respect to FedFund, and,$526,120, $655,034 and $709,383 with respect to
T-Fund, respectively. Any fees waived by PIMC are not recoverable. PIMC and
PNC Bank also serve as the
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<PAGE> 28
adviser and sub-adviser, respectively, to the Company's FedCash, T-Cash, Federal
Trust Fund and Treasury Trust Fund portfolios.
BANKING LAWS
Certain banking laws and regulations with respect to investment
companies are discussed in the Funds' Prospectuses. PIMC, PNC Bank and PFPC
believe that they may perform the services for the Funds contemplated by their
respective agreements, Prospectuses and this Statement of Additional Information
without violation of applicable banking laws or regulations. It should be
noted, however, that future changes in legal requirements relating to the
permissible activities of banks and their affiliates, as well as further
interpretations of present requirements, could prevent PIMC and PFPC from
continuing to perform such services for the Funds and PNC Bank from continuing
to perform such services for PIMC and the Funds. If PIMC, PFPC, or PNC Bank
were prohibited from continuing to perform such services, it is expected that
the Company's Board of Trustees would recommend that the Funds enter into new
agreements with other qualified firms. Any new advisory agreement would be
subject to shareholder approval.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
ADMINISTRATOR
As the Funds' administrators, PFPC and PDI have agreed to provide the
following services: (i) assist generally in supervising the Funds' operations,
including providing a Wilmington, Delaware order-taking facility with toll-free
IN-WATS telephone lines, providing for the preparing, supervising and mailing of
purchase and redemption order confirmations to shareholders of record, providing
and supervising the operation of an automated data processing system to process
purchase and redemption orders, maintaining a back-up procedure to reconstruct
lost purchase and redemption data, providing information concerning the Funds to
their shareholders of record, handling shareholder problems, supervising the
services of employees, provided by PDI, whose principal responsibility and
function is to preserve and strengthen shareholder relations, and monitoring the
arrangements pertaining to the Funds' agreements with Service Organizations;
(ii) assure that persons are available to receive and transmit purchase and
redemption orders; (iii) participate in the periodic updating of the Funds'
Prospectuses and Registration Statements; (iv) assist in maintaining the Funds'
Wilmington, Delaware office; (v) perform administrative services in connection
with the Fund's computer access program maintained to
-13-
<PAGE> 29
facilitate shareholder access to the Funds; (vi) accumulate information for and
coordinate the preparation of reports to the Funds' shareholders and the SEC;
(vii) maintain the registration or qualification of the Funds' shares for sale
under state securities laws; (viii) prepare or review, and provide advice with
respect to, all sales literature (advertisements, brochures and shareholder
communications) for each of the Funds and any class or sub-class thereof; and
(ix) assist in the monitoring of regulatory and legislative developments which
may affect the Company, participate in counseling and assisting the Company in
relation to routine regulatory examinations and investigations, and work with
the Company's counsel in connection with regulatory matters and litigation.
For their administrative services, the administrators are entitled
jointly to receive fees from the six Funds referred to above determined and
allocated in the same manner as PIMC's advisory fee set forth above. As stated
in their Prospectuses, each administrator is also reimbursed for its reasonable
out-of- pocket expenses incurred in connection with the Fund's computer access
program. For the Fiscal year ended October 31, 1995, the Company paid fees (net
of waivers) for administration fees aggregating $1,136,718 with respect to
FedFund and $911,096 with respect to T-Fund. For the same fiscal year, PFPC and
PDI voluntarily waived administration fees aggregating $855,806 with respect to
FedFund and $709,383 with respect to T-Fund. For the fiscal year ended October
31, 1994, the Company paid fees (net of waivers) for administration fees
aggregating $924,760 with respect to FedFund and $807,814 with respect to
T-Fund. For the same fiscal year, PFPC and PDI voluntarily waived
administration fees aggregating $819,525 with respect to FedFund and $655,034
with respect to T-Fund, respectively. For the period from October 1, 1992
through January 17, 1993 the Company paid fees (net of waivers) to its former
administrator, The Boston Company Advisors totalling $99,699 with respect to
FedFund and $65,982 with respect to T-Fund. Administration fees payable by
FedFund and T-Fund of $2,554 and $494, respectively, were voluntarily waived by
Boston Advisors during this period. For the period from January 18, 1993
through October 31, 1993, the Company paid fees (net of waivers) for
administrative services to PFPC and PDI (formerly called MFD Group, Inc.), its
administrators, aggregating $1,488,938 with respect to FedFund and $1,081,025
with respect to T-Fund. For the same period, administration fees of $630,847
with respect to FedFund and $526,120 with respect to T-Fund were voluntarily
waived.
PFPC, a wholly owned, indirect subsidiary of PNC Bank provides
administrative or and/or sub-administrative services to investment companies
which are distributed by PDI. PFPC and PDI also serve as co-administrators of
the Company's FedCash, T-Cash, Federal Trust Fund and Treasury Trust Fund
portfolios.
-14-
<PAGE> 30
DISTRIBUTOR
PDI acts as the distributor of the Funds' shares. Each Fund's shares
are sold on a continuous basis by the distributor as agent, although it is not
obliged to sell any particular amount of shares. PDI will prepare or review,
provide advice with respect to, and file with the federal and state agencies or
other organization as required by federal, state, or other applicable laws and
regulations, all sales literature (advertisements, brochures and shareholder
communications) for each of the Funds and any class or sub-class thereof. The
distributor pays the cost of printing and distributing prospectuses to persons
who are not shareholders of the Funds (excluding preparation and printing
expenses necessary for the continued registration of Fund shares) and of
preparing, printing and distributing all sales literature. PDI also serves as
the distributor for the Company's FedCash, T-Cash, Federal Trust Fund and
Treasury Trust Fund portfolios. PDI is a Delaware corporation, with its
principal place of business located at 259 Radnor-Chester Road, Suite 120,
Radnor, Pennsylvania l9087.
CUSTODIAN AND TRANSFER AGENT
Pursuant to a Custodian Agreement, PNC Bank serves as the Funds'
custodian. Under the Agreement, PNC Bank has agreed to provide the following
services: (i) maintain a separate account or accounts in the name of the Funds;
(ii) hold and disburse portfolio securities on account of the Funds; (iii)
collect and make disbursements of money on behalf of the Funds; (iv) collect and
receive all income and other payments and distributions on account of the Funds'
portfolio securities; and (v) make periodic reports to the Board of Trustees
concerning the Funds' operations. The Custodian Agreement permits PNC Bank, on
30 days' notice, to assign its rights and delegate its duties thereunder to any
other affiliate of PNC Bank or PNC Bank Corp., provided that PNC Bank remains
responsible for the performance of the delegate under the Custodian Agreement.
The Funds reimburse PNC Bank for its direct and indirect costs and
expenses incurred in rendering custodial services. Under the Custodian
Agreement, each Fund pays PNC Bank an annual fee equal to $.25 for each $1,000
of such Fund's average daily gross assets, which fee declines as such Fund's
average daily gross assets increase. In addition, each Fund pays the custodian
a fee for each purchase, sale or delivery of a security, interest collection or
claim item, and reimburses PFPC for out-of-pocket expenses incurred on behalf of
the Fund. For the fiscal years ended October 31, 1993, 1994 and 1995 FedFund
paid fees for custodian services aggregating $254,450, $220,443 and $238,805,
respectively. For the same fiscal years, T-Fund paid fees for custodian services
aggregating, $216,000, $202,087
-15-
<PAGE> 31
and $212,601 respectively. PNC Bank also serves as custodian for the Company's
FedCash, T-Cash, Federal Trust Fund and Treasury Trust Fund portfolios. PNC
Bank's principal business address is Broad and Chestnut Streets, Philadelphia,
Pennsylvania 19102.
PFPC also serves as the Funds' transfer agent, registrar and dividend
disbursing agent pursuant to a Transfer Agency Agreement. Under the Agreement,
PFPC has agreed to provide the following services: (i) maintain a separate
account or accounts in the name of the Funds; (ii) issue, transfer and redeem
shares of the Funds; (iii) disburse dividends and distributions, in the manner
described in each Fund's Prospectus, to shareholders of the Fund; (iv) transmit
all communications by the Funds to their shareholders or their authorized
representatives, including reports to shareholders, distribution and dividend
notices and proxy materials for meetings of shareholders; (v) prepare and file
with the appropriate taxing authorities reports or notices relating to dividends
and distributions made by the Funds; (vi) respond to correspondence by
shareholders, security brokers and others relating to its duties; (vii) maintain
shareholder accounts; and (viii) make periodic reports to the Company's Board of
Trustees concerning the Funds' operations. The Transfer Agency Agreement
permits PFPC, on 30-days' notice, to assign its rights and duties thereunder to
any other affiliate of PNC Bank or PNC Bank Corp., provided that PFPC remains
responsible for the performance of the delegate under the Transfer Agency
Agreement.
Under the Transfer Agency Agreement, each Fund pays PFPC fees at an
annual rate of $12.00 per account and sub-account maintained by PFPC plus $1.00
for each purchase or redemption transaction by an account (other than a purchase
transaction made in connection with the automatic reinvestment of dividends).
Payments to PFPC for sub-accounting services provided by others are limited to
the amount which PFPC pays to others for such services. In addition, the Funds
reimburse PFPC for out-of- pocket expenses related to such services. For the
fiscal years ended October 31, 1993, 1994 and 1995 FedFund paid fees for
transfer agency services aggregating, $147,259, $189,439 and $99,287
respectively. For the same fiscal years, T-Fund paid fees for transfer agency
services aggregating, $98,116, $81,291 and $65,092 respectively. PFPC also
serves as transfer agent, registrar and dividend disbursing agent for the
Company's FedCash, T-Cash, Federal Trust Fund and Treasury Trust Fund.
DOLLAR SHARE SERVICE ORGANIZATIONS
FedFund and T-Fund each currently offer a series of shares, Dollar
shares, which, as stated in the Funds' Prospectuses, the Funds will enter into
an agreement with each Service Organization which purchases Dollar shares
("Dollar Share
-16-
<PAGE> 32
Service Organizations") requiring it to provide support services to its
customers who beneficially own Dollar shares in consideration of the Funds'
payment of .25% (on an annualized basis) of the average daily net asset value of
the Dollar shares held by the Dollar Share Service Organization for the benefit
of customers. Such services include: (i) aggregating and processing purchase
and redemption requests from customers and placing net purchase and redemption
orders with the transfer agent; (ii) providing customers with a service that
invests the assets of their accounts in Dollar shares; (iii) processing dividend
payments from the Funds on behalf of customers; (iv) providing information
periodically to customers showing their positions in Dollar shares; (v)
arranging for bank wires; (vi) responding to customer inquiries relating to the
services performed by the Dollar Share Service Organization; (vii) providing
sub-accounting with respect to Dollar shares beneficially owned by customers or
the information necessary for sub-accounting; (viii) forwarding shareholder
communications from the Funds (such as proxies, shareholder reports, annual and
semi- annual financial statements and dividend, distribution and tax notices) to
customers, if required by law; and (ix) other similar services if requested by
the Funds. For the fiscal year ended October 31, 1995, the Company paid
$256,849 in servicing fees to an affiliate of the Company's adviser
(representing 50.2% of the aggregate servicing fees) of which $70,358 and
$186,491 was allocated to FedFund and T-Fund, respectively, pursuant to the
service agreements discussed above in effect during such period.
Each Fund's agreements with Dollar Share Service Organizations are
governed by a Shareholder Services Plan (the "Plan") that has been adopted by
the Company's Board of Trustees. Pursuant to each Plan, the Board of Trustees
reviews, at least quarterly, a written report of the amounts expended under the
Fund's agreements with Dollar Share Service Organizations and the purposes for
which the expenditures were made. In addition, the Funds' arrangements with
Dollar Share Service Organizations must be approved annually by a majority of
the Company's trustees, including a majority of the trustees who are not
"interested persons" of the Company as defined in the 1940 Act and have no
direct or indirect financial interest in such arrangements.
The Board of Trustees has approved the Funds' arrangements with Dollar
Share Service Organizations based on information provided by the Funds' service
contractors that there is a reasonable likelihood that the arrangements will
benefit the Funds and their shareholders by affording the Funds greater
flexibility in connection with the servicing of the accounts of the beneficial
owners of their shares in an efficient manner. Any material amendment to the
Funds' arrangements with Dollar Share Service Organizations must be approved by
a majority of the Company's Board of Trustees (including a majority of the non-
-17-
<PAGE> 33
interested trustees). So long as the Funds' arrangements with Dollar Share
Service Organizations are in effect, the selection and nomination of the members
of the Company's Board of Trustees who are not "interested persons" (as defined
in the 1940 Act) of the Company will be committed to the discretion of such non-
interested trustees.
DISTRIBUTION AND SERVICE PLAN
Pursuant to T-Fund's Distribution and Service Plan (the "Plus Shares
Plan"), the Fund may pay PDI fees for distribution and sales support services.
Currently, as described further below, only T-Fund Plus Shares bear the expense
of distribution fees under the Plus Shares Plan. In addition, the Fund may pay
PDI fees for the provision of personal services to shareholders and the
processing and administration of shareholder accounts. PDI, in turn, determines
the amount of the service fee to be paid to other Service Organizations that
purchase Plus Shares ("Plus Share Service Organizations"). The Plus Shares Plan
provides, among other things, that: (i) the Board of Trustees shall receive
quarterly reports regarding the amounts expended under the Plus Shares Plan and
the purposes for which such expenditures were made; (ii) the Plus Shares Plan
will continue in effect for so long as its continuance is approved at least
annually by the Board of Trustees in accordance with Rule 12b-1 under the 1940
Act; (iii) any material amendment thereto must be approved by the Board of
Trustees, including the trustees who are not "interested persons" of the Fund
(as defined in the 1940 Act) and who have no direct or indirect financial
interest in the operation of the Plus Shares Plan or any agreement entered into
in connection with the Plus Shares Plan (the "12b-1 Trustees"), acting in person
at a meeting called for said purpose; (iv) any amendment to increase materially
the costs which T-Fund Plus Shares may bear for distribution services pursuant
to the Plus Shares Plan shall be effective only upon approval by a vote of a
majority of the outstanding shares of such class and by a majority of the 12b-1
Trustees; and (v) while the Plus Shares Plan remains in effect, the selection
and nomination of the Company's trustees who are not "interested persons" of the
Company shall be committed to the discretion of such non-interested trustees.
The Plus Shares Plan is terminable without penalty at any time by a
vote of a majority of the 12b-1 Trustees, or by vote of the holders of a
majority of T-Fund Plus Shares. Similarly, any agreement entered into pursuant
to the Plus Shares Plan with a Plus Share Service Organization is terminable
without penalty, at any time, by T-Fund or by the Plus Share Service
Organization upon written notice to the other. Each such agreement will
terminate automatically in the event of its assignment.
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<PAGE> 34
The distribution fee payable under the Plus Shares Plan (at an annual
rate of .25% of the average daily net asset value of the outstanding T-Fund Plus
Shares) is used, among other things, to pay Plus Share Service Organizations for
sales support services and related expenses.
T-Fund intends to enter into service agreements with Plus Share Service
Organizations pursuant to which they will render certain support services to
their customers ("Customers") who are the beneficial owners of T-Fund Plus
Shares. Such services will be provided to Customers who are the beneficial
owners of T-Fund Plus Shares and are intended to supplement the services
provided by T-Fund's Administrators and transfer agent to the Fund's
shareholders of record. In consideration for payment of up to .25% (on an
annualized basis) of the average daily net asset value of the T-Fund Plus Shares
owned beneficially by their Customers, Plus Share Service Organizations may
provide general shareholder liaison services, including, but not limited to (i)
answering shareholder inquiries regarding account status and history, the manner
in which purchases, exchanges and redemptions of shares may be effected and
certain other matters pertaining to the shareholders' investments; and (ii)
assisting shareholders in designating and changing dividend options, account
designations and addresses.
EXPENSES
The Funds' expenses include taxes, interest, fees and salaries of the
Company's trustees and officers, SEC fees, state securities qualification fees,
Standard & Poor's rating fees (cost incurred by T-Fund only), Moody's rating
fees, costs of preparing and printing prospectuses for regulatory purposes and
for distribution to shareholders, advisory and administration fees, charges of
the custodian, transfer agent and dividend disbursing agent, shareholder
servicing fees, distribution fees, certain insurance premiums, outside auditing
and legal expenses, costs of the Funds' computer access program, costs of
shareholder reports and shareholder meetings and any extraordinary expenses. The
Funds also pay for brokerage fees and commissions (if any) in connection with
the purchase of portfolio securities.
ADDITIONAL INFORMATION CONCERNING TAXES
The following summarizes certain additional tax considerations
generally affecting each Fund and its shareholders that are not described in
each Fund's Prospectus. No attempt is made to present a detailed explanation of
the tax treatment of the Funds or their shareholders or possible legislative
changes, and the discussion here and in each Fund's Prospectus is not intended
as a substitute for careful tax planning. Investors
-19-
<PAGE> 35
should consult their tax advisors with specific reference to their own tax
situations.
Each Fund of the Company is treated as a separate corporate entity
under the Code and intends to qualify each year as a regulated investment
company under the Code. In order to so qualify for a taxable year, each Fund
must satisfy the distribution requirement described in its Prospectus, derive at
least 90% of its gross income for the year from certain qualifying sources,
comply with certain diversification requirements and derive less than 30% of its
gross income from the sale or other disposition of securities and certain other
investments held for less than three months. Interest (including original issue
discount and accrued market discount) received by a Fund upon maturity or
disposition of a security held for less than three months will not be treated as
gross income derived from the sale or other disposition of such security within
the meaning of this requirement. However, any other income that is attributable
to realized market appreciation will be treated as gross income from the sale or
other disposition of securities for this purpose.
A 4% nondeductible excise tax is imposed on regulated investment
companies that fail to distribute currently an amount equal to specified
percentages of their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses). Each Fund intends to make sufficient
distributions or deemed distributions of its ordinary taxable income and any
capital gain net income each calendar year to avoid liability for this excise
tax.
If for any taxable year a Fund does not qualify for tax treatment as a
regulated investment company, all of its taxable income will be subject to
federal income tax at regular corporate rates, without any deduction for
distributions to Fund shareholders. In such event, dividend distributions would
be taxable as ordinary income to Fund shareholders to the extent of that Fund's
current and accumulated earnings and profits and would be eligible for the
dividends received deduction in the case of corporate shareholders.
Each Fund will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends or gross sale proceeds paid to any
shareholder who has failed to provide a correct tax identification number in the
manner required, who is subject to withholding by the Internal Revenue Service
for failure to properly include on his return payments of taxable interest or
dividends, or who has failed to certify to the Fund when required to do so that
he is not subject to backup withholding or that he is an "exempt recipient."
-20-
<PAGE> 36
Depending upon the extent of the Funds' activities in states and
localities in which their offices are maintained, in which their agents or
independent contractors are located or in which they are otherwise deemed to be
conducting business, the Funds may be subject to the tax laws of such states or
localities. In addition, in those states and localities which have income tax
laws, the treatment of the Funds and their shareholders under such laws may
differ from their treatment under federal income tax laws. Shareholders are
advised to consult their tax advisors concerning the application of state and
local taxes.
The foregoing discussion is based on federal tax laws and regulations
which are in effect on the date of this Statement of Additional Information;
such laws and regulations may be changed by legislative or administrative
action.
DIVIDENDS
Net income of each of the Funds for dividend purposes consists of (i)
interest accrued and original issue discount earned on the Fund's assets, (ii)
plus the amortization of market discount and minus the amortization of market
premium on such assets, (iii) less accrued expenses directly attributable to the
Fund and the general expenses (e.g., legal, accounting and trustees' fees) of
the Company prorated to the Fund on the basis of its relative net assets. In
addition, Dollar shares bear exclusively the expense of fees paid to Dollar
Share Service Organizations and T-Fund Plus Shares bear exclusively the expenses
of fees paid to PDI and Plus Share Service Organizations. (See "Management of
the Funds--Service Organizations" and "Distribution and Service Plan.")
As stated, the Company uses its best efforts to maintain the net asset
value per share of FedFund and T-Fund at $1.00. As a result of a significant
expense or realized or unrealized loss incurred by either Fund, it is possible
that the Fund's net asset value per share may fall below $1.00.
ADDITIONAL YIELD INFORMATION
The "yields" and "effective yields" are calculated separately for each
class of shares of each Fund and in accordance with the formulas prescribed by
the SEC. The seven- day yield for each class of shares is calculated by
determining the net change in the value of a hypothetical pre-existing account
in the particular Fund which has a balance of one share of the class involved at
the beginning of the period, dividing the net change by the value of the account
at the beginning of
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<PAGE> 37
the period to obtain the base period return, and multiplying the base period
return by 365/7. The net change in the value of an account in a Fund includes
the value of additional shares purchased with dividends from the original share
and dividends declared on the original share and any such additional shares, net
of all fees charged to all shareholder accounts in proportion to the length of
the base period and the Fund's average account size, but does not include gains
and losses or unrealized appreciation and depreciation. In addition, an
effective annualized yield quotation may be computed on a compounded basis with
respect to each class of its shares by adding 1 to the base period return for
the class involved (calculated as described above), raising that sum to a power
equal to 365/7, and subtracting 1 from the result. Similarly, based on the
calculations described above, the Funds' 30-day (or one-month) yields and
effective yields may also be calculated.
For the seven-day period ended October 31, 1995, the yields on FedFund
shares and T-Fund shares were 5.66% and 5.67%, respectively, and the compounded
effective yields on FedFund shares and T-Fund shares were 5.82% and 5.83%,
respectively; the yields on FedFund Dollar shares and T-Fund Dollar shares were
5.41% and 5.42%, respectively, and the compounded effective yields on FedFund
Dollar shares and T-Fund Dollar shares were 5.56% and 5.57%, respectively.
During this seven-day period, the Funds' adviser and administrator voluntarily
waived a portion of its advisory and administration fees payable by the Funds.
Without these waivers, for the same period the yields on FedFund shares and
T-Fund shares would have been 5.55% and 5.56%, respectively, and the compounded
effective yields on FedFund shares and T-Fund shares would have been 5.70% and
5.71%, respectively, the yield on FedFund Dollar Shares and T-Fund Dollar Shares
would have been 5.30% and 5.31%, respectively, and the compounded effective
yields on FedFund Dollar Shares and T-Fund Dollar Shares would have been 5.44%
and 5.45%, respectively. As of October 31, 1995, T-Fund Plus Shares had not yet
been offered.
For the 30-day period ended October 31, 1995, the yields on FedFund
shares and T-Fund shares were 5.64% and 5.65%, respectively, and the compounded
effective yields on FedFund shares and T-Fund shares were 5.80% and 5.81%,
respectively; the yields on FedFund Dollar shares and T-Fund Dollar shares were
5.39% and 5.40%, respectively, and the compounded effective yields on FedFund
Dollar shares and T-Fund Dollar shares were 5.53% and 5.55%, respectively.
During this 30-day period, the Funds' adviser and administrator voluntarily
waived a portion of the advisory and administration fees payable by the Funds.
Without these waivers, for the same period the yields on FedFund shares and
T-Fund shares would have been 5.53% and 5.54%, respectively, and the compounded
effective yields on FedFund
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<PAGE> 38
shares and T-Fund shares would have been 5.68% and 5.69%, respectively, the
yield on FedFund Dollar Shares and T-Fund Dollar Shares would have been 5.28%
and 5.29%, respectively, and the compounded effective yields on FedFund Dollar
Shares and T-Fund Dollar Shares would have been 5.42% and 5.43%, respectively.
As of October 31, 1995, T-Fund Plus Shares had not yet been offered.
From time to time, in advertisements or in reports to shareholders, the
performance of the Funds may be quoted and compared to that of other money
market funds or accounts with similar investment objectives and to stock or
other relevant indices. For example, the yields of the Funds may be compared to
the Donoghue's Money Fund Average, which is an average compiled by
IBC/Donoghue's MONEY FUND REPORT(R) of Holliston, MA 01746, a widely recognized
independent publication that monitors the performance of money market funds, or
to the average yields reported by the Bank Rate Monitor from money market
deposit accounts offered by the 50 leading banks and thrift institutions in the
top five standard metropolitan statistical areas.
THE FUNDS' YIELDS WILL FLUCTUATE, AND ANY QUOTATION OF YIELD SHOULD NOT
BE CONSIDERED AS REPRESENTATIVE OF THE FUTURE PERFORMANCE OF THE FUNDS. Since
yields fluctuate, yield data cannot necessarily be used to compare an investment
in the Funds' shares with bank deposits, savings accounts, and similar
investment alternatives which often provide an agreed or guaranteed fixed yield
for a stated period of time. Shareholders should remember that performance and
yield are generally functions of the kind and quality of the investments held in
a Fund, portfolio maturity, operating expenses net of waivers and expense
reimbursements, and market conditions. Any fees charged by Dollar Share or Plus
Share Service Organizations or other institutional investors with respect to
customer accounts in investing in shares of the Funds will not be included in
calculations of yield and performance; such fees, if charged, would reduce the
actual performance and yield from that quoted.
The Funds may also from time to time include in advertisements, sales
literature, communications to shareholders and other materials ("Materials"),
discussions or illustrations of the effects of compounding. "Compounding"
refers to the fact that, if dividends or other distributions on a Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciation of a Fund would increase the value, not only of
the original Fund investment, but also of the additional Fund shares received
through reinvestment. As a result, the value of the Fund investment would
increase more quickly than if dividends or other distributions had been paid in
cash.
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<PAGE> 39
In addition, the Funds may also include in Materials discussions and/or
illustrations of the potential investment goals of a prospective investor,
investment management strategies, techniques, policies or investment suitability
of a Fund, economic conditions, the relationship between sectors of the economy
and the economy as a whole, various securities markets, the effects of inflation
and historical performance of various asset classes, including but not limited
to, stocks, bonds and Treasury securities. From time to time, Materials may
summarize the substance of information contained in shareholder reports
(including the investment composition of a Fund), as well as the views of the
advisers as to current market, economic, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
related matters believed to be of relevance to a Fund. The Funds may also
include in Materials charts, graphs or drawings which compare the investment
objective, return potential, relative stability and/or growth possibilities of
the Funds and/or other mutual funds, or illustrate the potential risks and
rewards of investment in various investment vehicles, including but not limited
to, stocks, bonds, Treasury securities and shares of a Fund and/or other mutual
funds. Materials may include a discussion of certain attributes or benefits to
be derived by an investment in a Fund and/or other mutual funds (such as value
investing, market timing, dollar cost averaging, asset allocation, constant
ratio transfer, automatic accounting rebalancing, the advantages and
disadvantages of investing in tax-deferred and taxable investments), shareholder
profiles and hypothetical investor scenarios, timely information on financial
management, designations assigned a Fund by various rating or ranking
organizations, Fund identifiers (such as CUSIP numbers or NASDAQ symbols), tax
and retirement planning and investment alternatives to certificates of deposit
and other financial instruments. Such Materials may include symbols, headlines
or other material which highlight or summarize the information discussed in more
detail therein.
From time to time in advertisements, sales literature and
communications to shareholders, the Funds may compare their total returns to
rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, such
data is found in IBC/Donoghue's Money Fund Report and reports prepared by Lipper
Analytical Services, Inc. Total return is the change in value of an investment
in a Fund over a particular period, assuming that all distributions have been
reinvested. Such rankings represent the Funds' past performance and should not
be considered as representative of future results.
The following information has been provided by the Funds' distributor:
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<PAGE> 40
In managing each Fund's portfolio, the investment
adviser utilizes a "pure and simple" approach, which
may include disciplined research, stringent credit
standards and careful management of maturities.
ADDITIONAL DESCRIPTION CONCERNING FUND SHARES
The Company does not presently intend to hold annual meetings of
shareholders except as required by the 1940 Act or other applicable law. Upon
the written request of shareholders owning at least twenty percent of the
Company's shares, the Company will call for a meeting of shareholders to
consider the removal of one or more trustees and other certain matters. To the
extent required by law, the Company will assist in shareholder communication in
such matters.
As stated in the Prospectuses for the Funds, holders of the Company's
FedFund and FedFund Dollar shares will vote in the aggregate and not by class on
all matters, except where otherwise required by law and except that only FedFund
Dollar shares will be entitled to vote on matters submitted to a vote of
shareholders pertaining to the Fund's arrangements with Dollar Share Service
Organizations. Holders of the Company's T-Fund, T- Fund Dollar and T-Fund Plus
shares will also vote in the aggregate and not by class except as described
above and only T- Fund Plus Shares will be entitled to vote on matters submitted
to a vote of shareholders pertaining to distribution fees. (See "Management of
the Funds--Service Organizations" and "Distribution and Service Plan.") Further,
shareholders of all of the Company's portfolios will vote in the aggregate and
not by portfolio except as otherwise required by law or when the Board of
Trustees determines that the matter to be voted upon affects only the interests
of the shareholders of a particular portfolio. Rule 18f-2 under the 1940 Act
provides that any matter required to be submitted by the provisions of such Act
or applicable state law, or otherwise, to the holders of the outstanding
securities of an investment company such as the Company shall not be deemed to
have been effectively acted upon unless approved by the holders of a majority of
the outstanding shares of each portfolio affected by the matter. Rule 18f-2
further provides that a portfolio shall be deemed to be affected by a matter
unless it is clear that the interests of each portfolio in the matter are
identical or that the matter does not affect any interest of the portfolio.
Under the Rule the approval of an investment advisory agreement or any change in
a fundamental investment policy would be effectively acted upon with respect to
a portfolio only if approved by the holders of a majority of the outstanding
voting securities of such portfolio. However, the Rule also provides that the
ratification of the selection of independent accountants, the approval of
principal underwriting contracts and
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<PAGE> 41
the election of trustees are not subject to the separate voting requirements and
may be effectively acted upon by shareholders of the investment company voting
without regard to portfolio.
COUNSEL
Drinker Biddle & Reath, Philadelphia National Bank Building, 1345
Chestnut Street, Philadelphia, Pennsylvania 19107- 3496, of which W. Bruce
McConnel, III, Secretary of the Company, is a partner, serves as counsel to the
Company and will pass upon the legality of the shares offered hereby.
AUDITORS
The financial statements and financial highlights of the Funds
incorporated by reference into this Statement of Additional Information have
been audited by Coopers & Lybrand L.L.P., independent accountants, whose report
thereon is incorporated by reference herein. Coopers & Lybrand L.L.P. has
offices at 2400 Eleven Penn Center, Philadelphia, Pennsylvania 19103.
MISCELLANEOUS
SHAREHOLDER VOTE
As used in this Statement of Additional Information and the
Prospectuses for the Funds, a "majority of the outstanding shares" of a Fund or
of any other portfolio means, with respect to the approval of an investment
advisory agreement, a distribution plan or a change in a fundamental investment
policy, the vote of the lesser of (1) 67% of the shares of such Fund
(irrespective of class) or of the portfolio represented at a meeting at which
the holders of more than 50% of the outstanding shares of such Fund or portfolio
are present in person or by proxy, or (2) more than 50% of the outstanding
shares of such Fund (irrespective of class) or of the portfolio.
CERTAIN RECORD HOLDERS
On March 26, 1996, the name, address and percentage of ownership of
each institutional investor that owned of record 5% or more of the outstanding
shares of the Company's FedFund and T-Fund portfolio were as follows:
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<PAGE> 42
FedFund
Mercantile Bank N.A. 6.35%
Trust Securities Unit
P.O. Box 387 Main Post Office
St. Louis, MO 63166
Harris Trust & Savings Bank 5.28%
200 W. Monroe, 12th Floor
Chicago, IL 60690
State Street Bank & Trust Co. 5.48%
Securities Lending
2 International Place, 31st Floor
Boston, MA 02110
T-Fund
The Chase Manhattan Bank NA 8.37%
GSS As Agent
2 Chase Plaza, 4th Floor
New York, NY 10081
PNC Mortgage Securities Corp 7.46%
Attn: Trust Department
700 Deerpath Drive
Vernon Hills, IL 60061
PNC Bank/Saxon & Co. 6.70%
Attn: Income Collections
Airport Business Center/Intl Court 2
200 Stevens Drive
Lester, PA 19113
SHAREHOLDER AND TRUSTEE LIABILITY
The Company is organized as a "business trust" under the laws of the
Commonwealth of Pennsylvania. Shareholders of such a trust may, under certain
circumstances, be held personally liable (as if they were partners) for the
obligations of the trust. The Declaration of Trust of the Company provides that
shareholders of the Funds shall not be subject to any personal liability for the
acts or obligations of the Company and that every note, bond, contract, order or
other undertaking made by the Company shall contain a provision to the effect
that the shareholders are not personally liable thereunder. The Declaration of
Trust provides for indemnification out of the trust property of any shareholder
held personally liable solely by reason of being or having been a shareholder
and not because of any acts or omissions or some other reason. The Declaration
of Trust also provides that the Company shall, upon request, assume the defense
of any claim made against any shareholder for
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<PAGE> 43
any act or obligation of the Company and satisfy any judgment thereon. Thus,
the risk of a shareholder's incurring financial loss beyond its investment on
account of shareholder liability is limited to circumstances in which the
Company itself would be unable to meet its obligations.
The Company's Declaration of Trust provides further that no trustee,
officer or agent of the Company shall be personally liable for or on account of
any contract, debt, tort, claim, damage, judgment or decree arising out of or
connected with the administration or preservation of the trust estate or the
conduct of any business of the Company, nor shall any trustee be personally
liable to any person for any action or failure to act except by reason of bad
faith, willful misfeasance, gross negligence in the performance of any duties or
by reason of reckless disregard of the obligations and duties as trustee. It
also provides that all persons having any claim against the trustees or the
Company shall look solely to the trust property for payment. With the
exceptions stated, the Declaration of Trust provides that a trustee is entitled
to be indemnified against all liabilities and expenses reasonably incurred by
him or her in connection with the defense or disposition of any proceeding in
which the trustee may be involved or with which the trustee may be threatened by
reason of being or having been a trustee, and that the trustees have the power,
but not the duty, to indemnify officers and employees of the Company unless such
person would not be entitled to indemnification had he or she been a trustee.
FINANCIAL STATEMENTS
The Company's Annual Report to Shareholders for the fiscal year ended
October 31, 1995 has been filed with the Securities and Exchange Commission. The
financial statements in such Annual Report (the "Financial Statements") are
incorporated into this Statement of Additional Information by reference. The
Financial Statements included in the Annual Report for the fiscal year ended
October 31, 1995 have been audited by the Company's independent accountants,
Coopers & Lybrand L.L.P., whose report thereon also appears in such Annual
Report and is incorporated herein by reference. The Financial Statements in
such Annual Report have been incorporated herein in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
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<PAGE> 44
APPENDIX A
Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt considered short-term in the relevant
market. The following summarizes the rating categories used by Standard and
Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However,
the relative degree of safety is not as high as for issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It is,
however, somewhat more vulnerable to the adverse effects of changes and
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity in
excess of 9 months. The following summarizes the rating categories used by
Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are considered to
have a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and well
established access to a range of financial markets and assured sources of
alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are considered to
have a strong capacity for repayment of short-
A-1
<PAGE> 45
term promissory obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings trends and coverage
ratios, while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternative liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D- 1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental protection factors. Risk
factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity, and other protection
factors qualify issue as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.
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<PAGE> 46
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years. The following
summarizes the rating categories used by Fitch for short-term obligations:
"F-1+" - Securities possess exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree of assurance
for timely payment.
"F-1" - Securities possess very strong credit quality. Issues assigned
this rating reflect an assurance of timely payment only slightly less in degree
than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned this
rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned this
rating have characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned this
rating have characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial and
economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a commercial
bank.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one year or less which is issued by United
States commercial banks, thrifts and non-bank banks; non-United States banks;
and broker-
A-3
<PAGE> 47
dealers. The following summarizes the ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is regarded as
non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an original
maturity of less than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for short-term debt ratings:
"A1+" - Obligations supported by the highest capacity for timely
repayment.
"A1" - Obligations are supported by a strong capacity for timely
repayment.
"A2" - Obligations are supported by a satisfactory capacity for timely
repayment, although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.
"A3" - Obligations are supported by a satisfactory capacity for timely
repayment. Such capacity is more susceptible to adverse changes in business,
economic or financial conditions than for obligations in higher categories.
"B" - Obligations for which the capacity for timely repayment is
susceptible to adverse changes in business, economic or financial conditions.
"C" - Obligations for which there is an inadequate capacity to ensure
timely repayment.
A-4
<PAGE> 48
"D" - Obligations which have a high risk of default or which are
currently in default.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned by
Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay interest and
repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay interest
and repay principal. Whereas such issues normally exhibit 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.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt 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.
"B" - Debt 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
A-5
<PAGE> 49
used for debt subordinated to senior debt that is assigned an actual or implied
"BB" or "BB-" rating.
"CCC" - Debt has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The "C" rating
may be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no interest is
being paid.
"D" - Debt is in payment default. This rating is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S & P believes such payments
will be made during such grace period. "D" rating is also used upon the filing
of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid, and
certain other obligations that S & P believes may experience high volatility or
high variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds 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
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<PAGE> 50
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
"Aa" - Bonds 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.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered 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.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in
default.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" to "B" in its bond rating system. The modifier 1
indicates that the issuer 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 issuer ranks at the lower end of its generic rating category.
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<PAGE> 51
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but adequate.
However, risk factors are more variable and greater in periods of economic
stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt
rated "B" possesses the risk that obligations will not be met when due. Debt
rated "CCC" is well below investment grade and has considerable uncertainty as
to timely payment of principal, interest or preferred dividends. Debt rated "DD"
is a defaulted debt obligation, and the rating "DP" represents preferred stock
with dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds 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.
"AA" - Bonds 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 issuers is generally rated "F-1+."
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<PAGE> 52
"A" - Bonds 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.
"BBB" - Bonds 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 an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Bonds that possess
one of these ratings are considered by Fitch to be speculative investments. The
ratings "BB" to "C" represent Fitch's assessment of the likelihood of timely
payment of principal and interest in accordance with the terms of obligation for
bond issues not in default. For defaulted bonds, the rating "DDD" to "D" is an
assessment of the ultimate recovery value through reorganization or liquidation.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an original
maturity of more than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for long-term debt ratings:
"AAA" - Obligations 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 substantially.
"AA" - Obligations 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.
"A" - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business,
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economic or financial conditions may lead to increased investment risk.
"BBB" - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
higher categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of these
ratings where it is considered that speculative characteristics are present.
"BB" represents the lowest degree of speculation and indicates a possibility of
investment risk developing. "C" represents the highest degree of speculation
and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to denote
relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis with limited incremental risk compared
to issues rated in the highest category.
"A" - This designation indicates that 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" - This designation represents Thomson BankWatch's 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.
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"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may include
a plus or minus sign designation which indicates where within the respective
category the issue is placed.
MUNICIPAL NOTE RATINGS
A Standard and Poor's rating reflects the liquidity concerns and market
access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad- based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high quality,
with margins of protection ample although not so large as in the preceding
group.
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"MIG-3"/"VMIG-3" - Loans bearing this designation are of favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate
quality, carrying specific risk but having protection commonly regarded as
required of an investment security and not distinctly or predominantly
speculative.
"SG" - Loans bearing this designation are of speculative quality and
lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
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