<PAGE> 1
PORTFOLIOS FOR DIVERSIFIED INVESTMENT
BELLEVUE PARK CORPORATE CENTER
400 BELLEVUE PARKWAY
SUITE 100
WILMINGTON, DELAWARE 19809
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 12, 1995
TO PORTFOLIOS FOR DIVERSIFIED INVESTMENT SHAREHOLDERS:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the
"Meeting") of the Fixed Income Fund of Portfolios for Diversified Investment
(the "Trust") will be held at the Bellevue Park Corporate Center, 400 Bellevue
Parkway, 4th Floor Conference Room, Wilmington, Delaware, on June 12, 1995 at
10:00 A.M. Eastern Time, for the following purposes:
ITEM 1. To consider and act upon a proposal to approve an Agreement and
Plan of Reorganization (the "Reorganization Agreement") by and among the
Trust and The PNC(R) Fund ("PNC Fund") and the transactions contemplated
thereby, including the transfer of all of the assets and known liabilities
of the Trust's Fixed Income Fund to the Intermediate-Term Bond Portfolio
(the "Bond Portfolio"), an investment portfolio of PNC Fund, in exchange
for Service Class shares and Institutional Class shares of the Bond
Portfolio which shall thereafter be distributed by the Trust to the holders
of Fixed Income Dollar Shares and Fixed Income Shares, respectively, of the
Fixed Income Fund in connection with the liquidation and termination of the
Trust.
ITEM 2. To transact such other business as may properly come before the
Meeting or any adjournment thereof.
The proposed reorganization and the transactions contemplated thereby are
described in the attached Combined Proxy Statement/Prospectus. A copy of the
Reorganization Agreement is appended as Exhibit A thereto.
Shareholders of record as of the close of business on May 12, 1995 are
entitled to notice of, and to vote at, the Meeting or any adjournment thereof.
SHAREHOLDERS ARE REQUESTED TO EXECUTE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE THE ACCOMPANYING PROXY CARD WHICH IS BEING SOLICITED BY THE TRUST'S
BOARD OF TRUSTEES. THIS IS IMPORTANT FOR THE PURPOSE OF ENSURING A QUORUM AT THE
MEETING. PROXIES MAY BE REVOKED BY ANY SHAREHOLDER AT ANY TIME BEFORE THEY ARE
EXERCISED BY EXECUTING AND SUBMITTING A REVISED PROXY, BY GIVING WRITTEN NOTICE
OF REVOCATION TO THE TRUST'S SECRETARY, OR BY WITHDRAWING THE PROXY AND VOTING
IN PERSON AT THE MEETING.
W. Bruce McConnel, III
Secretary
May 15, 1995
<PAGE> 2
PORTFOLIOS FOR DIVERSIFIED INVESTMENT
BELLEVUE PARK CORPORATE CENTER
400 BELLEVUE PARKWAY
SUITE 100
WILMINGTON, DELAWARE 19809
800-821-7432
THE PNC(R) FUND
BELLEVUE PARK CORPORATE CENTER
400 BELLEVUE PARKWAY
SUITE 100
WILMINGTON, DELAWARE 19809
800-422-6538
COMBINED PROXY STATEMENT/PROSPECTUS
DATED MAY 15, 1995
This Combined Proxy Statement/Prospectus is furnished in connection with
the solicitation of proxies by the Board of Trustees of Portfolios for
Diversified Investment (the "Trust") in connection with the Special Meeting of
Shareholders of the Fixed Income Fund of the Trust (the "Meeting") to be held at
10:00 A.M. Eastern Time on June 12, 1995 at the Bellevue Park Corporate Center,
400 Bellevue Parkway, 4th Floor Conference Room, Wilmington, Delaware, at which
shareholders of the Fixed Income Fund of the Trust will be asked to approve a
proposed Agreement and Plan of Reorganization dated May 12, 1995 (the
"Reorganization Agreement") by and between the Trust and The PNC(R) Fund ("PNC
Fund") and the transactions contemplated thereby (the "Reorganization").
The Trust and PNC Fund are open-end, series type management investment
companies. The Board of Trustees of the Trust, including the disinterested
Trustees, has determined that it is in the best interests of the Trust and its
shareholders to be reorganized into the Intermediate-Term Bond Portfolio (the
"Bond Portfolio"), an investment portfolio of PNC Fund. In reaching that
determination, the Board of Trustees considered the small asset size and the
lack of expected asset growth of the
(continued)
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 COMBINED PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS COMBINED PROXY
STATEMENT/PROSPECTUS AND IN THE MATERIALS EXPRESSLY INCORPORATED HEREIN BY
REFERENCE AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRUST OR PNC FUND.
SHARES IN THE BOND PORTFOLIO OF PNC FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION OR ANY OTHER BANK, AND
SUCH SHARES ARE NOT FEDERALLY INSURED BY, GUARANTEED BY, OBLIGATIONS OF OR
OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENTAL AGENCY.
INVESTMENTS IN SHARES OF THE BOND PORTFOLIO OF PNC FUND INVOLVE INVESTMENT
RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
1
<PAGE> 3
Fixed Income Fund and the problems associated with the resulting lack of
significant economies of scale. The Board of Trustees concluded that each of
these disadvantages would be addressed, to some degree, by combining the assets
of the Fixed Income Fund with the assets of the Bond Portfolio of PNC Fund
pursuant to the Reorganization described below. Further, the Board of Trustees
concluded that, among other advantages, the Reorganization is likely to reduce
the total expense ratios of the Fixed Income Fund (absent voluntary fee waivers
and expense reimbursements) and to produce a competitive rate of return through
a portfolio that has the same investment objective and similar policies,
restrictions, maturity parameters and expense ratios as those of the Fixed
Income Fund.
The Reorganization Agreement provides that all of the assets and known
liabilities of the Fixed Income Fund of the Trust will be transferred to the
Bond Portfolio of PNC Fund. In exchange for the transfer of these assets and
liabilities, PNC Fund will simultaneously issue a number of full and fractional
shares of beneficial interest in the Bond Portfolio of the Service and
Institutional Classes ("Service Shares" and "Institutional Shares,"
respectively) having an aggregate net asset value equal to the aggregate net
asset value of the Fixed Income Fund. The ratio of Service Shares to
Institutional Shares of the Bond Portfolio so issued to the Fixed Income Fund
shall be equal to the ratio of outstanding Fixed Income Dollar Shares to
outstanding Fixed Income Shares of the Fixed Income Fund at the time the
Reorganization becomes effective (the "Effective Time of the Reorganization").
The Fixed Income Fund will then make a liquidating distribution to its
shareholders of Bond Portfolio shares received from PNC Fund, so that holders of
Fixed Income Dollar Shares and holders of Fixed Income Shares of the Fixed
Income Fund at the Effective Time of the Reorganization will receive that number
of full and fractional Service Shares and Institutional Shares, respectively, of
the Bond Portfolio having a value equal to the value of the shareholder's shares
in the Fixed Income Fund immediately before the Effective Time of the
Reorganization. Following the Reorganization, the Trust will be terminated under
state law and deregistered as an investment company under the Investment Company
Act of 1940 (the "1940 Act").
This Combined Proxy Statement/Prospectus sets forth concisely the
information that a shareholder of the Fixed Income Fund should know before
voting on the Reorganization Agreement (and the transactions contemplated
thereby), and should be retained for future reference. The Reorganization
Agreement is attached to this Combined Proxy Statement/Prospectus as Exhibit A
and is incorporated herein by reference. A Statement of Additional Information
dated May 15, 1995 relating to this Combined Proxy Statement/Prospectus, and
incorporated herein by reference, may be obtained free of charge by calling or
writing PNC Fund at the telephone number or address shown on the cover page of
this Combined Proxy Statement/Prospectus.
The Prospectuses relating to the Service Shares and Institutional Shares of
the Bond Portfolio of PNC Fund dated January 30, 1995, which describe the
investment programs and operations of the Service Shares and Institutional
Shares of the Bond Portfolio, accompany this Combined Proxy
Statement/Prospectus. Additional information is set forth in the Statement of
Additional Information of the Bond Portfolio dated January 30, 1995, in this
Combined Proxy Statement/Prospectus, and in the Trust's Prospectus and Statement
of Additional Information dated October 28, 1994. Each of these documents is on
file with the Securities and Exchange Commission ("SEC"), and is available
without charge upon oral or written request by writing or calling the Trust or
PNC Fund at the respective addresses or telephone numbers shown on the cover
page of this Combined Proxy Statement/Prospectus. The information contained in
each of these Prospectuses and Statements of Additional Information is
incorporated herein by reference.
This Combined Proxy Statement/Prospectus constitutes the proxy statement of
the Trust for the Meeting and the Prospectus for Service Shares and
Institutional Shares of PNC Fund's Bond Portfolio, which shares have been
registered with the SEC and are to be issued in connection with the
Reorganization.
This Combined Proxy Statement/Prospectus is expected to first be sent to
shareholders of the Trust on or about May 15, 1995. Shareholders of the Trust
may redeem their shares of the Fixed Income Fund at any time prior to the
Effective Time of the Reorganization.
2
<PAGE> 4
SUMMARY
The following is a summary of certain information relating to the proposed
Reorganization, the parties thereto and the transactions contemplated thereby,
and is qualified by reference to the more complete information contained
elsewhere in this Combined Proxy Statement/Prospectus, the Prospectuses and
Statements of Additional Information of the Fixed Income Fund and the Bond
Portfolio, and the Reorganization Agreement dated May 12, 1995 attached to this
Combined Proxy Statement/ Prospectus as Exhibit A and which is incorporated
herein by reference.
PROPOSED REORGANIZATION. Based upon their evaluations of the relevant
information presented to them, and in light of their fiduciary duties under
Federal and state law, the Trust's Board of Trustees and PNC Fund's Board of
Trustees, including all of the non-interested members of each Board, have
determined that the proposed Reorganization is in the best interests of the
shareholders of the Trust and PNC Fund, respectively. THE TRUST'S BOARD
RECOMMENDS THE APPROVAL OF THE REORGANIZATION AGREEMENT BY THE SHAREHOLDERS OF
THE FIXED INCOME FUND AT THE MEETING.
Subject to shareholder approval, the Reorganization Agreement provides for:
(a) the acquisition by the Bond Portfolio of all of the assets, and the
assumption by the Bond Portfolio of the known liabilities, of the Fixed Income
Fund in exchange for Service Shares and Institutional Shares of the Bond
Portfolio; (b) the distribution of the Service Shares and Institutional Shares
of the Bond Portfolio to the holders of Fixed Income Dollar Shares and Fixed
Income Shares, respectively, in liquidation of the Fixed Income Fund; and (c)
the termination of the Trust under state law and its deregistration as an
investment company under the 1940 Act.
As a result of the proposed Reorganization, each holder of Fixed Income
Dollar Shares and Fixed Income Shares of the Fixed Income Fund will become a
holder of Service Shares and Institutional Shares, respectively, of the Bond
Portfolio and will hold, immediately after the Effective Time of the
Reorganization, shares of the Bond Portfolio having a net asset value equal to
the net asset value of the shares the shareholder held in the Fixed Income Fund
immediately before the Effective Time of the Reorganization.
For further information, see "Information Relating to the Proposed
Reorganization -- Description of the Reorganization Agreement."
REASONS FOR REORGANIZATION. In light of certain potential benefits and other
factors, the Board of Trustees of the Trust, including the disinterested
trustees, has determined that it is in the best interests of the Trust, and of
the Fixed Income Fund's shareholders, to reorganize into a portfolio of PNC
Fund. In making such determination, the Board of Trustees considered, among
other things, as described more fully below under "Information Relating to the
Proposed Reorganization -- Board Consideration," the small asset size and lack
of expected asset growth of the Fixed Income Fund, and the resulting problems
associated with the Fixed Income Fund's inability to achieve significant
economies of scale. The Board of Trustees felt that each of these problems would
be addressed by the Reorganization.
In addition, among other advantages, the Board of Trustees felt that the
Reorganization: (i) would likely reduce the overall expense ratios for the Fixed
Income Fund's shareholders (as calculated before advisory and administration fee
waivers and expense reimbursements); (ii) would provide potentially greater
portfolio diversification (through potential access to other money market,
equity and bond investment portfolios offered by PNC Fund); (iii) would provide
an investment portfolio with the same investment objective, and with similar
policies and restrictions as those of the Fixed Income Fund; and (iv) would be a
tax-free event. The Board of Trustees also considered the possible risks and
disadvantages of the Reorganization and determined that the Reorganization is
likely to provide benefits to the Trust and its shareholders that outweigh any
possible risks and disadvantages of the Reorganization, and the Board of
Trustees concluded that there are no significant risks or disadvantages to the
Trust, or any of its shareholders, from the Reorganization.
3
<PAGE> 5
Similarly, the Board of Trustees of PNC Fund, in approving the
Reorganization, determined that it would be advantageous for PNC Fund, and
specifically for the Bond Portfolio and its shareholders, to acquire the assets
and known liabilities of the Fixed Income Fund.
FEDERAL INCOME TAX CONSEQUENCES. As a condition to the consummation of the
Reorganization, Drinker Biddle & Reath, counsel to the Trust and PNC Fund, will
issue an opinion as of the Effective Time of the Reorganization to the effect
that the Reorganization will not give rise to the recognition of income, gain or
loss for Federal income tax purposes to the Fixed Income Fund, the Bond
Portfolio or their respective shareholders.
OVERVIEW OF THE TRUST AND PNC FUND. The investment objectives of the Fixed
Income Fund and the Bond Portfolio are identical. Both the Fixed Income Fund and
the Bond Portfolio seek a high level of current income consistent with prudent
investment risk. In addition, the investment policies and limitations of the
Fixed Income Fund and the Bond Portfolio are similar. There are, however, some
noteworthy differences. For example, the Bond Portfolio may invest without
limitation in long-term debt obligations rated at the time of purchase within
the four highest ratings assigned by Moody's Investors Service, Inc. ("Moody's")
(i.e., "Aaa," "Aa," "A" and "Baa") and Standard & Poor's Ratings Group ("S&P")
(i.e., "AAA," "AA," "A" and "BBB"). The Bond Portfolio may also purchase
commercial paper rated "Prime-1" or "Prime-2" by Moody's or "A-1" or "A-2" by
S&P. By contrast, the Fixed Income Fund may only purchase long-term debt
instruments rated within the top three ratings by Moody's or S&P, and may only
purchase commercial paper rated "Prime-1" by Moody's or "A-1" by S&P.
In addition to the quality parameters noted above, there are also
significant differences in the range of investments expressly permitted under
the respective investment policies of the Fixed Income Fund and the Bond
Portfolio. For example, the Fixed Income Fund may invest in preferred stock and
obligations convertible into common stock. The Fixed Income Fund may also invest
in common stock and stock warrants if they are attached to a fixed-income
obligation. The Fixed Income Fund may also purchase debt obligations issued by
or on behalf of states, territories and possessions of the United States, the
District of Columbia and other political subdivisions, agencies,
instrumentalities and authorities. None of the instruments referenced in this
paragraph are expressly permitted under the Bond Portfolio's investment
policies.
The Bond Portfolio may also invest in securities that fall outside the
scope of the Fixed Income Fund's investment policies. For example, the Bond
Portfolio may invest in mortgage-related securities, asset-backed securities,
options and futures. In addition, the Bond Portfolio is authorized to borrow
funds and utilize leverage (including through reverse repurchase agreements and
dollar rolls) in amounts not exceeding 33 1/3% of its total assets (including
the amount borrowed). For more information on the similarities and differences
between the investment policies and limitations of the Fixed Income Fund and the
Bond Portfolio, see "Comparison of the Trust and PNC Fund" below.
Trustees and Officers. With the exception of the Secretaries of the Trust
and PNC Fund, the current trustees and officers of the Trust and PNC Fund are
the same. See "Additional Information About PNC Fund" and "Additional
Information about the Trust" below.
Certain Service Provider Arrangements -- the Fixed Income Fund. PNC
Institutional Management Corporation ("PIMC") serves as investment adviser to
the Fixed Income Fund and is entitled to receive advisory fees from the Fixed
Income Fund, computed daily and paid monthly, at the annual rate of .20% of the
Fixed Income Fund's average daily net assets after taking into account agreed
upon advisory fee waivers. As a result of PIMC's voluntary agreement to limit
the Fixed Income Fund's expenses, PIMC received no advisory fees and reimbursed
expenses at the annual rate of .20% of the Fixed Income Fund's average daily net
assets for the fiscal year ended June 30, 1994.
PIMC and PNC Bank, National Association ("PNC Bank") have entered into a
sub-advisory agreement with respect to the Fixed Income Fund. PNC Bank is an
affiliate of PIMC. As sub-adviser to the Fixed Income Fund, PNC Bank is entitled
to receive from PIMC an amount equal to 75% of the
4
<PAGE> 6
advisory fee paid by the Trust to PIMC (subject to adjustment in certain
circumstances). For the fiscal year ended June 30, 1994, PNC Bank received no
sub-advisory fees. All sub-advisory fees paid to such sub-adviser are the sole
responsibility of PIMC and the Trust has no liability with respect to the
payment of such fees.
Administrative services are provided to the Fixed Income Fund by PFPC Inc.
("PFPC") and Provident Distributors, Inc. ("PDI"). PFPC also serves as the
Trust's transfer agent, registrar and dividend disbursing agent. For their
administrative services, PFPC and PDI are entitled to receive combined
administration fees, computed daily and paid monthly, at the annual rate of .20%
of the value of the Fixed Income Fund's average daily net assets. For the fiscal
year ended June 30, 1994, PFPC and PDI voluntarily waived all administration
fees payable to them by the Fixed Income Fund and reimbursed expenses at the
annual rate of .20% of the Fixed Income Fund's average daily net assets.
For its services as transfer agent, PFPC receives fees with respect to the
Fixed Income Fund based upon the number of shareholder accounts maintained by
PFPC, transaction charges and out-of-pocket expenses. Specifically, PFPC
receives an annual fee of $12.00 for each account and sub-account maintained by
PFPC or a duly authorized sub-transfer agent. PFPC receives $1.00 for each
purchase and redemption transaction (other than purchase transactions made in
connection with the reinvestment of dividends) made by an account. PFPC is also
reimbursed for the expense of sub-accounting services provided by others and for
certain out-of-pocket expenses.
PIMC, PFPC and PDI have agreed to reduce the advisory and administration
fees otherwise payable to them and to reimburse the Trust for its operating
expenses to the extent necessary to ensure that its operating expense ratio
(excluding fees paid to service organizations pursuant to the Trust's
Shareholder Services Plan for Fixed Income Dollar Shares) does not exceed .40%
of the Fixed Income Fund's average net assets. PIMC, PFPC and PDI may terminate
this agreement to reduce fees and limit expenses at any time upon 120 days'
notice to the Trust.
Custodial services are provided to the Fixed Income Fund by PNC Bank. For
its services as custodian, PNC Bank receives fees from the Fixed Income Fund
based upon asset levels, certain transaction charges and out-of-pocket expenses.
Specifically, PNC Bank receives annual custody fees of $.25 for each $1,000 of
the Fixed Income Fund's first $250 million of average daily gross assets, $.20
for each $1,000 of its next $250 million of average daily gross assets, $.15 for
each $1,000 of its next $500 million of average daily gross assets, $.09 for
each $1,000 of its next $2 billion of average daily gross assets and $.08 for
each $1,000 of its average daily gross assets in excess of $3 billion. With
respect to all fixed income and equity securities (not including money market
obligations), PNC Bank receives $15.00 for each purchase, sale or delivery of
each such security upon its maturity date. With respect to each interest
collection or claim item, PNC Bank receives a fee of $40.00. PNC Bank is also
reimbursed for certain out-of-pocket expenses.
PDI also serves as the distributor of the Trust's shares. No compensation
is payable by the Fixed Income Fund to PDI for its distribution services.
Under its Shareholder Services Plan, the Trust will enter into an agreement
with each service organization which purchases Fixed Income Dollar Shares
requiring it to provide support services to its customers who are the beneficial
owners of Fixed Income Dollar Shares in consideration of the Trust's payment of
.25% (on an annualized basis) of the average daily net asset value of the Fixed
Income Dollar Shares held by the service organization for the benefit of its
customers. Such services include aggregating and processing purchase and
redemption requests from customers and placing net purchase and redemption
orders with PFPC; processing dividend payments from the Trust on behalf of
customers; providing information periodically to customers showing their
positions in Fixed Income Dollar Shares; and providing sub-accounting or the
information necessary for sub-accounting with respect to Fixed Income Dollar
Shares beneficially owned by customers. Under the terms of the agreements,
service organizations are required to provide to their customers a schedule of
any fees that they may charge to the customers relating to the investment of the
customers' assets in Fixed
5
<PAGE> 7
Income Dollar Shares. Fixed Income Shares do not bear the expense of payments
under the Shareholder Services Plan.
Certain Service Provider Arrangements -- PNC Fund. PIMC serves as
investment adviser to the Bond Portfolio and is entitled to a fee, computed
daily and paid monthly, at the following annual rates: .50% of the Bond
Portfolio's first $1 billion of average daily net assets, .45% of its next $1
billion of average daily net assets, .425% of its next $1 billion of average
daily net assets and .40% of its average daily net assets in excess of $3
billion. PNC Fund paid PIMC advisory fees at the annual rate of .19% of the
average daily net assets of the Bond Portfolio for the year ended September 30,
1994, and PIMC waived advisory fees at the annual rate of .31% of the average
daily net assets of the Bond Portfolio for that year.
PIMC and BlackRock Financial Management, Inc. ("BlackRock") have entered
into a sub-advisory agreement with respect to the Bond Portfolio. As sub-adviser
to the Bond Portfolio, BlackRock is entitled to receive from PIMC a fee,
computed daily and payable monthly, at the following annual rates: .35% of the
Bond Portfolio's first $1 billion of average daily net assets, .30% of its next
$1 billion of average daily net assets, .275% of its next $1 billion of average
daily net assets and .25% of its average daily net assets in excess of $3
billion. From March 1, 1993 through March 29, 1995, PNC Bank served as
sub-adviser to the Bond Portfolio under a sub-advisory agreement that was
substantially the same as the sub-advisory agreement currently in effect between
PIMC and BlackRock. PIMC paid PNC Bank sub-advisory fees at the annual rate of
.14% of the average daily net assets of the Bond Portfolio for the year ended
September 30, 1994, and PNC Bank waived sub-advisory fees at the annual rate of
.21% of the average daily net assets of the Bond Portfolio for that year. All
sub-advisory fees payable to BlackRock with respect to the Bond Portfolio are
the sole responsibility of PIMC.
PFPC and PDI also serve as co-administrators for the Bond Portfolio. PFPC
also serves as the Bond Portfolio's transfer agent, registrar and dividend
disbursing agent. As compensation for their administrative services, PFPC and
PDI are jointly entitled to combined administration fees, computed daily and
paid monthly, at the following annual rates: .20% of the first $500 million of
the Bond Portfolio's average daily net assets, .18% of its next $500 million of
average daily net assets, .16% of its next $1 billion of average daily net
assets, and .15% of its average daily net assets in excess of $2 billion. PNC
Fund paid PFPC and PDI combined administration fees at the annual rate of .08%
of the Bond Portfolio's average daily net assets for the year ended September
30, 1994, and PFPC and PDI waived combined administration fees at the annual
rate of .12% of the Bond Portfolio's average daily net assets for that year.
For its services as transfer agent, PFPC receives fees with respect to the
Bond Portfolio based upon the number and type of shareholder accounts maintained
by PFPC, the average net assets allocable to each class of shares in the Bond
Portfolio and out-of-pocket expenses. Specifically, PFPC receives fees at the
annual rate of .03% of the average net asset value of outstanding Service and
Institutional Shares in the Bond Portfolio. For each Bond Portfolio account
serviced through third parties providing sub-accounting services, PFPC receives
an annual account fee of $11.00. For each Bond Portfolio account serviced
directly by PFPC, PFPC receives an annual account fee of $13.00. PFPC is also
reimbursed for certain out-of-pocket expenses.
PNC Bank also serves as custodian of the assets of the Bond Portfolio. For
its custodian services, PNC Bank receives fees from PNC Fund based upon asset
levels, certain transaction charges and out-of-pocket expenses. Specifically,
PNC Bank receives annual custody fees of $.25 for each $1,000 of the Bond
Portfolio's first $50 million of average daily gross assets, $.20 for each
$1,000 of its next $50 million of average daily gross assets and $.15 for each
$1,000 of its average daily gross assets in excess of $100 million. With respect
to portfolio securities, PNC Bank receives a transaction charge of $15.00 for
each purchase, sale, maturity or delivery of a certificated security for
reissuance; $30.00 per sale, purchase, exercise or expiration of an option
contract (round trip); $50.00 per sale, purchase, exercise or expiration of a
futures contract (round trip); and $15.00 for each repurchase trade with an
6
<PAGE> 8
institution other than PNC Bank (round trip). PNC Bank is also reimbursed for
the expense of foreign custody services and for certain out-of-pocket expenses.
The minimum monthly custody fee for the Bond Portfolio is $1,000 (exclusive of
out-of-pocket expenses and transaction charges).
State Street Bank and Trust Company ("State Street") and The Chase
Manhattan Bank, N.A. ("Chase") serve as sub-custodians of foreign securities
held by the Bond Portfolio. For the sub-custodial services provided by State
Street and Chase, PNC Bank pays sub-custody fees based on the amount and type of
securities maintained by such sub-custodians, account maintenance fees,
transaction charges and certain out-of-pocket expenses. State Street and Chase
receive no fees directly from PNC Fund or the Bond Portfolio with respect to
their services as sub-custodians.
PDI serves as distributor of the shares of the Bond Portfolio. No
compensation is payable by the Bond Portfolio to PDI for its distribution
services.
Under its Service Plan, PNC Fund intends to enter into servicing agreements
with institutions (including PNC Bank and its affiliates) pursuant to which
institutions will render certain support services to customers who are the
beneficial owners of Service Shares. Such services are intended to supplement
the services provided by PNC Fund's administrators and transfer agent to PNC
Fund's shareholders of record. In consideration for payment of up to .15% (on an
annualized basis) of the average daily net asset value of Service Shares owned
beneficially by their customers, institutions may provide one or more of the
following services to such customers: processing purchase and redemption
requests from customers and placing orders with PNC Fund's transfer agent or the
distributor; processing dividend payments from PNC Fund on behalf of customers;
providing sub-accounting with respect to Service Shares beneficially owned by
customers or the information necessary for sub-accounting; and other similar
services. In consideration for payment of up to a separate .15% (on an
annualized basis) of the average daily net asset value of Service Shares owned
beneficially by their customers, institutions may provide one or more of these
additional services to such customers: responding to customer inquiries relating
to the services performed by the institution and to customer inquiries
concerning their investments in Service Shares; providing information
periodically to customers showing their positions in Service Shares; and other
similar shareholder liaison services. Institutional Shares do not bear the
expense of payments under PNC Fund's Service Plan.
Banking Laws. Banking laws and regulations currently 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, controlling
or distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from underwriting securities, but such banking laws and regulations do not
prohibit such a holding company or affiliate or banks generally from acting as
investment adviser, administrator, transfer agent, or custodian to such an
investment company, or from purchasing shares of such a company as agent for and
upon the order of customers. PNC Bank, PIMC and PFPC and service organizations
that are banks or bank affiliates are subject to such banking laws and
regulations. In addition, state securities laws may differ from the
interpretations of Federal law discussed in this paragraph and banks and
financial institutions may be required to register as dealers pursuant to state
law.
Should future legislative, judicial or administrative action prohibit or
restrict the activities of such companies in connection with the provision of
services on behalf of PNC Fund and the holders of Service Shares and
Institutional Shares and on behalf of the Trust and the holders of Fixed Income
Dollar Shares and Fixed Income Shares, PNC Fund and the Trust might be required
to alter materially or discontinue their arrangements with such companies and
change their method of operations with respect to Service Shares and
Institutional Shares, and Fixed Income Dollar Shares and Fixed Income Shares,
respectively. It is not anticipated, however, that any change in the method of
operations of
7
<PAGE> 9
PNC Fund or the Trust would affect their respective net asset values per share
or result in financial loss to any investor.
Comparative Fee Table. The following table sets forth the current fees and
expenses of the Fixed Income Fund as of June 30, 1994 and the Bond Portfolio as
of September 30, 1994, as reflected in the current Prospectuses for the Fixed
Income Fund and the Bond Portfolio. The current fees and expenses of the Bond
Portfolio are expected to remain unchanged as a result of the Reorganization.
COMPARATIVE FEE TABLE
<TABLE>
<CAPTION>
PORTFOLIOS
FOR PORTFOLIOS
DIVERSIFIED FOR PNC FUND PNC FUND
INVESTMENT'S DIVERSIFIED BOND BOND
FIXED INCOME INVESTMENT'S PORTFOLIO'S PORTFOLIO'S
FIXED INCOME SERVICE INSTITUTIONAL
DOLLAR SHARES SHARES SHARES SHARES
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES
After Fee Waivers and Expense
Reimbursements (as a percentage
of average daily net assets)
Advisory Fees........................ 0.00%(1) 0.00%(1) 0.28%(2) 0.28%(2)
Other Operating Expenses............. 0.65 0.40 0.50 0.20
---- ---- ---- ----
Administration Fees................ 0.00(1) 0.00(1) 0.10(2) 0.10(2)
Shareholder Servicing Fee.......... 0.25 None 0.15 None
Other Expenses..................... 0.40(1) 0.40(1) 0.25(2) 0.10(2)
---- ---- ---- ----
Total Fund Operating Expenses........ 0.65% 0.40% 0.78% 0.48%
==== ==== ==== ====
</TABLE>
- ---------------
(1) Advisory fees are net of waivers of .20% and administration fees are net of
waivers of .20%. The expenses noted above under "Other Expenses" are
estimated based on the level of such expenses for the Trust's most recent
fiscal year and reflect expense reimbursements by PIMC, PFPC and PDI
aggregating .3%.
(2) Advisory fees are net of waivers of .22% and administration fees are net of
waivers of .10% for the Bond Portfolio. PIMC and the Administrators are
under no obligation to waive or continue waiving such fees, but have
informed PNC Fund that they expect to waive or continue waiving such fees
during the current fiscal year as necessary to maintain the Bond Portfolio's
total operating expenses at the levels set forth in the table. The expenses
noted above under "Other Expenses" are estimated based on the level of such
expenses for PNC Fund's most recent fiscal year.
Example: An investor in the Fixed Income Fund or the Bond Portfolio would
pay the following expenses on a $1,000 investment, assuming (1) 5% annual
return, and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Fixed Income Dollar Shares................... $7 $21 $36 $ 81
Fixed Income Shares.......................... 4 13 22 51
Bond Portfolio (Service Shares).............. 8 25 43 97
Bond Portfolio (Institutional Shares)........ 5 15 27 60
</TABLE>
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
INVESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND OPERATING
EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
The foregoing Comparative Fee Table and Example are intended to assist
investors in understanding the estimated operating expenses of the Fixed Income
Fund and the Bond Portfolio. The information in the table is based on the
advisory and administration fees and other expenses: (i) for the fiscal year
ended June 30, 1994, in the case of the Fixed Income Fund; and (ii) for the
fiscal year ended September 30, 1994, in the case of the Bond Portfolio, as
restated to reflect revised fee waivers.
8
<PAGE> 10
The following table sets forth the ratios of operating expenses to average
net assets for the Fixed Income Dollar Shares and Fixed Income Shares for the
year ended June 30, 1994 (i) after fee waivers and expense reimbursements, and
(ii) absent fee waivers and expense reimbursements; and for the six-month period
ended December 31, 1994 (i) after fee waivers and expense reimbursements, and
(ii) absent fee waivers and expense reimbursements:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, 1994
---------------------------------------------
RATIO OF OPERATING
RATIO OF OPERATING EXPENSES TO AVERAGE
EXPENSES TO AVERAGE NET ASSETS ABSENT
NET ASSETS AFTER FEE FEE
WAIVERS AND EXPENSE WAIVERS AND EXPENSE
FIXED INCOME FUND REIMBURSEMENTS REIMBURSEMENTS
--------------------------------------------- -------------------- --------------------
<S> <C> <C>
Fixed Income Shares.......................... 0.40% 0.96%
Fixed Income Dollar Shares................... 0.65% 1.21%
</TABLE>
<TABLE>
<CAPTION>
SIX-MONTH PERIOD ENDED DECEMBER 31, 1994
---------------------------------------------
RATIO OF OPERATING
RATIO OF OPERATING EXPENSES TO AVERAGE
EXPENSES TO AVERAGE NET ASSETS ABSENT
NET ASSETS AFTER FEE FEE
WAIVERS AND EXPENSE WAIVERS AND EXPENSE
FIXED INCOME FUND REIMBURSEMENTS REIMBURSEMENTS
--------------------------------------------- -------------------- --------------------
<S> <C> <C>
Fixed Income Shares.......................... 0.40% 1.02%
Fixed Income Dollar Shares................... 0.65% 1.27%
</TABLE>
The following table sets forth the ratios of operating expenses to average
net assets for Service Shares and Institutional Shares of the Bond Portfolio for
the fiscal year ended September 30, 1994 (i) after fee waivers; and (ii) absent
fee waivers:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30, 1994
-------------------------------------------
RATIO OF OPERATING RATIO OF OPERATING
EXPENSES TO AVERAGE EXPENSES TO AVERAGE
NET ASSETS AFTER NET ASSETS ABSENT
BOND PORTFOLIO FEE WAIVERS FEE WAIVERS
------------------------------------------------ ------------------- -------------------
<S> <C> <C>
Service Shares.................................. 0.70% 1.13%
Institutional Shares............................ 0.45% 0.88%
</TABLE>
Miscellaneous. The Trust and PNC Fund are both organized as Massachusetts
business trusts. The purchase, redemption, dividend and other practices and
procedures of the Fixed Income Fund and the Bond Portfolio are similar as
discussed further below under "Comparison of the Trust and PNC Fund."
VOTING INFORMATION. This Combined Proxy Statement/Prospectus is being furnished
in connection with the solicitation of proxies by the Trust's Board of Trustees
in connection with the Special Meeting of Shareholders of the Fixed Income Fund
to be held at Bellevue Park Corporate Center, 400 Bellevue Parkway, 4th Floor
Conference Room, Wilmington, Delaware on June 12, 1995 at 10:00 A.M. Eastern
Time. Only shareholders of record at the close of business on May 12, 1995 will
be entitled to vote at the Meeting. Each share or fraction thereof is entitled
to one vote or fraction thereof. Shares represented by a properly executed proxy
will be voted in accordance with the instructions thereon, or if the proxy is
returned and executed but no specification is made, the persons named as proxies
will vote in favor of each proposal set forth in the Notice of the Meeting.
Proxies may be revoked at any time before they are exercised by the shareholder
submitting to the Secretary of the Trust a written notice of revocation or a
subsequently executed proxy or by the shareholder attending the Meeting and
voting in person. For additional information, including a description of the
shareholder vote required for approval of the Reorganization Agreement and the
transactions contemplated thereby, see "Information Relating to Voting Matters."
RISK FACTORS. Because of the differences in the investment policies of the
Fixed Income Fund and the Bond Portfolio, there are differences between the risk
factors associated with the Fixed Income Fund and the Bond Portfolio.
9
<PAGE> 11
The Bond Portfolio may invest in long-term debt securities rated in the top
four rating categories by Moody's or S&P, and in unrated securities deemed by
the adviser to be of comparable quality. By contrast, the Fixed Income Fund may
not invest in long-term debt instruments with the lowest of the top four ratings
by Moody's and S&P. Debt obligations rated in the lowest of the top four ratings
(i.e., "Baa" by Moody's and "BBB" by S&P) are considered to have speculative
characteristics and are generally more sensitive to economic change than higher
rated securities. If a portfolio security is reduced below Baa by Moody's or BBB
by S&P, the Bond Portfolio's sub-adviser will dispose of the security in an
orderly fashion as soon as practicable.
The Bond Portfolio may invest in certain mortgage-related securities. The
investment policies for the Fixed Income Fund do not specifically provide for
such investments. Although certain mortgage-related securities are guaranteed by
a third party or are otherwise similarly secured, the market value of the
security, which may fluctuate, is not so secured. If the Bond Portfolio
purchases a mortgage-related security at a premium, that portion may be lost if
there is a decline in the market value of the security whether resulting from
increases in interest rates or prepayment of the underlying mortgage collateral.
As with other interest-bearing securities, the prices of such securities are
inversely affected by changes in interest rates. However, though the value of a
mortgage-related security may decline when interest rates rise, the converse is
not necessarily true because in periods of declining interest rates mortgages
underlying securities are prone to prepayment. For this and other reasons, a
mortgage-related security's stated maturity may be shortened by unscheduled
prepayments on underlying mortgages and, therefore, it is not possible to
predict accurately the security's return to the Bond Portfolio. Mortgage-related
securities provide regular payments consisting of interest and principal. No
assurance can be given as to the return the Bond Portfolio will receive when
these amounts are reinvested.
Mortgage-related securities acquired by the Bond Portfolio may also include
collateralized mortgage obligations ("CMOs") issued by U.S. Government agencies
or instrumentalities, as well as by private issuers. CMOs may exhibit more or
less price volatility and interest rate risk than other types of
mortgage-related obligations.
The Bond Portfolio may invest in asset-backed securities. Investments in
asset-backed securities are not expressly permitted under the Fixed Income
Fund's investment policies. Asset-backed securities involve certain risks that
are not presented by mortgage-backed securities arising primarily from the
nature of the underlying assets (i.e., credit card and automobile loan
receivables as opposed to real estate mortgages). For example, credit card
receivables are generally unsecured and may require the repossession of personal
property upon the default of the debtor which may be difficult or impracticable
in some cases. In addition, asset-backed securities may be considered illiquid
under certain circumstances.
The yield characteristics of asset-backed securities differ from
traditional debt securities. A major difference is that the principal amount of
the obligations may be prepaid at any time because the underlying assets
generally may be prepaid at any time. As a result, if an asset-backed security
is purchased at a premium, a prepayment rate that is faster than expected may
reduce yield to maturity, while a prepayment rate that is slower than expected
may have the opposite effect of increasing yield to maturity. Conversely, if an
asset-backed security is purchased at a discount, faster than expected
prepayments may increase, while slower than expected prepayments may decrease,
yield to maturity. In general, the collateral supporting asset-backed securities
is of shorter maturity than mortgage-related securities. Like other fixed-income
securities, when interest rates rise, the value of an asset-backed security
generally will decline; however, when interest rates decline, the value of an
asset-backed security with prepayment features may not increase as much as that
of other fixed-income securities.
The Bond Portfolio may invest in options and futures contracts. The Fixed
Income Fund may not invest in options and futures contracts. The risks related
to the use of options and futures contracts include the following: (i) the
correlation between movements in the market price of the portfolio
10
<PAGE> 12
investments (held or intended for purchase) being hedged and in the price of the
futures contract or option may be imperfect; (ii) possible lack of a liquid
secondary market for closing out options or futures positions; (iii) the need
for additional portfolio management skills and techniques; and (iv) losses due
to unanticipated market movements. Successful use of options and futures by the
Bond Portfolio is subject to the adviser's or sub-adviser's ability to correctly
predict movements in the direction of the market. For example, if the Bond
Portfolio uses futures contracts as a hedge against the possibility of a decline
in the market adversely affecting securities held by it and securities prices
increase instead, the Bond Portfolio will lose part or all of the benefit of the
increased value of its securities which it has hedged because it will have
approximately equal offsetting losses in its futures positions. The risk of loss
in trading futures contracts in some strategies can be substantial, due both to
the low margin deposits required and the extremely high degree of leverage
involved in futures pricing. As a result, a relatively small price movement in a
futures contract may result in immediate and substantial loss or gain to the
investor. Thus, a purchase or sale of a futures contract may result in losses or
gains in excess of the amount invested in the contract.
Options trading is a highly specialized activity which entails greater than
ordinary investment risks. When engaging in options transactions with
broker/dealers, the Bond Portfolio bears the risk that the broker/dealer may
fail to meet its obligations. There is no assurance that the Bond Portfolio will
be able to close an unlisted option position. Furthermore, unlisted options are
not subject to the protections afforded purchasers of listed options by the
Options Clearing Corporation, which performs the obligations of its members who
fail to do so in connection with the purchase or sale of options.
There are several other risks associated with transactions in options on
securities and indexes. For example, restrictions may be imposed by a national
securities exchange (an "Exchange") on opening transactions or closing
transactions or both; trading halts, suspensions or other restrictions may be
imposed with respect to particular classes or series of options or underlying
securities; unusual or unforeseen circumstances may interrupt normal operations
on an Exchange; the facilities of an Exchange or the Options Clearing
Corporation may not at all times be adequate to handle current trading volume;
or one or more Exchanges could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that Exchange (or in that class or series of options) would cease to exist,
although outstanding options that had been issued by the Options Clearing
Corporation as a result of trades on that Exchange would continue to be
exercisable in accordance with their terms.
Investments in futures transactions and options thereon also entail other
risks. For example, in the event of adverse price movements, the Bond Portfolio
would continue to be required to make daily cash payments to maintain its
required margin. In such situations, the Bond Portfolio may have to sell
portfolio securities to meet daily margin requirements at a time when it may be
disadvantageous to do so if the Bond Portfolio has insufficient cash to meet the
daily margin call. In addition, utilization of futures transactions by the Bond
Portfolio involves the risk of loss of margin deposits in the event of
bankruptcy of a broker with whom the Bond Portfolio has an open position in a
futures contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting some futures
traders to substantial losses.
11
<PAGE> 13
The trading of futures contracts is also subject to the risk of trading
halts, suspensions, Exchange or clearing house equipment failure, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal trading activity, which could at times make it difficult
or impossible to liquidate existing positions or to recover excess variation
margin payments.
The Bond Portfolio may also hold participation certificates in leases,
installment purchase contracts, or conditional sales contracts (collectively,
"lease obligations"). The Fixed Income Fund is not expressly authorized under
its investment policies to invest in lease obligations.
The Bond Portfolio may invest substantially in obligations of foreign banks
or foreign branches of U.S. banks where the adviser deems the instrument to
present minimal credit risks. These investments are not specifically permitted
under the investment policies of the Fixed Income Fund. Investments in
obligations issued by foreign banks and foreign branches of U.S. banks may
involve risks that are different from investments in obligations of domestic
branches of U.S. banks. These risks may include future unfavorable political and
economic developments, possible withholding taxes on interest income, seizure or
nationalization of foreign deposits, currency controls, interest limitations, or
other governmental restrictions which might affect the payment of principal or
interest on the securities held by the Bond Portfolio. Additionally, these
institutions may be subject to less stringent reserve requirements and to
different accounting, auditing, reporting and recordkeeping requirements than
those applicable to domestic branches of U.S. banks.
The Bond Portfolio's investment policies provide for investments in
floating rate instruments. The investment policies of the Fixed Income Fund do
not specifically authorize such investments. The absence of an active secondary
market with respect to particular floating rate instruments could make it
difficult for the Bond Portfolio to dispose of a floating rate instrument if the
issuer defaulted on its payment obligation or during periods when the Bond
Portfolio is not entitled to exercise its demand rights, and the Bond Portfolio
could, for these or other reasons, suffer a loss with respect to such
instruments.
Certain other policies and investment techniques utilized by the Bond
Portfolio present noteworthy risk considerations not associated with the Fixed
Income Fund. For example, the Bond Portfolio is authorized to borrow funds and
utilize leverage (including through reverse repurchase agreements and dollar
rolls) in amounts not exceeding 33 1/3% of its total assets (including the
amount borrowed) and under current market conditions intends to borrow or obtain
equivalent leverage up to such amount. The use of leverage by the Bond Portfolio
would create an opportunity for increased net income, but, at the same time,
creates special risks. In particular, if the Bond Portfolio borrows on a
short-term basis and invests the proceeds in long-term securities, an increase
in interest rates may (i) reduce or eliminate the interest rate differential
usually available between short-term and long-term rates and (ii) reduce the
value of the Bond Portfolio's long-term securities, thereby exposing the Bond
Portfolio to lower yields and risk of loss on disposition of its long-term
securities.
To take advantage of attractive financing opportunities in the mortgage
market and to enhance current income, the Bond Portfolio may enter into dollar
roll transactions. For a description of dollar roll transactions, see
"Comparison of the Trust and PNC Fund -- Investment Policies" below. The
investment policies for the Fixed Income Fund do not include the use of dollar
roll transactions. Dollar roll transactions involve the risk that the market
value of the securities the Bond Portfolio is required to purchase may decline
below the agreed upon repurchase price of those securities. If the broker/dealer
to whom the Bond Portfolio sells securities becomes insolvent, the Bond
Portfolio's right to purchase or repurchase securities may be restricted and the
instruments which the Bond Portfolio is required to repurchase may be worth less
than an instrument which the Bond Portfolio originally held when the Bond
Portfolio is able to complete the purchase. Successful use of mortgage dollar
rolls may depend upon the investment adviser's ability to correctly predict
interest rates and prepayments. There is no assurance that dollar rolls can be
successfully employed.
The Bond Portfolio may also lend portfolio securities with an aggregate
value of up to 30% of its total assets to broker/dealers and other institutional
investors pursuant to agreements requiring that
12
<PAGE> 14
the loans be continuously secured by collateral equal at all times in value to
at least the market value of the securities loaned. The Fixed Income Fund may
not engage in securities lending. Default by or bankruptcy of a borrower would
expose the Bond Portfolio to possible loss because of adverse market action,
expenses and/or delays in connection with the disposition of the underlying
securities.
The Bond Portfolio may purchase or sell securities on a "forward
commitment" basis. These transactions involve a commitment by the Bond Portfolio
to purchase or sell particular securities with payment and delivery taking place
at a future date (perhaps one or two months later), and permit the Bond
Portfolio to lock in a price or yield on a security it owns or intends to
purchase, regardless of future changes in interest rates. The Fixed Income Fund
may not purchase or sell securities on a forward commitment basis. Forward
commitment transactions involve the risk that the price or yield obtained in a
transaction may be less favorable than the price or yield available in the
market when the securities delivery takes place. When the Bond Portfolio engages
in forward commitment transactions, it relies on the other party to consummate
the trade. Failure of such party to do so may cause the Bond Portfolio to incur
a loss or miss an opportunity to obtain a price considered to be advantageous.
In addition, the Bond Portfolio will normally segregate assets in the amount of
its purchase commitments when it purchases securities on a "forward commitment"
basis. This may adversely affect the Bond Portfolio's liquidity and ability to
manage its investment portfolio. In order to limit this risk, the Bond Portfolio
expects that its commitments to purchase securities on a "forward commitment"
basis normally will not exceed 25% of its total assets.
For more information on these and other differences between the investment
policies of the Fixed Income Fund and the Bond Portfolio, see "Comparison of the
Trust and PNC Fund" below.
INFORMATION RELATING TO THE PROPOSED REORGANIZATION
The terms and conditions under which the Reorganization may be consummated
are set forth in the Reorganization Agreement. Significant provisions of the
Reorganization Agreement are summarized below; however, this summary is
qualified in its entirety by reference to the Reorganization Agreement, a copy
of which is attached as Exhibit A to this Combined Proxy Statement/Prospectus
and which is incorporated herein by reference.
DESCRIPTION OF THE REORGANIZATION AGREEMENT. As discussed above, the Fixed
Income Fund of the Trust is similar, but not identical, to the Bond Portfolio of
PNC Fund. The Reorganization Agreement provides that the Trust will declare a
dividend or dividends prior to the Effective Time of the Reorganization which,
together with all previous dividends, will have the effect of distributing to
the shareholders of the Fixed Income Fund all undistributed net investment
income earned and net capital gains realized up to and including the Effective
Time of the Reorganization. The Reorganization Agreement provides that at the
Effective Time of the Reorganization, the assets and known liabilities of the
Fixed Income Fund will be transferred to and assumed by the Bond Portfolio. In
exchange for the transfer of the assets of, and the assumption of the known
liabilities of, the Fixed Income Fund, PNC Fund will issue at the Effective Time
of the Reorganization full and fractional Service Shares and Institutional
Shares of the Bond Portfolio with an aggregate net asset value equal to the
aggregate net asset value of the Fixed Income Fund as determined at the
Valuation Time specified in the Reorganization Agreement.
Following the transfer of assets to, and the assumption of the known
liabilities of the Fixed Income Fund by, the Bond Portfolio, the Trust will
distribute the Service Shares and Institutional Shares of the Bond Portfolio
received from PNC Fund to the holders of Fixed Income Dollar Shares and Fixed
Income Shares, respectively, of the Trust in liquidation of the Fixed Income
Fund. Each holder of Fixed Income Dollar Shares and Fixed Income Shares of the
Trust at the Effective Time of the Reorganization will receive an amount of
Service Shares and Institutional Shares, respectively, of equal value, plus the
right to receive any dividends or distributions which were declared before the
Effective Time of the Reorganization but that remained unpaid at that time with
respect to the Fixed Income
13
<PAGE> 15
Dollar Shares and Fixed Income Shares of the Trust. In connection with the
Reorganization, the Trust will be terminated under state law and deregistered as
an investment company under the 1940 Act.
The stock transfer books of the Trust will be permanently closed at the
Effective Time of the Reorganization. If any shares of the Fixed Income Fund are
represented by a share certificate, the certificate must be surrendered to PNC
Fund's transfer agent for cancellation, or verification of such share
certificate's loss and indemnification with respect to such loss must be
established, before the Bond Portfolio shares issued to the shareholder in the
Reorganization can be redeemed.
The Reorganization with respect to the Fixed Income Fund is subject to a
number of conditions, including approval of the Reorganization Agreement and the
transactions contemplated thereby described in this Combined Proxy
Statement/Prospectus by the shareholders of the Trust; the receipt of certain
legal opinions described in Sections 9(d), 9(e), 10(c) and 10(d) of the
Reorganization Agreement (which include an opinion of Drinker Biddle & Reath
that the shares of the Bond Portfolio issued to shareholders of the Fixed Income
Fund in accordance with the terms of the Reorganization Agreement will be
validly issued, fully paid and non-assessable); the receipt of certain
certificates from the parties concerning the continuing accuracy of the
representations and warranties in the Reorganization Agreement and other
matters; and the parties' performance in all material respects of their
respective agreements and undertakings in the Reorganization Agreement. Assuming
satisfaction of the conditions in the Reorganization Agreement, the Effective
Time of the Reorganization will be on June 15, 1995 or such other date as is
agreed to by the parties.
The Reorganization Agreement provides that each party thereto shall be
responsible for the payment of all expenses incurred by such party in connection
with the Reorganization and the transactions contemplated thereby.
The Reorganization Agreement and the Reorganization described herein may be
abandoned at any time prior to the Effective Time of the Reorganization by the
mutual consent of the parties to the Reorganization Agreement. The
Reorganization Agreement provides further that at any time prior to or (to the
fullest extent permitted by law) after approval of the Reorganization Agreement
by the shareholders of the Fixed Income Fund (a) the parties thereto may, by
written agreement authorized by their respective Presidents and with or without
the approval of their respective shareholders, amend any of the provisions of
the Reorganization Agreement and (b) any party may waive any breach by the other
party or the failure to satisfy any of the conditions to its obligations (such
waiver to be in writing and authorized by the President of the waiving party
with or without the approval of such party's shareholders).
BOARD CONSIDERATION. Based upon its evaluations of the information presented to
it, and in light of its fiduciary duties under Federal and state law, the Board
of Trustees of the Trust has unanimously determined that the proposed
Reorganization is in the best interests of the shareholders of the Fixed Income
Fund, and recommends the approval of the Reorganization Agreement by such
shareholders at the Meeting. The following is a summary of the information that
was presented to, and considered by, the Board of Trustees in making its
determination.
Initially, the Board of Trustees, including the disinterested trustees,
identified several areas of concern regarding the Fixed Income Fund which gave
rise to the consideration by the Board of Trustees of several ways to reorganize
the structure and/or to alter the Trust's and the Fixed Income Fund's
relationship with the Trust's service providers. The Board of Trustees
considered the small asset size and lack of expected asset growth of the Fixed
Income Fund, including the fact that its small asset size prevented the Fixed
Income Fund from realizing any significant economies of scale in reducing its
relatively high expense ratios (absent waivers of fees and reimbursement of
expenses by the Fixed Income Fund's adviser and administrators). The Board of
Trustees noted in particular that the Fixed Income Fund relies upon large fee
waivers and expense reimbursements by its adviser and administrators to keep its
expense ratios competitive, and that such waivers and reimbursements are
voluntary and can be terminated at any time without Board approval upon 120
days' notice to the Trust. The Board of Trustees also considered that there was
no expectation that the expense ratios for
14
<PAGE> 16
the Fixed Income Fund (absent fee waivers and expense reimbursements) would
decrease in the future absent a significant increase in the assets of the Fixed
Income Fund.
The Board of Trustees considered a number of alternatives to address the
Fixed Income Fund's problems. Among the alternatives considered by the Board of
Trustees were: (i) continuing the Fixed Income Fund without its adviser's and
administrators' voluntary waiver of fees and reimbursement of expenses; (ii) the
liquidation and dissolution of the Fixed Income Fund and the Trust; and (iii)
the reorganization of the Fixed Income Fund into another investment company and
the subsequent dissolution of the Trust. The Board of Trustees carefully
considered the advantages and disadvantages of each alternative and, in
particular, the likelihood that each alternative would address the asset size
and growth problem of the Fixed Income Fund.
The alternative that the Board of Trustees felt offered the greatest
likelihood of addressing the asset size and growth problem was the
reorganization of the Fixed Income Fund into a corresponding investment company
with similar but not identical investment objectives, policies and limitations.
The Board of Trustees believed that none of the other alternatives could be
reasonably expected to provide an adequate solution to the asset size and growth
problems noted above. Further, the Board of Trustees felt that with the proper
selection of a reorganization candidate, certain other advantages, as identified
below, could be realized. As a result of the Board of Trustees' determination to
pursue the reorganization alternative, the Board of Trustees and the officers of
the Trust sought to identify possible reorganization candidates for the Fixed
Income Fund. This led the Board of Trustees to examine and evaluate the
possibility of a reorganization into the Bond Portfolio of PNC Fund.
At a regularly scheduled meeting of the Board held on January 27, 1995, the
Board of Trustees of the Trust considered the proposed Reorganization with
respect to the Fixed Income Fund. During the course of their review and
deliberation, the Trustees evaluated the potential benefits and detriments to
the Fixed Income Fund and its shareholders. The Trustees received from PFPC
written materials containing relevant information about the Bond Portfolio and
the proposed Reorganization, including fee structure and expense ratio
information, and yield and performance data.
The Board of Trustees of the Trust considered the anticipated expenses and
charges of the Bond Portfolio that would be borne directly and indirectly by the
shareholders of the Fixed Income Fund after the Reorganization. The Board of
Trustees evaluated the current actual and contractual expense levels of the Bond
Portfolio and compared such expense levels to the current actual and contractual
expense levels of the Fixed Income Fund. The Board of Trustees considered the
fact that the current actual total operating expenses of the Bond Portfolio are
higher than those of the Fixed Income Fund. The Board of Trustees also noted
that on a contractual basis, the advisory fee payable by the Bond Portfolio is
higher than that payable by the Fixed Income Fund. Although the maximum combined
administration fees for both the Fixed Income Fund and the Bond Portfolio are
the same (.20% (annualized) of average daily net assets), the Board of Trustees
noted that the combined administration fees for the Bond Portfolio will decrease
according to a schedule of break-points if and when specified asset levels are
attained. In addition, the Board of Trustees recognized that the other operating
expenses of the Fixed Income Fund are substantially higher than those borne by
the Bond Portfolio, and that the total operating expenses of the Fixed Income
Fund would be higher than those of the Bond Portfolio in the absence of
voluntary fee waivers and expense reimbursements (in the case of the Fixed
Income Fund) by PIMC, PFPC and PDI. The Board of Trustees of the Trust noted
that the Trust and PNC Fund share the same investment adviser, fund counsel and
most of their principal service providers. The Board of Trustees also took into
consideration the fact that the existing fee waivers with respect to the Bond
Portfolio are voluntary and can be terminated at any time without Board approval
or prior notice to shareholders. The Board of Trustees recognized that any such
termination could result in higher expense ratios for the Bond Portfolio in the
future.
The Board of Trustees also considered the additional efficiencies and
benefits for shareholders that are expected to result from the Reorganization of
the Fixed Income Fund into the Bond Portfolio. These benefits include potential
access to the many other investment portfolios offered by PNC Fund;
15
<PAGE> 17
potential asset growth with resulting economies of scale, such as lower per
share expenses (as calculated before fee waivers and expense reimbursements);
greater portfolio trading efficiencies, such as quantity discounts; and
potentially broader portfolio diversification.
The Board of Trustees considered the compatibility of the Bond Portfolio's
investment objective, policies and limitations with those of the Fixed Income
Fund. In addition, in reviewing the compatibility of the investment objective
and policies of the Bond Portfolio, the Board of Trustees specifically
considered the potential and actual additional risks that shareholders of the
Trust would be subject to as shareholders of the Bond Portfolio, which has a
broader range of permissible investments than the Fixed Income Fund. The Board
of Trustees also considered those provisions of the Reorganization Agreement
relating to the price of shares to be exchanged. The Trustees also noted that
the Trust would be provided with an opinion of counsel with respect to the
tax-free treatment of the Reorganization for the Fixed Income Fund and its
shareholders.
The Board of Trustees noted that the purchase and redemption services
offered by PNC Fund were comparable to those currently offered by the Trust and
that the shareholder services offered by PNC Fund to holders of Service Shares
and Institutional Shares of the Bond Portfolio were similar to those currently
offered by the Trust to the holders of Fixed Income Dollar Shares and Fixed
Income Shares, respectively, of the Fixed Income Fund. The Board of Trustees
noted further that no sales charges would be imposed on any Service Shares or
Institutional Shares of the Bond Portfolio acquired by holders of Fixed Income
Dollar Shares or Fixed Income Shares, respectively, of the Fixed Income Fund in
connection with the Reorganization, and that no sales charge is currently
imposed on purchases of Service Shares and Institutional Shares of the Bond
Portfolio.
Lastly, the Board of Trustees considered the undertaking of PIMC to hold
the Trust and PNC Fund harmless against any losses relating to liabilities of
the Bond Portfolio and the Fixed Income Fund, respectively, that are not
reflected in such respective portfolios' net asset value at the Effective Time
of the Reorganization.
Based upon their evaluation of the relevant information presented to them,
and in light of their fiduciary duties under Federal and state law, the Trust's
Board of Trustees unanimously determined that the proposed Reorganization was in
the best interests of the Trust and the Fixed Income Fund and its shareholders
and recommended the approval of the Reorganization Agreement by the Trust's
shareholders at the Meeting.
Similarly, at a meeting also held on January 27, 1995, the Board of
Trustees of PNC Fund considered the proposed Reorganization with respect to the
Bond Portfolio. Based upon its evaluation of the relevant information provided
to it, and in light of its fiduciary duties under Federal and state law, the
Board of Trustees unanimously determined that the proposed Reorganization was in
the best interests of the Bond Portfolio and its shareholders.
CAPITALIZATION. At March 31, 1995, the net asset value of all classes of
outstanding shares of the Bond Portfolio and the Fixed Income Fund was
$137,452,039 and $12,552,688, respectively. Because the Trust's Fixed Income
Fund will be combined in the Reorganization with PNC Fund's Bond Portfolio, the
total capitalization of the Bond Portfolio after the Reorganization is expected
to be greater than the current capitalization of the Fixed Income Fund. The
following table sets forth as of December 31, 1994: (i) the capitalization of
each class of shares of the Fixed Income Fund; (ii) the capitalization of the
Service and Institutional Classes of shares of the Bond Portfolio; and (iii) the
pro forma capitalization of the Service and Institutional Classes of shares of
the Bond Portfolio as adjusted to give effect to the Reorganization. If
consummated, the capitalization of the Service and Institutional Classes of
Shares of the Bond Portfolio is likely to be different at the Effective Time of
the Reorganization as a
16
<PAGE> 18
result of daily share purchase and redemption activity in the Fixed Income Fund
and the Bond Portfolio.
<TABLE>
<CAPTION>
PRO FORMA
TRUST PNC FUND COMBINED
----------- ----------- -----------
<S> <C> <C> <C>
FIXED INCOME FUND (FIXED INCOME DOLLAR SHARES)/BOND
PORTFOLIO (SERVICE SHARES)
Total Net Assets........................................ $ 474,570 $34,363,430 $34,838,000
----------- ----------- -----------
Shares Outstanding...................................... 50,634 3,859,638 3,912,960
----------- ----------- -----------
Net Asset Value Per Share............................... $ 9.37 $ 8.90 $ 8.90
----------- ----------- -----------
FIXED INCOME FUND (FIXED INCOME SHARES)/BOND PORTFOLIO
(INSTITUTIONAL SHARES)
Total Net Assets........................................ $13,346,824 $74,089,569 $87,436,393
----------- ----------- -----------
Shares Outstanding...................................... 1,424,033 8,322,586 9,822,229
----------- ----------- -----------
Net Asset Value Per Share............................... $ 9.37 $ 8.90 $ 8.90
----------- ----------- -----------
</TABLE>
FEDERAL INCOME TAX CONSEQUENCES. Consummation of the Reorganization is subject
to the condition that the Trust and PNC Fund receive an opinion from Drinker
Biddle & Reath, counsel to both the Trust and PNC Fund, that for Federal income
tax purposes (i) the transfer of all of the assets and known liabilities of the
Fixed Income Fund to the Bond Portfolio in exchange for Service Shares and
Institutional Shares of the Bond Portfolio and the distribution to holders of
Fixed Income Dollar Shares and Fixed Income Shares of the Fixed Income Fund of
the Service Shares and Institutional Shares, respectively, of the Bond Portfolio
so received, as described in the Reorganization Agreement, will constitute a
reorganization within the meaning of Section 368(a)(1)(C) or Section
368(a)(1)(D) of the Internal Revenue Code of 1986, as amended; (ii) no gain or
loss will be recognized by the Fixed Income Fund as a result of such
transactions; (iii) no gain or loss will be recognized by the Bond Portfolio as
a result of such transactions; (iv) no gain or loss will be recognized by the
holders of Fixed Income Dollar Shares or Fixed Income Shares on the distribution
to them by the Fixed Income Fund of Service Shares and Institutional Shares,
respectively, of the Bond Portfolio in exchange for their shares of the Fixed
Income Fund; (v) the basis of the Bond Portfolio shares received by a
shareholder of the Fixed Income Fund will be the same as the basis of the
shareholder's Fixed Income Fund shares immediately before the Reorganization;
(vi) the basis to the Bond Portfolio of the assets of the Fixed Income Fund
received pursuant to such transactions will be the same as the basis of the
assets in the hands of the Fixed Income Fund immediately before such
transactions; (vii) a shareholder's holding period for the Bond Portfolio shares
will be determined by including the period for which the shareholder held the
Fixed Income Fund shares exchanged therefor, provided that the shareholder held
such Fixed Income Fund shares as a capital asset; and (viii) the Bond
Portfolio's holding period with respect to the assets received in the
Reorganization will include the period for which such assets were held by the
Fixed Income Fund.
PNC Fund and the Trust have not sought a tax ruling from the Internal
Revenue Service ("IRS"). The opinion of counsel is not binding on the IRS and
does not preclude the IRS from adopting a contrary position. Shareholders should
consult their own tax advisers concerning the potential tax consequences to
them, including state and local income tax consequences.
COMPARISON OF THE TRUST AND PNC FUND
As noted above, the Fixed Income Fund and the Bond Portfolio share the
identical investment objective: to seek a high level of current income
consistent with prudent investment risk. The investment policies and limitations
of the Fixed Income Fund and the Bond Portfolio are similar, but not identical.
The following discussion summarizes some of the more significant similarities
and differences in the investment policies and limitations of the Fixed Income
Fund and the Bond Portfolio.
17
<PAGE> 19
INVESTMENT POLICIES. The Bond Portfolio may invest in mortgage-related
securities. The investment policies for the Fixed Income Portfolio do not
specifically provide for such investments. Mortgage-related securities which may
be purchased by the Bond Portfolio are represented by pools of mortgage loans
assembled for sale to investors by various governmental agencies such as the
Government National Mortgage Association ("GNMA") and government-related
organizations such as the Federal National Mortgage Association ("FNMA") and the
Federal Home Loan Mortgage Corporation ("FHLMC"), as well as by private issuers
such as commercial banks, savings and loan institutions, mortgage bankers and
private mortgage insurance companies.
Mortgage-related securities acquired by the Bond Portfolio may also include
CMOs issued by FNMA, FHLMC or other U.S. Government agencies or
instrumentalities, as well as by private issuers. CMOs provide an investor with
a specified interest in the cash flow of a pool of underlying mortgages or other
mortgage-related securities. Issuers of CMOs frequently elect to be taxed as
pass-through entities known as real estate mortgage investment conduits
("REMICs"). CMOs are issued in multiple classes, each with a specified fixed or
floating interest rate and a final distribution date. The relative payment
rights of the various CMO classes may be structured in many ways. Generally,
payments of principal are applied to the CMO classes in the order of their
respective stated maturities, so that no principal payments will be made on a
CMO class until all other classes having an earlier stated maturity date are
paid in full. Sometimes, however, CMO classes are "parallel pay," i.e. payments
of principal are made to two or more classes concurrently.
The Bond Portfolio may invest in asset-backed securities. Investments in
asset-backed securities are not expressly permitted under the Fixed Income
Fund's investment policies. Asset-backed securities represent a participation
in, or are secured by and payable from, a stream of payments generated by
particular assets, most often a pool of assets similar to one another. Assets
generating such payments will consist of such instruments as motor vehicle
installment purchase obligations, credit card receivables and home equity loans.
The Bond Portfolio may also invest in other types of asset-backed securities
that may be available in the future. Payment of principal and interest may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit issued by a financial institution unaffiliated with entities issuing the
securities. The estimated life of an asset-backed security varies with the
prepayment experience with respect to the underlying debt instruments. The rate
of such prepayments, and hence the life of the asset-backed security, will be
primarily a function of current market rates, although other economic and
demographic factors will be involved.
The Bond Portfolio may write covered call options, buy put options, buy
call options and write put options. Additionally, the Bond Portfolio may invest
in futures contracts and options on futures contracts (index futures contracts
or interest rate futures contracts, as applicable) for hedging purposes or for
other purposes so long as aggregate initial margins and premiums required for
non-hedging positions do not exceed 5% of its net assets, after taking into
account any unrealized profits and losses on any such contracts it has entered
into. The investment policies for the Fixed Income Fund do not provide for
investments in options or futures.
The Bond Portfolio may also hold participation certificates in leases,
installment purchase contracts and conditional sales contracts (collectively,
"lease obligations"). The Fixed Income Fund is not expressly authorized under
its investment policies to invest in lease obligations.
The Bond Portfolio may invest substantially in obligations of foreign banks
or foreign branches of U.S. banks where the adviser deems the instrument to
present minimal credit risks. These investments are not specifically permitted
under the investment policies of the Fixed Income Fund. Investments in
obligations of foreign banks or foreign branches of U.S. banks may include
Eurodollar Certificates of Deposit ("ECDs") which are U.S. dollar-denominated
certificates of deposit issued by foreign and domestic banks located outside the
United States; Eurodollar Time Deposits ("ETDs") which are U.S.
dollar-denominated deposits in a foreign branch of a U.S. bank or a foreign
bank; Canadian Time Deposits ("CTDs") which are essentially the same as ETDs,
except they are issued by Canadian offices of major Canadian banks; and Yankee
Certificates of Deposit ("Yankee CDs") which are U.S. dollar-
18
<PAGE> 20
denominated certificates of deposit issued by a U.S. branch of a foreign bank
and held in the United States.
The Bond Portfolio's investment policies provide for investments in
floating rate instruments. These instruments may include variable amount master
demand notes that permit the indebtedness thereunder to vary in addition to
providing for periodic adjustments in the interest rate. Issuers of floating
rate instruments must satisfy the credit quality criteria set forth above for
the Bond Portfolio and will be determined to present minimal credit risks by the
sub-adviser. The Fixed Income Fund's investment policies do not specifically
contemplate investments in floating rate instruments.
Certain other policies and investment techniques utilized by the Bond
Portfolio differ from those permitted under the investment policies of the Fixed
Income Fund. For example, the Bond Portfolio may borrow funds and utilize
leverage (including through reverse repurchase agreements and dollar rolls) in
amounts not exceeding 33 1/3% of its total assets (including the amount
borrowed) and under current market conditions intends to borrow or obtain
equivalent leverage up to such amount. The Bond Portfolio may also borrow up to
an additional 5% of its total assets for temporary purposes without regard to
the foregoing limitation. By contrast, the Fixed Income Fund may only borrow in
the aggregate up to 10% of its total assets, and is not specifically authorized
to utilize leverage through the use of dollar rolls.
To take advantage of attractive financing opportunities in the mortgage
market and to enhance current income, the Bond Portfolio may enter into dollar
roll transactions. The investment policies for the Fixed Income Fund do not
include the use of dollar roll transactions. A dollar roll transaction, which is
considered a borrowing by the Bond Portfolio, involves a sale by the Bond
Portfolio of a mortgage-backed or other security to a financial institution,
such as a bank or broker/dealer, concurrently with an agreement by the Bond
Portfolio to repurchase a similar security from the institution at a later date
at an agreed upon price. The securities that are repurchased will bear the same
interest rate and stated maturity as those sold, but pools of mortgages
collateralizing such securities may have different prepayment histories than
those sold, which may affect the duration of such securities. During the period
between the sale and repurchase, the Bond Portfolio will not be entitled to
receive interest and principal payments on the securities sold. Proceeds of the
sale will be invested in additional instruments for the Bond Portfolio, and the
income from these investments will generate income for the Bond Portfolio. If
such income does not exceed the income, capital appreciation and gain or loss
that would have been realized on the securities sold as part of the dollar roll,
the use of this technique will diminish the investment performance of the Bond
Portfolio compared with what such performance would have been without the use of
dollar rolls.
To increase income on its investments, the Bond Portfolio may lend its
portfolio securities with an aggregate value of up to 30% of its total assets to
broker/dealers and other institutional investors pursuant to agreements
requiring that the loans be continuously secured by collateral equal at all
times in value to at least the market value of the securities loaned. Collateral
for such loans may include cash, securities of the U.S. Government or its
agencies or instrumentalities or an irrevocable letter of credit issued by a
bank which is deemed creditworthy by the adviser or sub-adviser. The Fixed
Income Fund may not engage in securities lending.
The Bond Portfolio may purchase or sell securities on a "forward
commitment" basis. These transactions involve a commitment by the Bond Portfolio
to purchase or sell particular securities with payment and delivery taking place
at a future date (perhaps one or two months later), and permit the Bond
Portfolio to lock in a price or yield on a security it owns or intends to
purchase, regardless of future changes in interest rates. By contrast, the Fixed
Income Fund may not purchase or sell securities on a forward commitment basis.
The Bond Portfolio's forward commitments are not expected to exceed 25% of the
value of its total assets absent unusual market conditions. The Bond Portfolio
does not intend to engage in forward commitments for speculative purposes but
only in furtherance of its investment objective.
19
<PAGE> 21
There are also noteworthy differences between the quality and maturity
parameters within which the Fixed Income Fund and the Bond Portfolio must
operate. As noted above, the Bond Portfolio may invest in long-term debt
securities rated in the top four rating categories by Moody's or S&P, and may
purchase commercial paper rated "Prime-2" or better by Moody's or "A-2" and
better by S&P. By contrast, the Fixed Income Fund must limit its investments in
long-term debt to instruments rated in the top three rating categories by
Moody's and S&P, and may not purchase commercial paper rated below "Prime-1" by
Moody's or "A-1" by S&P.
Lastly, the Bond Portfolio may invest up to 15% of its net assets in
illiquid securities, whereas the Fixed Income Fund must limit such investments
to 10% of its net assets.
INVESTMENT LIMITATIONS. Neither the Bond Portfolio nor the Fixed Income Fund
may change its fundamental investment limitations without the affirmative vote
of the holders of a majority of its outstanding shares (as defined in the 1940
Act). The fundamental investment limitations of the Bond Portfolio and the Fixed
Income Fund are similar, but not identical.
The Fixed Income Fund and the Bond Portfolio are both "diversified"
investment portfolios and, therefore, have a fundamental policy limiting
investments in securities of any one issuer, other than securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities (and, with
respect to the Bond Portfolio, certificates of deposit for any such securities)
to 5% of the value of their respective total assets. The Fixed Income Fund must
limit its investments in the securities of any one issuer to 10% of such
issuer's outstanding securities or outstanding voting securities. The Bond
Portfolio may not purchase securities of any one issuer if more than 10% of such
issuer's outstanding voting securities would be owned by the Bond Portfolio and
all other investment portfolios of PNC Fund in the aggregate. However, the Fixed
Income Fund and the Bond Portfolio may invest up to 25% of the value of their
respective total assets without regard to their respective investment
limitations described in this paragraph.
Neither the Fixed Income Fund nor the Bond Portfolio may purchase any
securities which would cause 25% or more of the value of its total assets at the
time of purchase to be invested in the securities of one or more issuers
conducting their principal business activities in the same industry. For the
Fixed Income Fund, this limitation does not apply to investments in U.S.
Treasury Bills or other obligations issued or guaranteed by the U.S. Government,
its agencies and instrumentalities. For the Bond Portfolio, this investment
limitation does not apply to instruments issued or guaranteed by the United
States, any state, any territory or possession of the United States, the
District of Columbia or any of their authorities, agencies, instrumentalities or
political subdivisions, or to repurchase agreements secured by such instruments.
Both the Fixed Income Fund and the Bond Portfolio are subject to
limitations on borrowing, but the Bond Portfolio may generally borrow to a
greater extent. The Fixed Income Fund may not borrow money, except from banks
for temporary purposes and then in amounts not in excess of 10% of the value of
its total assets at the time of such borrowing. The Fixed Income Fund is
prohibited from mortgaging, pledging or hypothecating any 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 its total assets at the time
of such borrowing. Similarly, the Bond Portfolio may not borrow money or issue
senior securities, except that it may borrow from banks and enter into reverse
repurchase agreements for temporary purposes in amounts up to one-third of the
value of its total assets at the time of such borrowing. The Bond Portfolio also
may not mortgage, pledge or hypothecate any assets except in connection with
such borrowing and then in amounts not in excess of one-third of the value of
its total assets at the time of such borrowing. The Fixed Income Fund may not
purchase securities while borrowings in excess of 5% of its net assets are
outstanding. Similarly, the Bond Portfolio may not purchase securities while
borrowings in excess of 5% of its total assets are outstanding.
Both the Fixed Income Fund and the Bond Portfolio may not purchase or sell
real estate, except that both the Fixed Income Fund and the Bond Portfolio may
invest in securities of issuers which deal in real estate and may purchase
securities which are secured by interests in real estate.
20
<PAGE> 22
Neither the Fixed Income Fund nor the Bond Portfolio may write or sell put
options, call options, straddles, spreads or any combination thereof, except
that the Bond Portfolio may engage in these investment practices for
transactions in options on securities, securities indices, futures contracts and
options on futures contracts.
Both the Fixed Income Fund and the Bond Portfolio are prohibited from the
following activities: making investments for the purpose of exercising control
or management; acting as an underwriter of securities, except insofar as the
purchase of obligations directly from the issuer thereof or the disposition of
securities may be deemed to be underwriting; and acquiring any other investment
company or investment company security except in connection with a merger,
consolidation, reorganization or acquisition of assets or where otherwise
permitted by the 1940 Act.
Neither the Fixed Income Fund nor the Bond Portfolio may make loans, except
that each may purchase or hold debt instruments and may enter into repurchase
agreements in accordance with their respective investment policies. In addition,
the Bond Portfolio is specifically authorized to engage in securities lending.
Neither the Fixed Income Fund nor the Bond Portfolio may purchase or sell
commodity contracts (and, in the case of the Fixed Income Fund, commodities), or
invest in oil, gas or mineral exploration or development programs, except that
the Bond Portfolio may purchase securities of companies engaging in whole or in
part in such activities and may enter into futures contracts and related
options. Finally, neither the Fixed Income Fund nor the Bond Portfolio may
purchase securities on margin, make short sales of securities or maintain a
short position, except that: i) the Bond Portfolio may invest in futures
contracts and related options and may sell securities short against the box, and
ii) the Fixed Income Fund may obtain such short-term credit as may be necessary
for the clearance of purchases and sales of portfolio shares.
For more information on the investment policies and limitations of the
Fixed Income Fund and the Bond Portfolio, see "Summary -- Overview of the Trust
and PNC Fund" and "Summary -- Risk Factors."
PURCHASE AND REDEMPTION INFORMATION, EXCHANGE PRIVILEGES, DISTRIBUTIONS, PRICING
AND ORGANIZATION. Fixed Income Dollar Shares and Fixed Income Shares of the
Trust are offered on a continuous basis by PDI. Shares of the Fixed Income Fund
are sold at the net asset value per share for the Fixed Income Dollar Shares and
the Fixed Income Shares, respectively, next determined after receipt of a
purchase order by PFPC, the Trust's transfer agent. Purchase orders for shares
of the Fixed Income Fund are accepted on days on which both the New York Stock
Exchange and the Federal Reserve Bank of Philadelphia are open for business
("Business Days"). The Trust may in its discretion reject any order for shares.
Payment for Fixed Income Fund shares may be made only in Federal funds or other
funds immediately available to the Trust's custodian. The minimum initial
investment by an institution is $5,000; however, broker-dealers and other
institutional investors may set a higher minimum for their customers. There is
no minimum subsequent investment.
Fixed Income Fund Dollar Shares and Fixed Income Fund Shares of the Trust
are sold without a sales load by the Fixed Income Fund. Institutional investors
purchasing or holding Fixed Income Dollar Shares for their customer accounts may
charge customers fees for cash management and other services provided in
connection with their accounts. An institution purchasing or redeeming Fixed
Income Dollar Shares on behalf of its customers is responsible for transmitting
orders to the Trust's distributor in accordance with its customer agreements.
Shares of the Bond Portfolio are offered on a continuous basis for PNC Fund
by PDI. Shares of the Bond Portfolio are offered at the net asset value per
share for the Service Shares and Institutional Shares, respectively, next
computed after an order is received by PFPC. Shares may be purchased on any
Business Day. PNC Fund may in its discretion reject any order for shares.
Payment for shares of the Bond Portfolio may be made only in Federal funds or
other funds immediately available to PNC
21
<PAGE> 23
Fund's custodian. The minimum initial investment by an institution is $5,000;
however, institutional investors may set a higher minimum for their customers.
There is no minimum subsequent investment.
Service Shares and Institutional Shares of the Bond Portfolio are sold
without a sales load. Service Shares are sold to institutional investors acting
on behalf of their customers which maintain accounts with such institutional
investors. Institutional investors may receive compensation from PNC Fund for
providing various shareholder services and may charge their customer accounts
for services provided in connection with the purchase or redemption of Service
Shares. An institution purchasing or redeeming Service Shares on behalf of its
customers is responsible for transmitting orders to PNC Fund's distributor in
accordance with its account procedures. Institutional Shares are sold to
institutional investors generally.
Shareholders of the Trust may redeem shares of the Fixed Income Fund by
telephone or direct computer access. Shareholders of PNC Fund may redeem shares
of the Bond Portfolio by mail or by telephone. The holders of Fixed Income
Dollar Shares of the Fixed Income Fund and Service Shares of the Bond Portfolio
must redeem their respective shares through the institutional investors with
which they maintain accounts in accordance with the applicable account
procedures.
The Fixed Income Fund's net investment income is declared daily as a
dividend to shareholders of record at the close of business on the day of
declaration. The Fixed Income Fund expects to distribute at least once each year
any net realized short- and long-term capital gains. Shareholders of the Fixed
Income Fund will automatically receive all income dividends and capital gains
distributions in cash, unless the shareholder elects to receive such dividends
and distributions in full and fractional shares of the same class.
The net investment income of the Bond Portfolio is declared monthly as a
dividend to investors who are shareholders of the Bond Portfolio at the close of
business on the day of declaration. Net realized capital gains (including net
short-term capital gains), if any, will be distributed by the Bond Portfolio at
least annually. All distributions are reinvested at net asset value in the form
of additional full and fractional shares of the same class of the Bond Portfolio
unless an investor elects to receive such dividends and distributions in cash.
Valuation of securities held by the Fixed Income Fund is as follows:
portfolio securities for which market quotations are readily available (other
than debt securities with remaining maturities of sixty days or less) are valued
at the mean between the most recent quoted bid and asked prices provided by
investment dealers; unlisted securities for which market quotations are readily
available will be valued at the most recent quoted bid price; other securities
and assets for which market quotations are not readily available, including
restricted securities and other debt obligations purchased in private
transactions, are valued at their fair value in the best judgment of PIMC under
procedures established by, and under the supervision of, the Trust's Board of
Trustees; and debt securities with maturities of sixty days or less are valued
on an amortized cost basis (unless the Board determines that such basis does not
represent fair value at the time).
Valuation of securities held by the Bond Portfolio is as follows:
securities traded on a national securities exchange or on the NASDAQ National
Market System are valued at the last reported sale price that day; securities
traded on a national securities exchange or on the NASDAQ National Market System
for which there were no sales on that day and securities traded on other
over-the-counter markets for which market quotations are readily available are
valued at the mean of the bid and asked prices; an option or futures contract is
valued at the last sales price prior to 4:00 P.M. (Eastern Time), as quoted on
the principal exchange or board of trade on which such option or contract is
traded, or in the absence of a sale, the mean between the last bid and asked
prices prior to 4:00 P.M. (Eastern Time); and securities for which market
quotations are not readily available are valued at fair market value as
determined in good faith by or under the direction of PNC Fund's Board of
Trustees. The amortized cost method of valuation will also be used with respect
to debt obligations with sixty days or less remaining to maturity unless the
investment adviser and/or sub-adviser under the supervision of the Board of
Trustees determines such method does not represent fair value.
22
<PAGE> 24
Valuation of securities of foreign issuers held by the Bond Portfolio is as
follows: to the extent sale prices are available, securities which are traded on
a recognized stock exchange, whether U.S. or foreign, are valued at the latest
sale price on that exchange prior to the time when assets are valued or prior to
the close of regular trading hours on the New York Stock Exchange. In the event
that there are no sales, the mean between the last available bid and asked
prices will be used. If a security is traded on more than one exchange, the
latest sale price on the exchange where the security is primarily traded is
used. An option or futures contract is valued at the last sales price prior to
4:00 P.M. (Eastern Time), as quoted on the principal exchange or board of trade
on which such option or contract is traded, or in the absence of a sale, the
mean between the last bid and asked prices prior to 4:00 P.M. (Eastern Time). In
the event that application of these methods of valuation results in a price for
a security which is deemed not to be representative of the market value of such
security, the security will be valued by, under the direction of or in
accordance with a method specified by the Board of Trustees as reflecting fair
value. The amortized cost method of valuation will be used with respect to debt
obligations with sixty days or less remaining to maturity unless the investment
adviser and/or sub-adviser under the supervision of the Board of Trustees
determines such method does not represent fair value. All other assets and
securities held by the Bond Portfolio (including restricted securities) are
valued at fair value as determined in good faith by the Board of Trustees or by
someone under its direction. Any assets which are denominated in a foreign
currency are translated into U.S. dollars at the prevailing market rates.
The net asset value per share for Fixed Income Dollar Shares and Fixed
Income Shares, respectively, of the Fixed Income Fund and for Service Shares and
Institutional Shares, respectively, of the Bond Portfolio for purposes of
pricing purchase and redemption orders is determined as of 4:00 P.M., Eastern
Time, on each Business Day.
OTHER INFORMATION. PNC Fund and the Trust are registered as open-end management
investment companies under the 1940 Act. Currently, PNC Fund offers twenty-five
investment portfolios and the Trust offers one investment portfolio.
The Trust and PNC Fund are organized as Massachusetts business trusts and
are subject to the provisions of their respective Declarations of Trust and
Codes of Regulation. The attributes of a share of common stock in PNC Fund are
comparable to those of a share of beneficial interest in the Trust. Shares of
both the Bond Portfolio and the Fixed Income Fund are entitled to one vote for
each full share held and fractional votes for fractional shares held; will vote
in the aggregate and not by class except as otherwise required by law or when
class voting is permitted by the respective Board of Trustees; and are entitled
to participate equally in the dividends and distributions that are declared with
respect to the particular investment portfolio and in the net distributable
assets of such portfolio on liquidation. Each Fixed Income Dollar Share and
Fixed Income Share of the Fixed Income Fund is without par value, whereas each
Service Share and each Institutional Share of the Bond Portfolio has a par value
of $.001. In addition, shares of the Bond Portfolio and the Fixed Income Fund
have no pre-emptive rights and only such conversion and exchange rights as the
respective Board of Trustees may grant in its discretion. When issued for
payment as described in their respective Prospectuses, Bond Portfolio shares and
Fixed Income Fund shares are fully paid and non-assessable by such entities
except as required under Massachusetts law. Neither PNC Fund nor the Trust is
required to hold annual meetings for the election of Board members and other
business unless and until such time as less than a majority of the Board members
holding office have been elected by shareholders. Under certain circumstances,
however, shareholders have the right to call a meeting of shareholders to
consider the removal of one or more trustees. To the extent required by law, PNC
Fund and the Trust will assist in shareholder communications in such matters.
The foregoing is only a summary of certain significant attributes of PNC
Fund, the Trust and their shares. Shareholders may obtain copies of the
Declarations of Trust and Codes of Regulation of PNC Fund and the Trust, and of
the Massachusetts General Law, upon written request at the address shown on the
cover page of this Combined Proxy Statement/Prospectus.
23
<PAGE> 25
INFORMATION RELATING TO VOTING MATTERS
GENERAL INFORMATION: This Combined Proxy Statement/Prospectus is being
furnished in connection with the solicitation of proxies by the Trust's Board of
Trustees in connection with the Meeting. It is expected that the solicitation of
proxies will be primarily by mail. Officers and service contractors of the Trust
and PNC Fund may also solicit proxies by telephone, telegraph or personal
interview. The cost of proxy solicitation will be borne by the Trust. Any
shareholder giving a proxy may revoke it at any time before it is exercised by
submitting to the Trust a written notice of revocation or a subsequently
executed proxy or by attending the Meeting and voting in person.
Only shareholders of record at the close of business on May 12, 1995 will
be entitled to vote at the Meeting. On that date there were outstanding and
entitled to be voted 0 Fixed Income Dollar Shares and 1,285,600.29 Fixed Income
Shares of the Fixed Income Fund. Each share or fraction thereof is entitled to
one vote or fraction thereof.
If the accompanying proxy is executed and returned in time for the Meeting,
the shares covered thereby will be voted in accordance with the proxy on all
matters that may properly come before the Meeting or any adjournment thereof.
For information on adjournment of the Meeting, see "Quorum" below.
THE TRUST WILL FURNISH, WITHOUT CHARGE, A COPY OF THE TRUST'S ANNUAL REPORT
TO SHAREHOLDERS DATED JUNE 30, 1994 AND THE TRUST'S SEMI-ANNUAL REPORT TO
SHAREHOLDERS DATED DECEMBER 31, 1994 TO ANY SHAREHOLDER UPON REQUEST. THE
TRUST'S ANNUAL AND SEMI-ANNUAL REPORTS TO SHAREHOLDERS MAY BE OBTAINED FROM THE
TRUST BY CALLING (800) 821-7432.
SHAREHOLDER AND BOARD APPROVALS. The Reorganization Agreement (and the
transactions contemplated thereby) is being submitted for approval at the
Meeting by the holders of a majority of the outstanding Fixed Income Dollar
Shares and Fixed Income Shares of the Fixed Income Fund voting together as a
single class in accordance with the provisions of the Trust's Declaration of
Trust and the requirements of the 1940 Act. The term "majority of the
outstanding shares" of the Fixed Income Fund means the lesser of (a) 67% of the
shares of the Fixed Income Fund present at the Meeting if the holders of more
than 50% of the outstanding shares of the Fixed Income Fund are present in
person or by proxy, or (b) more than 50% of the outstanding shares of the Fixed
Income Fund. In the absence of voting instructions, shares will be voted FOR the
proposal as indicated on each proxy. If a proxy is properly executed and
returned, but marked with an abstention, the shares represented thereby will be
considered to be present at the Meeting for purposes of determining the
existence of a quorum for the transaction of business. Under Massachusetts law,
abstentions will have the same effect as casting a vote against the proposal.
Broker "non-votes" (i.e., proxies from brokers or nominees indicating that such
persons have not received instructions from the beneficial owner or other
persons entitled to vote shares on a particular matter with respect to which the
brokers or nominees do not have discretionary power) will be disregarded for all
purposes.
The vote of the shareholders of the Bond Portfolio is not being solicited
because their approval or consent is not necessary for the Reorganization to be
consummated.
The approval of the Reorganization Agreement by the Boards of the Trust and
PNC Fund is discussed above under "Information Relating to the Proposed
Reorganization -- Board Consideration."
At May 12, 1995, PNC Bank held of record approximately 77% of the
outstanding shares of PNC Fund and may be deemed a controlling person of PNC
Fund under the 1940 Act. PNC Bank is a national bank organized under the laws of
the United States. All of the capital stock of PNC Bank is owned by PNC Bancorp,
Inc., and all of the capital stock of PNC Bancorp, Inc. is owned by PNC Bank
Corp., a publicly held bank holding company.
24
<PAGE> 26
At May 12, 1995, Cohahco First National Bank of S.W. Ohio held of record
45% of the outstanding shares of the Fixed Income Fund. The Trust does not know
whether Cohahco First National Bank is the beneficial owner of the shares held
by it.
At May 12, 1995, the trustees and officers of PNC Fund owned less than 1%
of the outstanding shares of the Bond Portfolio. At May 12, 1995, the trustees
and officers of the Trust, as a group, owned less than 1% of the outstanding
shares of the Fixed Income Fund.
APPRAISAL RIGHTS. Shareholders are not entitled to any rights of share
appraisal under the Trust's Declaration of Trust or under the laws of the
Commonwealth of Massachusetts in connection with the Reorganization. However,
shareholders have the right to redeem from the Trust their Fixed Income Fund
shares at net asset value until the Effective Time of the Reorganization, and
thereafter shareholders may redeem from PNC Fund the Bond Portfolio shares
acquired by them in the Reorganization at net asset value subject to the forward
pricing requirements of Rule 22c-1 under the 1940 Act.
QUORUM. In the event that a quorum is not present at the Meeting, or in the
event that a quorum is present at the Meeting but sufficient votes to approve
the Reorganization Agreement and the transactions contemplated thereby are not
received, the persons named as proxies may propose one or more adjournments of
the Meeting to permit further solicitation of proxies. Any such adjournment will
require the affirmative vote of a majority of those shares affected by the
adjournment that are represented at the Meeting in person or by proxy. If a
quorum is present, the persons named as proxies will vote those proxies which
they are entitled to vote FOR the Reorganization Agreement in favor of such
adjournments, will vote those proxies required to be voted AGAINST such proposal
against any adjournments, and will abstain from voting on such adjournments with
respect to those proxies marked "ABSTAIN". Fixed Income Fund proxies properly
executed and marked with a negative vote or an abstention will be considered to
be present at the Meeting for the purposes of determining the existence of a
quorum for the transaction of business.
ANNUAL MEETINGS. PNC Fund does not presently intend to hold annual meetings of
shareholders for the election of trustees and other business unless and until
such time as less than a majority of the trustees holding office have been
elected by the shareholders, at which time the trustees then in office will call
a shareholders' meeting for the election of trustees. Shareholders have the
right to call a meeting of shareholders to consider the removal of one or more
trustees or for other matters and such meetings will be called when requested in
writing by the holders of record of 10% or more of PNC Fund's outstanding shares
of common stock. To the extent required by law, PNC Fund will assist in
shareholder communications on such matters.
ADDITIONAL INFORMATION ABOUT PNC FUND
Information about PNC Fund and the Bond Portfolio is included in the
Prospectus accompanying this Combined Proxy Statement/Prospectus, which is
incorporated by reference herein. Additional information about PNC Fund and the
Bond Portfolio is included in its Statement of Additional Information dated
January 30, 1995, which has been filed with the SEC and is incorporated by
reference herein. A copy of the Statement of Additional Information may be
obtained without charge by calling 1-800-422-6538. PNC Fund is subject to the
informational requirements of the 1940 Act, as applicable, and, in accordance
with such requirements, files proxy materials, reports and other information
with the SEC. These materials can be inspected and copied at the Public
Reference Facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at the offices of PFPC, 400 Bellevue Parkway,
Wilmington, Delaware 19809 and at the SEC's Regional Offices at 7 World Trade
Center, Suite 1300, New York, New York 10048 and 500 W. Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such materials can also be obtained
from the Public Reference Branch, Office of Consumer Affairs and Information
Services, Securities and Exchange Commission, Washington, D.C. 20549, at
prescribed rates.
25
<PAGE> 27
The current trustees and officers of PNC Fund will continue as trustees and
officers of PNC Fund following the Reorganization. The name and address of each
trustee and officer as well as information concerning his principal occupations
during the last five years are as follows:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION DURING PAST FIVE YEARS
- -------------------------------- ---------------------- -------------------------------------
<S> <C> <C>
Philip E. Coldwell.............. Trustee Economic Consultant; Chairman,
Coldwell Financial Consultants Coldwell Financial Consultants;
3330 Southwestern Blvd. Director, Maxus Energy Corporation
Dallas, TX 75225 (energy products) from 1989 to 1993;
Director or Trustee of Temporary
Investment Fund, Inc., Trust for
Federal Securities, Municipal Fund
for Temporary Investment and
Portfolios for Diversified
Investment.
Robert R. Fortune............... Trustee Financial Consultant; Chairman,
2920 Ritter Lane President and Chief Executive
Allentown, PA 18104 Officer, Associated Electric & Gas
Insurance Services Limited from 1984
to 1993; Member of the Financial
Executives Institute and American
Institute of Certified Public
Accountants; Director, Trustee or
Managing General Partner of a number
of investment companies advised by
PIMC; Director, Prudential Utility
Fund, Inc., Prudential Structured
Maturity Fund, Inc. and Prudential
IncomeVertible Fund, Inc.
Rodney D. Johnson............... Trustee President, Fairmount Capital
Fairmount Capital Advisors, Inc. Advisors, Inc. (financial advisers)
1435 Walnut St. since 1987; Treasurer, North
Philadelphia, PA 19102 Philadelphia Health System (formerly
Girard Medical Center) from 1988 to
1992; Member, Board of Education,
School District of Philadelphia, 1983
to 1988; Treasurer, Cascade Aphasia
Center, 1984 to 1988; Director or
Trustee of Temporary Investment Fund,
Inc., Trust for Federal Securities,
Municipal Fund for Temporary
Investment, Portfolios for
Diversified Investment, Municipal
Fund for California Investors, Inc.
and Municipal Fund for New York
Investors, Inc.
G. Willing Pepper(1)............ Chairman of the Board Retired; Chairman of the Board,
128 Springton Lake Road and President Specialty Composites Corporation
Media, PA 19063 until May 1984; Chairman of the
Board, The Institute for Cancer
Research until 1979; Director,
Philadelphia National Bank until
1978; President, Scott Paper Company
from 1971 to 1973; Director, Marmon
Group, Inc. until April 1986;
Director, Trustee or Managing General
Partner of a number of investment
companies advised by PIMC.
- ---------------
(1) This trustee may be deemed an "interested person" of the Fund as defined in the 1940 Act.
</TABLE>
26
<PAGE> 28
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION DURING PAST FIVE YEARS
- -------------------------------- ---------------------- -------------------------------------
<S> <C> <C>
Anthony M. Santomero............ Trustee Deputy Dean from 1990 to 1994,
310 Keithwood Road Richard K. Mellon Professor of
Wynnewood, PA 19096 Finance since April 1984, and Dean's
Advisory Council Member since July
1984, The Wharton School, University
of Pennsylvania; Associate Editor,
Journal of Banking and Finance since
June 1978; Associate Editor, Journal
of Economics and Business since
October 1979; Associate Editor,
Journal of Money, Credit and Banking
since January 1980; Research
Associate, New York University Center
for Japan-U.S. Business and Economic
Studies since July 1989; Editorial
Advisory Board, Open Economics Review
since November 1990; Director, The
Zweig Fund and The Zweig Total Return
Fund; Director or Trustee of
Temporary Investment Fund, Inc.,
Trust for Federal Securities,
Municipal Fund for Temporary
Investment, Portfolios for
Diversified Investment and Municipal
Fund for California Investors, Inc.
David R. Wilmerding, Jr......... Vice-Chairman of the President, Gates, Wilmerding, Carper
One Aldwyn Center Board & Rawlings, Inc. (investment
Villanova, PA 19085 advisers) since February 1989;
Director, Beaver Management
Corporation; Until September 1988,
President, Treasurer and Trustee, The
Mutual Assurance Company; Until
September 1988, Chairman, President,
Treasurer and Director, The Green
Tree Insurance Company (a
wholly-owned subsidiary of The Mutual
Assurance Company); Until September
1988, Director, Keystone State Life
Insurance Company; Director, Trustee
or Managing General Partner of a
number of investment companies
advised by PIMC.
Edward J. Roach................. Treasurer and Certified Public Accountant; Partner
400 Bellevue Parkway Vice-President of the accounting firm of Main
Suite 100 Hurdman until 1981; Vice Chairman of
Wilmington, DE 19809 the Board, Fox Chase Cancer Center;
Trustee Emeritus, Pennsylvania School
for the Deaf; Trustee Emeritus,
Immaculata College; President, Vice
President and/or Treasurer of a
number of investment companies
advised by PIMC.
Morgan R. Jones................. Secretary Partner in the law firm of Drinker
Philadelphia National Biddle & Reath, Philadelphia,
Bank Building Pennsylvania.
1345 Chestnut Street
Philadelphia, PA 19107-3496
</TABLE>
27
<PAGE> 29
Information included in this Combined Proxy Statement/Prospectus concerning PNC
Fund and the Bond Portfolio was provided by PNC Fund and PIMC.
ADDITIONAL INFORMATION ABOUT THE TRUST
Information about the Trust is incorporated herein by reference from its
Prospectus and Statement of Additional Information dated October 28, 1994,
copies of which may be obtained without charge by writing or calling the Trust
at the address and telephone number shown on the cover page of this Combined
Proxy Statement/Prospectus. The Fixed Income Fund is subject to the
informational requirements of the 1940 Act, as applicable, and, in accordance
with such requirements, files proxy materials, reports and other information
with the SEC. These materials can be inspected and copied at the Public
Reference Facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at the offices of PFPC, 400 Bellevue Parkway,
Wilmington, Delaware 19809 and at the SEC's Regional Offices at 7 World Trade
Center, Suite 1300, New York, New York 10048 and 500 W. Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such materials can also be obtained
from the Public Reference Branch, Office of Consumer Affairs and Information
Services, Securities and Exchange Commission, Washington, D.C. 20549, at
prescribed rates.
With the exception of the Secretary of the Trust, the current trustees and
officers of the Trust are the same as those listed above for PNC Fund. The name
and address of the Secretary of the Trust, as well as information concerning his
principal occupation during the last five years, are as follows:
<TABLE>
<CAPTION>
POSITION
WITH PRINCIPAL OCCUPATION
NAME AND ADDRESS TRUST DURING PAST FIVE YEARS
- -------------------------------------------- ---------- -------------------------------------
<S> <C> <C>
W. Bruce McConnel, III...................... Secretary Partner in the law firm of Drinker
Philadelphia National Bank Building Biddle & Reath, Philadelphia,
1345 Chestnut Street Pennsylvania.
Philadelphia, PA 19107-3496
</TABLE>
The Trust has an Executive Committee comprised of Messrs. Fortune, Pepper
and Wilmerding. During intervals between Board meetings, the Executive Committee
may exercise the authority of the Board of Trustees in the management of the
Trust's business to the extent permitted by law.
Below is financial information about the Fixed Income Fund for the
six-month period ended December 31, 1994. The financial information is based on
a single Fixed Income Dollar Share and a single Fixed Income Share outstanding
throughout such period. This information is derived from the Fixed Income Fund's
unaudited financial statements for such period. This data should be read in
conjunction with the financial statements and related notes which are included
in the Statement of Additional Information related to this Combined Proxy
Statement/Prospectus.
28
<PAGE> 30
FIXED INCOME FUND
FIXED INCOME SHARES
PORTFOLIOS FOR DIVERSIFIED INVESTMENT
FINANCIAL HIGHLIGHTS
The table below sets forth selected financial data for a share of capital
stock outstanding throughout the period presented.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
DECEMBER 31,
1994
(UNAUDITED)
------------
<S> <C>
Net asset value, beginning...................................... $ 9.57
------------
Income from investment operations:
Net investment income........................................... 0.28
Net gain (loss) on securities (realized and unrealized)......... (0.20)
------------
Total income (loss) from investment operations............. 0.08
------------
Less distributions:
Dividends from net investment income............................ (0.28)
Distributions from capital gains................................ 0.00
Distributions in excess of capital gains........................ 0.00
------------
Total distributions........................................ (0.28)
------------
Net asset value, end of period.................................. $ 9.37
==========
Total return.................................................... (3.52%)(a)
Ratios/supplemental data:
Net assets, end of period (in 000's)............................ $ 13,347
Ratio of expenses to average daily net assets................... 0.40%(a)(b)
Ratio of net investment income to average daily net assets...... 5.82%(a)
Portfolio turnover rate......................................... 65%(a)
</TABLE>
- ---------------
(a) Annualized.
(b) Without the waiver of administrative fees, advisory fees, trustees' fees and
officer's salary and expense reimbursements, the ratios of expenses to
average daily net assets would have been 1.02% (annualized) for the period
ended December 31, 1994.
29
<PAGE> 31
FIXED INCOME FUND
FIXED INCOME DOLLAR SHARES
PORTFOLIOS FOR DIVERSIFIED INVESTMENT
FINANCIAL HIGHLIGHTS
The table below sets forth selected financial data for a share of capital
stock outstanding throughout the period presented.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
DECEMBER 31,
1994
(UNAUDITED)
------------
<S> <C>
Net asset value, beginning of period............................ $ 9.57
------------
Income from investment operations:
Net investment income........................................... 0.27
Net gain(loss) on securities (realized and unrealized).......... (0.20)
------------
Total income from investment operations.................... 0.07
------------
Less distributions:
Dividends from net investment income............................ (0.27)
Distributions from capital gains................................ 0.00
Distributions in excess of capital gains........................ 0.00
------------
Total distributions........................................ (0.27)
------------
Net asset value, end of period.................................. $ 9.37
==========
Total return.................................................... (3.77%)(a)
Ratios/supplemental data:
Net assets, end of period (in 000's)............................ $ 474
Ratio of expenses to average daily net assets................... 0.65%(a)(b)
Ratios of net investment income to average daily net assets..... 5.57%(a)
Portfolio turnover rate......................................... 65%(a)
</TABLE>
- ---------------
(a) Annualized.
(b) Without the waiver of administrative fees, advisory fees, trustees' fees and
officer's salary and expense reimbursements, the ratios of expenses to
average daily net assets would have been 1.27%(annualized) for the period
ended December 31, 1994.
30
<PAGE> 32
Information included in this Combined Proxy Statement/Prospectus concerning
the Trust and the Fixed Income Fund was provided by the Trust and PIMC.
FINANCIAL STATEMENTS
The financial statements and financial highlights of the Bond Portfolio for
the fiscal year ended September 30, 1994 that are included in its Prospectuses
and Statement of Additional Information have been audited by Coopers & Lybrand,
L.L.P., independent accountants, and the financial statements and financial
highlights of the Fixed Income Fund for the fiscal year ended June 30, 1994 that
are included in the Statement of Additional Information related to this Combined
Proxy Statement/Prospectus have been audited by Coopers & Lybrand, L.L.P.,
independent accountants, to the extent indicated in their reports thereon,
incorporated by reference or included in such Prospectuses and Statements of
Additional Information. The financial statements and financial highlights
audited by Coopers & Lybrand, L.L.P. and included in such Prospectuses and
Statements of Additional Information have been included in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing. The financial statements and financial highlights for the Fixed Income
Fund for the six-month period ended December 31, 1994 that are included in the
Statement of Additional Information related to this Combined Proxy
Statement/Prospectus (and with respect to the financial highlights, that are
included in this Combined Proxy Statement/Prospectus) are unaudited.
OTHER BUSINESS
The Board of Trustees of the Trust knows of no other business to be brought
before the Meeting. However, if any other matters come before the Meeting, it is
the intention that proxies which do not contain specific restrictions to the
contrary will be voted on such matters in accordance with the judgment of the
persons named in the enclosed form of proxy.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Trust in writing at the
address on the cover page of this Combined Proxy Statement/Prospectus or by
telephoning 1-800-821-7432.
* * *
SHAREHOLDERS WHO DO NOT EXPECT TO BE PRESENT AT THE MEETING ARE URGED TO
DATE AND SIGN THE ENCLOSED PROXY AND PROMPTLY RETURN IT IN THE ENCLOSED ENVELOPE
WHICH IS ADDRESSED FOR YOUR CONVENIENCE AND NEEDS NO POSTAGE IF MAILED IN THE
UNITED STATES. IN ORDER TO AVOID THE EXPENSE OF FURTHER SOLICITATION, WE ASK
YOUR COOPERATION IN COMPLETING AND RETURNING YOUR PROXY PROMPTLY.
31
<PAGE> 33
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary
Proposed Reorganization............................................................. 3
Reasons for Reorganization.......................................................... 3
Federal Income Tax Consequences..................................................... 4
Overview of the Trust and PNC Fund.................................................. 4
Voting Information.................................................................. 9
Risk Factors........................................................................ 9
Information Relating to the Proposed Reorganization................................... 13
Description of the Reorganization Agreement......................................... 13
Board Consideration................................................................. 14
Capitalization...................................................................... 16
Federal Income Tax Consequences..................................................... 17
Comparison of the Trust and PNC Fund.................................................. 17
Investment Policies................................................................. 18
Investment Limitations.............................................................. 20
Purchase and Redemption Information, Exchange Privileges, Distributions,
Pricing and Organization......................................................... 21
Other Information................................................................... 23
Information Relating to Voting Matters................................................ 24
General Information................................................................. 24
Shareholder and Board Approvals..................................................... 24
Appraisal Rights.................................................................... 25
Quorum.............................................................................. 25
Annual Meetings..................................................................... 25
Additional Information About PNC Fund................................................. 25
Additional Information About the Trust................................................ 28
Financial Statements.................................................................. 31
Other Business........................................................................ 31
Shareholder Inquiries................................................................. 31
Exhibit A: Agreement and Plan of Reorganization....................................... A-1
Exhibit B: Adviser's Investment Review................................................ B-1
</TABLE>
32
<PAGE> 34
EXHIBIT A
AGREEMENT AND PLAN OF
REORGANIZATION
BY AND BETWEEN
PORTFOLIOS FOR DIVERSIFIED INVESTMENT
AND
THE PNC(R) FUND
DATED MAY 12, 1995
<PAGE> 35
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Transfer of Assets of PDI Portfolio................................................... A-2
Liquidating Distributions and Termination of PDI...................................... A-3
Valuation Time........................................................................ A-3
Certain Representations, Warranties and Agreements of PDI............................. A-3
Certain Representations, Warranties and Agreements of PNC............................. A-5
Shareholder Action on Behalf of the PDI Portfolio..................................... A-6
N-14 Registration Statement........................................................... A-7
Effective Time of the Reorganization.................................................. A-7
PNC Conditions........................................................................ A-7
PDI Conditions........................................................................ A-9
Tax Documents......................................................................... A-9
Further Assurances.................................................................... A-9
Termination of Representations and Warranties......................................... A-9
Termination of Agreement.............................................................. A-10
Amendment and Waiver.................................................................. A-10
Governing Law......................................................................... A-10
Successors and Assigns................................................................ A-10
Beneficiaries......................................................................... A-10
PNC Liability......................................................................... A-10
PDI Liability......................................................................... A-10
Notices............................................................................... A-11
Expenses.............................................................................. A-11
Entire Agreement...................................................................... A-11
Counterparts.......................................................................... A-11
Index of Defined Terms................................................................ A-13
</TABLE>
A-1
<PAGE> 36
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of
this twelfth of May, 1995 between Portfolios for Diversified Investment ("PDI"),
a Massachusetts business trust consisting of one investment portfolio, the Fixed
Income Portfolio (the "PDI Portfolio"), and The PNC(R)Fund ("PNC"), a
Massachusetts business trust consisting of 25 investment portfolios, including
the Intermediate-Term Bond Portfolio (the "PNC Portfolio").
WHEREAS, each of PNC and PDI is an open-end management investment company
registered with the Securities and Exchange Commission (the "SEC") under the
Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the parties desire that all of the assets and known liabilities of
the PDI Portfolio be transferred to, and be acquired and assumed by, the PNC
Portfolio, as stated herein, in exchange for Service Class shares and
Institutional Class shares of the PNC Portfolio which shall thereafter be
distributed by PDI to the holders of Fixed Income Dollar Shares and Fixed Income
Shares, respectively, of the PDI Portfolio in connection with the liquidation
and termination of PDI as described in this Agreement (the "Reorganization");
and
WHEREAS, the parties intend that, in connection with the Reorganization,
PDI shall be terminated and deregistered as described in this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth and subject to the terms and conditions thereof, the
parties hereto, intending to be legally bound, agree as follows:
1. TRANSFER OF ASSETS OF PDI PORTFOLIO. At the Effective Time of the
Reorganization, all property of every description, and all interests, rights,
privileges and powers of the PDI Portfolio (such assets are herein referred to
as the "Fund Assets") shall be transferred and conveyed by the PDI Portfolio to
the PNC Portfolio and shall be accepted by the PNC Portfolio, and the PNC
Portfolio shall assume all known liabilities of the PDI Portfolio reflected as
such in the calculation of the PDI Portfolio's net asset value (such liabilities
are herein referred to as the "Fund Liabilities") as more particularly set forth
in the following paragraph, such that at and after the Effective Time of the
Reorganization: (a) all assets of the PDI Portfolio shall become and be the
assets of the PNC Portfolio; and (b) all known liabilities of the PDI Portfolio
reflected as such in the calculation of the PDI Portfolio's net asset value
shall attach to the PNC Portfolio as aforesaid and may thenceforth be enforced
against the PNC Portfolio to the extent as if the same had been incurred by it.
Without limiting the generality of the foregoing, it is understood that the Fund
Assets shall include all property and assets of any nature whatsoever,
including, without limitation, all cash, cash equivalents, securities, claims
and receivables (including dividend and interest receivables) owned by the PDI
Portfolio, and any deferred or prepaid expenses shown as an asset on the PDI
Portfolio's books, at the Effective Time of the Reorganization, and all good
will, all other intangible property and all books and records belonging to the
PDI Portfolio. It is further understood that recourse for the Fund Liabilities
assumed by the PNC Portfolio shall, at and after the Effective Time of the
Reorganization, be limited to the PNC Portfolio.
In exchange for the transfer of the Fund Assets and the assumption of the
Fund Liabilities, PNC shall simultaneously issue at the Effective Time of the
Reorganization to the PDI Portfolio a number of full and fractional shares of
beneficial interest in the PNC Portfolio (to the third decimal place), of the
Service and Institutional Classes ("Service Shares" and "Institutional Shares,"
respectively), having an aggregate net asset value equal to the aggregate net
asset value of the PDI Portfolio, all determined and adjusted as provided in
this Section 1. The portion of the aggregate net asset value of the PDI
Portfolio allocated to Service Shares and Institutional Shares of the PNC
Portfolio, respectively, shall be equal to the ratio of outstanding Fixed Income
Dollar Shares to outstanding Fixed Income Shares of the PDI Portfolio at the
Effective Time of the Reorganization. Service Shares and Institutional Shares of
the PNC Portfolio shall be issued at their respective net asset values pro rata
to the holders of the Fixed Income Dollar Shares and the Fixed Income Shares,
respectively, of the PDI Portfolio.
A-2
<PAGE> 37
The net asset value of Service Shares and Institutional Shares of the PNC
Portfolio and the net asset value of the PDI Portfolio shall be determined as of
the Valuation Time specified in Section 3. The net asset value of Service Shares
and Institutional Shares of the PNC Portfolio shall be computed in the manner
set forth in the PNC Portfolio's then current prospectuses under the Securities
Act of 1933, as amended (the "1933 Act"). In determining the value of the
securities transferred by the PDI Portfolio to the PNC Portfolio, each security
shall be priced in accordance with the policies and procedures of PNC as
described in its then current prospectus for the Intermediate-Term Bond
Portfolio. For such purposes, price quotations and the security characteristics
relating to establishing such quotations shall be determined by PNC, provided
that such determination shall be subject to the approval of PDI.
2. LIQUIDATING DISTRIBUTIONS AND TERMINATION OF PDI. At the Effective Time
of the Reorganization, the PDI Portfolio shall distribute in complete
liquidation: (i) pro rata to the recordholders of Fixed Income Dollar Shares at
the Effective Time of the Reorganization the Service Shares of the PNC Portfolio
received by the PDI Portfolio pursuant to Section 1; and (ii) pro rata to the
recordholders of Fixed Income Shares at the Effective Time of the Reorganization
the Institutional Shares of the PNC Portfolio received by the PDI Portfolio
pursuant to Section 1. In addition, each shareholder of record of the PDI
Portfolio shall have the right to receive any unpaid dividends or other
distributions which were declared before the Effective Time of the
Reorganization with respect to the shares of the PDI Portfolio that are held by
the shareholder at the Effective Time of the Reorganization. In accordance with
instructions it receives from PDI, PNC shall record on its books the ownership
of the Service Shares and Institutional Shares of the PNC Portfolio by the
recordholders of the Fixed Income Dollar Shares and the Fixed Income Shares,
respectively, of the PDI Portfolio. No redemption or repurchase of any PNC
Portfolio shares credited to former PDI shareholders in respect to the PDI
Portfolio shares represented by unsurrendered share certificates shall be
permitted until such certificates have been surrendered to PNC's transfer agent
for cancellation. All of the issued and outstanding shares of the PDI Portfolio
shall be cancelled on the books of PDI at the Effective Time of the
Reorganization and shall thereafter represent only the right to receive Service
Shares or Institutional Shares of the PNC Portfolio, and the PDI Portfolio's
transfer books shall be closed permanently. As soon as practicable after the
Effective Time of the Reorganization, PDI shall make all filings and take all
other steps as shall be necessary and proper to effect its complete dissolution,
and shall file an application pursuant to Section 8(f) of the 1940 Act for an
order declaring that it has ceased to be an investment company. After the
Effective Time of the Reorganization, PDI shall not conduct any business except
in connection with its liquidation, dissolution, and deregistration.
3. VALUATION TIME. The Valuation Time shall be 4:00 P.M., Eastern Time, on
June 15, 1995, or such earlier or later date and time as may be mutually agreed
by the Board of Trustees of each of the parties and set forth in writing signed
by the parties' duly authorized officers.
4. CERTAIN REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF PDI. PDI, on
behalf of itself and the PDI Portfolio, represents and warrants to, and agrees
with, PNC as follows:
(a) It is a Massachusetts business trust duly created pursuant to its
Declaration of Trust for the purpose of acting as a management
investment company under the 1940 Act and is validly existing under
the laws of, and duly authorized to transact business in, the
Commonwealth of Massachusetts. Its registration with the SEC as an
open-end management investment company under the 1940 Act is in full
force and effect.
(b) It has power to own all of its properties and assets and, subject to
the approvals of shareholders referred to in Section 6, to carry out
and consummate the transactions contemplated herein, and has all
necessary federal, state and local authorizations to carry on its
business as now being conducted and to consummate the transactions
contemplated by this Agreement.
(c) This Agreement has been duly authorized, executed and delivered by
PDI, and represents PDI's valid and binding contract, enforceable in
accordance with its terms, subject as to
A-3
<PAGE> 38
enforcement to bankruptcy, insolvency, reorganization, arrangement,
moratorium, and other similar laws of general applicability relating
to or affecting creditors' rights and to general equity principles.
The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated by this Agreement will
not, violate PDI's Declaration of Trust or Code of Regulations or any
agreement or arrangement to which it is a party or by which it is
bound.
(d) The PDI Portfolio has elected to qualify and has qualified as a
regulated investment company under Part I of Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"), as of and
since its first taxable year; has been a regulated investment company
under such Part of the Code at all times since the end of its first
taxable year when it so qualified; and qualifies and shall continue to
qualify as a regulated investment company for its taxable year ending
upon its liquidation.
(e) All federal, state, local and foreign income, profits, franchise,
sales, withholding, customs, transfer and other taxes, including
interest, additions to tax and penalties (collectively, "Taxes")
relating to the Fund Assets due or properly shown to be due on any
return filed by PDI with respect to taxable periods ending on or prior
to, and the portion of any interim period up to, the date hereof have
been fully and timely paid; and there are no levies, liens, or other
encumbrances relating to Taxes existing, threatened or pending with
respect to the Fund Assets.
(f) The financial statements for its fiscal year ended June 30, 1994,
audited by Coopers & Lybrand, L.L.P., and its unaudited financial
statements for the six-month period ended December 31, 1994, copies of
which have been previously furnished to PNC, present fairly the
financial position of the PDI Portfolio as of the respective dates
indicated and the results of its operations for the periods indicated,
in conformity with generally accepted accounting principles applied on
a consistent basis.
(g) Prior to the Valuation Time, the PDI Portfolio shall have declared a
dividend or dividends, with a record date and ex-dividend date prior
to the Valuation Time, which, together with all previous dividends,
shall have the effect of distributing to its shareholders all of its
net investment company income, if any, for the taxable periods or
years ended June 30, 1994 and for the period from said date to and
including the Effective Time of the Reorganization (computed without
regard to any deduction for dividends paid), and all of its net
capital gain, if any, realized in taxable periods or years ended June
30, 1994 and in the period from said date to and including the
Effective Time of the Reorganization.
(h) At both the Valuation Time and the Effective Time of the
Reorganization, there shall be no known liabilities of the PDI
Portfolio, whether accrued, absolute, contingent or otherwise, not
reflected in the aggregate net asset value of the PDI Portfolio.
(i) There are no legal, administrative or other proceedings pending or,
to its knowledge, threatened against PDI or the PDI Portfolio which
could result in liability on the part of PDI or the PDI Portfolio.
(j) Subject to the approvals of shareholders referred to in Section 6, at
both the Valuation Time and the Effective Time of the Reorganization,
it shall have full right, power and authority to sell, assign,
transfer and deliver the Fund Assets and, upon delivery and payment
for the Fund Assets as contemplated herein, the PNC Portfolio shall
acquire good and marketable title thereto, free and clear of all liens
and encumbrances, and subject to no restrictions on the ownership or
transfer thereof (except as imposed by federal or state securities
laws).
(k) At the Effective Time of the Reorganization, all portfolio securities
and other investments included in the Fund Assets shall be permissible
investments for the PNC Portfolio under the investment objective,
policies and limitations set forth in the PNC Portfolio's registration
statement and under applicable law. From the date of this Agreement to
and including the
A-4
<PAGE> 39
Effective Time of the Reorganization, PDI shall confer and cooperate
fully with PNC with respect to the management of the PDI Portfolio to
ensure that PDI's obligations under this subsection are duly met.
(l) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by PDI of the
transactions contemplated by this Agreement, except such as may be
required under the 1933 Act, the Securities Exchange Act of 1934, as
amended ("1934 Act"), the 1940 Act, the rules and regulations under
those Acts, or state securities laws.
(m) Insofar as the following relate to PDI, the registration statement
filed by PNC on Form N-14 relating to the shares of the PNC Portfolio
that will be registered with the SEC pursuant to this Agreement, which
shall include or incorporate by reference the proxy statement of PDI
and the prospectus of PNC with respect to the transactions contemplated
by this Agreement, and any supplement or amendment thereto or to the
documents contained or incorporated therein by reference (the "N-14
Registration Statement"), on the effective date of the N-14
Registration Statement, at the time of the shareholders' meeting
referred to in Section 6 and at the Effective Time of the
Reorganization: (i) shall comply in all material respects with the
provisions of the 1933 Act, the 1934 Act and the 1940 Act, the rules
and regulations thereunder, and state securities laws, and (ii) shall
not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, that the representations
and warranties made by PDI in this subsection shall apply only to
statements in or omissions from the N-14 Registration Statement made in
reliance upon and in conformity with information furnished by it for
use therein as provided in Section 7.
(n) All of the issued and outstanding Fixed Income Dollar Shares and Fixed
Income Shares of the PDI Portfolio have been validly issued and are
duly paid and non-assessable, and were offered for sale and sold in
conformity with all applicable federal and state securities laws.
(o) It shall not sell or otherwise dispose of any shares of the PNC
Portfolio to be received in the transactions contemplated herein,
except in distribution to its shareholders as contemplated herein.
5. CERTAIN REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF PNC. PNC, on
behalf of itself and the PNC Portfolio, represents and warrants to, and agrees
with, PDI as follows:
(a) It is a Massachusetts business trust duly created pursuant to its
Declaration of Trust for the purpose of acting as a management
investment company under the 1940 Act and is validly existing under the
laws of, and duly authorized to transact business in, the Commonwealth
of Massachusetts. It is registered as an investment company under the
1940 Act and its registration with the SEC as an investment company is
in full force and effect. It has power to own all of its properties and
assets and to carry out and consummate the transactions contemplated
herein, and has all necessary federal, state and local authorizations
to carry on its business as now being conducted and to consummate the
transactions contemplated by this Agreement.
(b) This Agreement has been duly authorized, executed and delivered by PNC,
and represents PNC's valid and binding contract, enforceable in
accordance with its terms, subject as to enforcement to bankruptcy,
insolvency, reorganization, arrangement, moratorium and other similar
laws of general applicability relating to or affecting creditors'
rights and to general equity principles. The execution and delivery of
this Agreement did not, and the consummation of the transactions
contemplated by this Agreement will not, violate PNC's Declaration of
Trust or Code of Regulations or any agreement or arrangement to which
it is a party or by which it is bound.
A-5
<PAGE> 40
(c) The PNC Portfolio has elected to qualify and has qualified as a
regulated investment company under Part I of Subchapter M of the Code,
as of and since its first taxable year; has been a regulated investment
company under such Part of the Code at all times since the end of its
first taxable year when it so qualified; and intends to continue to
qualify as a regulated investment company.
(d) The financial statements for its fiscal year ended September 30, 1994,
audited by Coopers & Lybrand, L.L.P., copies of which have been
previously furnished to PDI, present fairly the financial position of
the PNC Portfolio as of the date indicated and the results of its
operations for the period indicated, in conformity with generally
accepted accounting principles applied on a consistent basis.
(e) At both the Valuation Time and the Effective Time of the
Reorganization, there shall be no known liabilities of the PNC
Portfolio, whether accrued, absolute, contingent or otherwise, not
reflected in the net asset value per share of its Service Shares and
Institutional Shares, respectively, issued pursuant to this Agreement.
(f) There are no legal, administrative or other proceedings pending or, to
its knowledge, threatened against PNC or the PNC Portfolio which assert
liability on the part of PNC or the PNC Portfolio.
(g) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by PNC of the
transactions contemplated by this Agreement, except such as may be
required under the 1933 Act, the 1934 Act, the 1940 Act, the rules and
regulations under those Acts, or state securities laws.
(h) Insofar as the following relate to PNC, the N-14 Registration
Statement, on its effective date, at the time of the shareholders'
meeting referred to in Section 6 and at the Effective Time of the
Reorganization: (i) shall comply in all material respects with the
provisions of the 1933 Act, the 1934 Act and the 1940 Act, the rules
and regulations thereunder, and state securities laws, and (ii) shall
not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, that the representations
and warranties made by PNC in this subsection shall not apply to
statements in or omissions from the N-14 Registration Statement made in
reliance upon and in conformity with information furnished by PDI for
use therein as provided in Section 7.
(i) The Service Shares and Institutional Shares of the PNC Portfolio to be
issued and delivered to the PDI Portfolio for the account of
recordholders of Fixed Income Dollar Shares and Fixed Income Shares,
respectively, of the PDI Portfolio, pursuant to the terms hereof, shall
have been duly authorized as of the Effective Time of the
Reorganization and, when so issued and delivered, shall be registered
under the 1933 Act, duly and validly issued, fully paid and non-
assessable, and no shareholder of PNC shall have any preemptive right
of subscription or purchase in respect thereto.
6. SHAREHOLDER ACTION ON BEHALF OF THE PDI PORTFOLIO. As soon as
practicable after the effective date of the N-14 Registration Statement, but in
any event prior to the Effective Time of the Reorganization and as a condition
thereto, the Board of Trustees of PDI shall call, and PDI shall hold, a meeting
of the shareholders of the PDI Portfolio for the purpose of considering and
voting upon:
(a) Approval of this Agreement and the transactions contemplated hereby,
including:
(i) The transfer of the Fund Assets belonging to the PDI Portfolio to
the PNC Portfolio, and the assumption by the PNC Portfolio of the
Fund Liabilities, in exchange for Service Shares and
Institutional Shares of the PNC Portfolio.
A-6
<PAGE> 41
(ii) The liquidation of the PDI Portfolio through the distribution to
its recordholders of Fixed Income Dollar Shares and Fixed Income
Shares of the Service Shares and Institutional Shares,
respectively, of the PNC Portfolio as described in this
Agreement.
(iii) The subsequent deregistration of PDI as an investment company
registered under the 1940 Act.
(b) Such other matters as may be determined by the Boards of Trustees of
the parties.
7. N-14 REGISTRATION STATEMENT. PNC shall file the N-14 Registration
Statement. PNC and PDI have cooperated and shall continue to cooperate with each
other, and have furnished and shall continue to furnish each other with the
information relating to itself that is required by the 1933 Act, the 1934 Act,
the 1940 Act, the rules and regulations under each of those Acts and state
securities laws, to be included in the N-14 Registration Statement.
8. EFFECTIVE TIME OF THE REORGANIZATION. Delivery of the Fund Assets and
the shares of the PNC Portfolio to be issued pursuant to Section 1 and the
liquidation and termination of PDI pursuant to Section 2 shall occur following
the Valuation Time on June 15, 1995, or on such other date, and at such place
and time and date, agreed to by the Board of Trustees of each of the parties.
The date and time at which such actions are taken are referred to herein as the
"Effective Time of the Reorganization." To the extent any Fund Assets are, for
any reason, not transferred at the Effective Time of the Reorganization, PDI
shall cause such Fund Assets to be transferred in accordance with this Agreement
at the earliest practicable date thereafter.
9. PNC CONDITIONS. The obligations of PNC hereunder shall be subject to
the following conditions precedent:
(a) This Agreement and the transactions contemplated by this Agreement
shall have been approved by the Board of Trustees of PDI and by the
shareholders of the PDI Portfolio in the manner required by law.
(b) PDI shall have duly executed and delivered to PNC such bills of sale,
assignments, certificates and other instruments of transfer ("Transfer
Documents") as PNC may deem necessary or desirable to transfer all of
PDI Portfolio's right, title and interest in and to the Fund Assets.
The Fund Assets shall be accompanied by all necessary state stock
transfer stamps or cash for the appropriate purchase price therefor.
(c) All representations and warranties of PDI made in this Agreement shall
be true and correct in all material respects as if made at and as of
the Valuation Time and the Effective Time of the Reorganization. As of
the Valuation Time and the Effective Time of the Reorganization there
shall have been no material adverse change in the financial position
of PDI since the dates of the financial statements referred to in
Section 4(f). No action, suit or other proceeding shall be threatened
or pending before any court or governmental agency in which it is
sought to restrain or prohibit, or obtain damages or other relief in
connection with, this Agreement or the transactions contemplated
herein. PNC shall have received a certificate from the President of
PDI stating that each of the conditions set forth in this Section 9(c)
have been met.
(d) PNC shall have received an opinion of Drinker Biddle & Reath,
addressed to PNC and PDI in the form reasonably satisfactory to them
and dated the Effective Time of the Reorganization, substantially to
the effect that: (i) PDI and PNC are Massachusetts business trusts
duly organized and validly existing under the laws of the Commonwealth
of Massachusetts; (ii) the shares of the PDI Portfolio outstanding at
the Effective Time of the Reorganization are duly authorized, validly
issued, fully paid and non-assessable by the PDI Portfolio, and the
shares of the PNC Portfolio to be delivered to the PDI Portfolio as
provided for by this Agreement are duly authorized and upon delivery
will be validly issued, fully paid and non-assessable by the PNC
Portfolio; (iii) this Agreement and the Transfer Documents have
A-7
<PAGE> 42
been duly authorized, executed and delivered by PDI and represent
legal, valid and binding contracts, enforceable in accordance with
their terms, subject to the effect of bankruptcy, insolvency,
moratorium, fraudulent conveyance and similar laws relating to or
affecting creditors' rights generally and court decisions with respect
thereto, and such counsel shall express no opinion with respect to the
application of equitable principles in any proceeding, whether at law
or in equity; (iv) the execution and delivery of this Agreement did
not, and the consummation of the transactions contemplated by this
Agreement will not, violate the Declaration of Trust or Code of
Regulations of PDI or PNC, respectively, or any material agreement
known to such counsel to which PDI or PNC is a party or by which PDI
or PNC is bound; and (v) no consent, approval, authorization or order
of any court or governmental authority is required for the
consummation by PDI of the transactions contemplated by this
Agreement, except such as have been obtained under the 1933 Act, the
1934 Act, the 1940 Act, the rules and regulations under those Acts and
such as may be required under the state securities laws. Such opinion
may rely on the opinion of other counsel to the extent set forth in
such opinion, provided such other counsel is reasonably acceptable to
PNC.
(e) PNC shall have received an opinion of Drinker Biddle & Reath,
addressed to PNC and PDI in the form reasonably satisfactory to them
and dated the Effective Time of the Reorganization, substantially to
the effect that for federal income tax purposes (i) the transfer of
all of the Fund Assets to the PNC Portfolio, and the assumption by the
PNC Portfolio of the Fund Liabilities, in exchange for shares of the
PNC Portfolio, and the distribution of said shares to the shareholders
of the PDI Portfolio, as provided in this Agreement, will constitute a
reorganization within the meaning of Section 368(a)(1)(C) or Section
368(a)(1)(D) of the Code; (ii) in accordance with Sections 361(a),
361(c)(1) and 357(a) of the Code, no gain or loss will be recognized
to PDI as a result of such transactions; (iii) in accordance with
Section 1032 of the Code, no gain or loss will be recognized to the
PNC Portfolio as a result of such transactions; (iv) in accordance
with Section 354(a)(1) of the Code, no gain or loss will be recognized
to the shareholders of the PDI Portfolio on the distribution to them
by the PDI Portfolio of shares of the PNC Portfolio in exchange for
their shares of the PDI Portfolio; (v) in accordance with Section
358(a)(1) of the Code, the basis of the PNC Portfolio shares received
by a shareholder of the PDI Portfolio will be the same as the basis of
the shareholder's PDI Portfolio shares immediately prior to the
transactions; (vi) in accordance with Section 362(b) of the Code, the
basis to the PNC Portfolio of the Fund Assets of the PDI Portfolio
will be the same as the basis of such Fund Assets in the hands of the
PDI Portfolio immediately prior to the exchange; (vii) in accordance
with Section 1223 of the Code, a shareholder's holding period for PNC
Portfolio shares will be determined by including the period for which
the shareholder held the shares of the PDI Portfolio exchanged
therefor, provided that the shareholder held such shares of the PDI
Portfolio as a capital asset; and (viii) in accordance with Section
1223 of the Code, the holding period of the PNC Portfolio with respect
to the Fund Assets will include the period for which such Fund Assets
were held by the PDI Portfolio.
(f) The N-14 Registration Statement shall have become effective under the
1933 Act and no stop order suspending such effectiveness shall have
been instituted or, to the knowledge of PNC, contemplated by the SEC
and the parties shall have received all permits and other
authorizations necessary under state securities laws to consummate the
transactions contemplated by this Agreement.
(g) The President of PDI shall have certified that PDI has performed and
complied in all material respects with each of its agreements and
covenants required by this Agreement to be performed or complied with
by it prior to or at the Valuation Time and the Effective Time of the
Reorganization.
A-8
<PAGE> 43
10. PDI CONDITIONS. The obligations of PDI hereunder shall be subject to
the following conditions precedent:
(a) This Agreement shall have been adopted and the transactions
contemplated by this Agreement shall have been approved by the Board
of Trustees of PNC and by the shareholders of PDI in the manner
required by law.
(b) All representations and warranties of PNC made in this Agreement shall
be true and correct in all material respects as if made at and as of
the Valuation Time and the Effective Time of the Reorganization. As of
the Valuation Time and the Effective Time of the Reorganization there
shall have been no material adverse change in the financial position
of the PNC Portfolio since the date of the financial statements
referred to in Section 5(d). No action, suit or other proceeding shall
be threatened or pending before any court or governmental agency in
which it is sought to restrain or prohibit, or obtain damages or other
relief in connection with, this Agreement or the transactions
contemplated herein. PDI shall have received a certificate from the
President of PNC stating that each of the conditions set forth in this
Section 10(b) have been met.
(c) PDI shall have received an opinion of Drinker Biddle & Reath, addressed
to PNC and PDI in the form reasonably satisfactory to them and dated
the Effective Time of the Reorganization, relating to the matters set
forth in Section 9(d).
(d) PDI shall have received an opinion of Drinker Biddle & Reath, addressed
to PNC and PDI in the form reasonably satisfactory to them and dated
the Effective Time of the Reorganization, with respect to the matters
specified in Section 9(e).
(e) The N-14 Registration Statement shall have become effective under the
1933 Act and no stop order suspending such effectiveness shall have
been instituted, or to the knowledge of PNC, contemplated by the SEC
and the parties shall have received all permits and other
authorizations necessary under state securities laws to consummate the
transactions contemplated by this Agreement.
(f) The President of PNC shall have certified that PNC has performed and
complied in all material respects with each of its agreements and
covenants required by this Agreement to be performed or complied with
by it prior to or at the Valuation Time and the Effective Time of the
Reorganization.
11. TAX DOCUMENTS. PDI shall deliver to PNC at the Effective Time of the
Reorganization confirmations or other adequate evidence as to the adjusted tax
basis of the Fund Assets delivered to the PNC Portfolio in accordance with the
terms of this Agreement.
12. FURTHER ASSURANCES. Subject to the terms and conditions herein
provided, each of the parties hereto shall use its best efforts to take, or
cause to be taken, such action, to execute and deliver, or cause to be executed
and delivered, such additional documents and instruments and to do, or cause to
be done, all things necessary, proper or advisable under the provisions of this
Agreement and under applicable law to consummate and make effective the
transactions contemplated by this Agreement, including without limitation,
delivering and/or causing to be delivered to PNC, each account, book, record or
other document of PDI required to be maintained by Section 31(a) of the 1940 Act
and Rules 31a-1 to 31a-3 thereunder (regardless of whose possession they are
in).
13. TERMINATION OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the parties set forth in this Agreement shall terminate upon the
delivery of the Fund Assets to the PNC Portfolio and the issuance of the shares
of the PNC Portfolio at the Effective Time of the Reorganization.
A-9
<PAGE> 44
14. TERMINATION OF AGREEMENT. This Agreement may be terminated by a party
at any time at or prior to the Effective Time of the Reorganization by a vote of
a majority of its Board of Trustees as provided below:
(a) By PNC if the conditions set forth in Section 9 are not satisfied as
specified in said Section;
(b) By PDI if the conditions set forth in Section 10 are not satisfied as
specified in said Section;
(c) By mutual consent of both parties.
This Agreement shall terminate automatically on September 1, 1995 in the event
that the Reorganization has not been consummated by such date.
15. AMENDMENT AND WAIVER. At any time prior to or (to the fullest extent
permitted by law) after approval of this Agreement by the shareholders of PDI
(a) the parties hereto may, by written agreement authorized by their respective
Presidents and with or without the approval of their shareholders, amend any of
the provisions of this Agreement, and (b) any party may waive any breach by any
other party or the failure to satisfy any of the conditions to its obligations
(such waiver to be in writing and authorized by the President of the waiving
party with or without the approval of such party's shareholders).
16. GOVERNING LAW. This Agreement and the transactions contemplated hereby
shall be governed, construed and enforced in accordance with the laws of the
Commonwealth of Pennsylvania, without giving effect to the conflicts of law
principles otherwise applicable therein.
17. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the
respective successors and permitted assigns of the parties hereto. This
Agreement and the rights, obligations and liabilities hereunder may not be
assigned by any party without the consent of all other parties.
18. BENEFICIARIES. Nothing contained in this Agreement shall be deemed to
create rights in persons not parties hereto, other than the successors and
permitted assigns of the parties.
19. PNC LIABILITY.
(a) The names "The PNC Fund" and "Trustees of The PNC Fund" refer
respectively to the trust created and the trustees, as trustees but not
individually or personally, acting from time to time under a
Declaration of Trust dated December 22, 1988, which is hereby referred
to and a copy of which is on file at the office of the State Secretary
of the Commonwealth of Massachusetts and at the principal office of
PNC. The obligations of PNC entered into in the name or on behalf
thereof by any of the trustees, officers, representatives or agents are
made not individually, but in such capacities, and are not binding upon
any of the trustees, shareholders, officers, representatives or agents
of PNC personally, but bind only the trust property, and all persons
dealing with any class of shares of PNC must look solely to the trust
property belonging to such class for the enforcement of any claims
against PNC.
(b) Each party specifically acknowledges and agrees that all obligations of
PNC under this Agreement are binding only with respect to the PNC
Portfolio; that any liability of PNC under this Agreement with respect
to the PNC Portfolio, or in connection with the transactions
contemplated herein with respect to the PNC Portfolio, shall be
discharged only out of the assets of the PNC Portfolio; and that no
other portfolio of PNC shall be liable with respect to this Agreement
or in connection with the transactions contemplated herein.
20. PDI LIABILITY.
(a) The names "Portfolios for Diversified Investment" and "Trustees of
Portfolios for Diversified Investment" refer respectively to the trust
created and the trustees, as trustees but not individually or
personally, acting from time to time under a Declaration of Trust dated
June 11, 1985, which is hereby referred to and a copy of which is on
file at the office of the State Secretary of the Commonwealth of
Massachusetts and at the principal office of PDI. The
A-10
<PAGE> 45
obligations of PDI entered into in the name or on behalf thereof by any
of the trustees, representatives or agents are made not individually,
but in such capacities, and are not binding upon any of the trustees,
shareholders or representatives of PDI personally, but bind only the
trust property, and all persons dealing with any class of shares of PDI
must look solely to the trust property belonging to such class for the
enforcement of any claims against PDI.
(b) Each party specifically acknowledges and agrees that all obligations of
PDI under this Agreement are binding only with respect to the PDI
Portfolio; and that any liability of PDI under this Agreement with
respect to the PDI Portfolio, or in connection with the transactions
contemplated herein with respect to the PDI Portfolio, shall be
discharged only out of the assets of the PDI Portfolio.
21. NOTICES. All notices required or permitted herein shall be in writing
and shall be deemed to be properly given when delivered personally or by
telecopier to the party entitled to receive the notice or when sent by certified
or registered mail, postage prepaid, or delivered to an internationally
recognized overnight courier service, in each case properly addressed to the
party entitled to receive such notice at the address or telecopier number stated
below or to such other address or telecopier number as may hereafter be
furnished in writing by notice similarly given by one party to the other party
hereto:
If to PNC:
The PNC Fund
Bellevue Park Corporate Center
400 Bellevue Parkway
Wilmington, Delaware 19809
With copies to:
Vernon Stanton, Jr., Esq.
Drinker Biddle & Reath
1345 Chestnut Street
Philadelphia, PA 19107
Telecopier Number: (215) 988-2757
If to PDI:
Portfolios for Diversified Investment
Bellevue Park Corporate Center
400 Bellevue Parkway
Wilmington, Delaware 19809
With copies to:
W. Bruce McConnel, III, Esq.
Drinker Biddle & Reath
1345 Chestnut Street
Philadelphia, PA 19107
Telecopier Number: (215) 988-2757
22. EXPENSES. Each party shall be responsible for the payment of all
expenses incurred by such party in connection with this Agreement and the
transactions contemplated hereby.
23. ENTIRE AGREEMENT. This Agreement embodies the entire agreement and
understanding of the parties hereto and supersedes any and all prior agreements,
arrangements and understandings relating to matters provided for herein.
24. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which, when executed and delivered shall be deemed to be
an original, but all of which together shall constitute one and the same
instrument.
A-11
<PAGE> 46
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their duly authorized officers designated below as of the date first
written above.
<TABLE>
<S> <C>
THE PNC(R) FUND
ATTEST:
- -------------------------------------------- By:
-------------------------------------------
Secretary Vice President and Treasurer
PORTFOLIOS FOR DIVERSIFIED INVESTMENT
ATTEST:
- -------------------------------------------- By:
-------------------------------------------
Secretary President
</TABLE>
A-12
<PAGE> 47
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
PAGE WHERE
DEFINED TERM DEFINED
- --------------------------------------------------------------------------------- ----------
<S> <C>
1934 Act......................................................................... A-5
1940 Act......................................................................... A-2
PDI Portfolio.................................................................... A-2
PDI.............................................................................. A-2
PNC Portfolio.................................................................... A-2
Agreement........................................................................ A-2
PNC.............................................................................. A-2
Code............................................................................. A-4
Effective Time of the Reorganization............................................. A-7
Fund Assets...................................................................... A-2
Fund Liabilities................................................................. A-2
N-14 Registration Statement...................................................... A-5
Reorganization................................................................... A-2
SEC.............................................................................. A-2
Transfer Documents............................................................... A-7
Taxes............................................................................ A-4
</TABLE>
A-13
<PAGE> 48
EXHIBIT B
THE PNC FUND
ANNUAL INVESTMENT ADVISER'S REPORT
INTERMEDIATE-TERM BOND PORTFOLIO
The fixed income markets plummeted from October '93 highs over the last
twelve months as a stronger-than-expected economy prompted several Federal
Reserve Bank tightenings totaling 175 basis points in short rates. Inflation
fears were sparked early into 1994 as signs of strength in production,
employment and consumer confidence jittered the markets.
Accordingly, interest rates rose over 200 basis points on average during
this period. The Treasury long bond yield rose from 6.03% to 7.82% while the
two-year Treasury note rose from 3.86% to 6.59% during the same twelve month
period ending September 30, 1994. As a result, the Treasury yield curve
flattened 94 basis points during that period.
Substantial cash outflows from domestic fixed income funds along with
weakness in the U.S. dollar (primarily versus the Yen and DM) placed additional
pressure on fixed income security prices. In this environment, shorter duration
portfolios performed the best.
The Intermediate-Term Bond Portfolio, after being long in duration for the
first four months of 1994, shortened its duration from a high of 4.6 years to
its current 3.3 duration. The Portfolio's longer duration for the majority of
the year led to the underperformance of the Portfolio versus the Lehman
Intermediate Government/Corporate Index over the last twelve months ended
September 30, 1994.
Comparison of Change in Value of $10,000 investment in the
Intermediate-Term Bond Portfolio and the Lehman Intermediate
Government/Corporate Index from inception and at each Fiscal Year End:
Average Annual Total Return
Total Return One Year (3.52)%
From Inception (3.30)%
<TABLE>
<CAPTION>
PNC INTERMEDIATE* LEHMAN INTERMEDIATE
TERM BOND GOVERNMENT/CORP. INDEX
<S> <C> <C>
"9/17/93" 10,000 10,000
"9/30/93" 10,010 10,017
"9/30/94" 9,658 9,851
</TABLE>
Past performance is not predictive of future performance.
Institutional Class
Average Annual Total Return
Total Return One Year (3.80)%
From Inception (3.53)%
<TABLE>
<CAPTION>
PNC INTERMEDIATE* LEHMAN INTERMEDIATE
TERM BOND GOVERNMENT/CORP. INDEX
<S> <C> <C>
"9/23/93" 10,000 10,000
"9/30/93" 10,010 10,017
"9/30/94" 9,639 9,851
</TABLE>
Past performance is not predictive of future performance.
Service Class
B-1
<PAGE> 49
THE PNC(R) FUND
BELLEVUE CORPORATE CENTER
400 BELLEVUE PARKWAY
WILMINGTON, DELAWARE 19809
STATEMENT OF ADDITIONAL INFORMATION
(1995 SPECIAL MEETING OF SHAREHOLDERS OF
PORTFOLIOS FOR DIVERSIFIED INVESTMENT)
This Statement of Additional Information is not a prospectus but
should be read in conjunction with the Combined Proxy Statement/Prospectus
dated May 15, 1995 for the Special Meeting of Shareholders of Portfolios
for Diversified Investment to be held on June 12, 1995. Copies of the Combined
Proxy Statement/Prospectus may be obtained at no charge from The PNC Fund's
distributor by calling toll-free (800) 441-7379.
Unless otherwise indicated, capitalized terms used herein and not
otherwise defined have the same meanings as are given to them in the Combined
Proxy Statement/Prospectus.
Further information about The PNC Fund is contained in and
incorporated by reference to its Statement of Additional Information dated
January 30, 1995, copies of which are included herewith.
Further information about Portfolios for Diversified Investment is
contained in and incorporated by reference to its Statement of Additional
Information dated October 28, 1994, a copy of which is included herewith.
The date of this Statement of Additional Information is
May 15, 1995.
<PAGE> 50
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General Information . . . . . . . . . . . . . . . . . . . . . 3
Financial Statements for
The PNC Fund's Intermediate-Term
Bond Portfolio dated September 30, 1994 . . . . . . . . . FS-1
Financial Statements for
Portfolios for Diversified Investment's
Fixed Income Fund dated December 31, 1994 . . . . . . . . . FS-16
Pro Forma Financial
Statements for The PNC Fund
(as of December 31, 1994) . . . . . . . . . . . . . . . . FS-26
</TABLE>
<PAGE> 51
GENERAL INFORMATION
The shareholders of Portfolios for Diversified Investment ("the
Trust") are being asked to approve or disapprove an Agreement and Plan of
Reorganization (the "Reorganization Agreement") dated as of May 12, 1995
by and between the Trust and The PNC Fund ("PNC Fund") and the transactions
contemplated thereby. The Reorganization Agreement contemplates the transfer
of all of the assets and known liabilities of the Fixed Income Fund of the
Trust in exchange for Service Shares and Institutional Shares of the
Intermediate-Term Bond Portfolio of PNC Fund. Following the exchange, the
Trust will make a liquidating distribution of the Service Shares and
Institutional Shares received by the Trust to the holders of Fixed Income
Dollar Shares and Fixed Income Shares, respectively, of the Fixed Income Fund,
such that a holder of shares in the Fixed Income Fund at the Effective Time of
the Reorganization will receive full and fractional shares of the
Intermediate-Term Bond Portfolio having an aggregate net asset value equal to
the aggregate net asset value of the shareholder's shares in the Fixed Income
Fund. In connection with the Reorganization, the Trust will be terminated
under state law and deregistered as an investment company under the Investment
Company Act of 1940.
A Special Meeting of Shareholders of the Fixed Income Fund to
consider the Reorganization Agreement and the transactions contemplated thereby
will be held at the Bellevue Park Corporate Center, 400 Bellevue Parkway, 4th
Floor Conference Room, Wilmington, Delaware on June 12, 1995 at 10:00 A.M.
Eastern Time. For further information about the Reorganization, see the
Combined Proxy Statement/Prospectus.
3
<PAGE> 52
THE PNC(R) FUND
INTERMEDIATE-TERM BOND PORTFOLIO
STATEMENT OF NET ASSETS
SEPTEMBER 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------- ------------
<S> <C> <C> <C>
AGENCY
OBLIGATIONS -- 43.4%
FEDERAL HOME LOAN BANK
BONDS -- 6.0%
5.07% 11/17/94 $ 2,000 $ 1,996,000
6.99% 04/25/97 2,500 2,506,175
7.04% 05/24/99 2,000 1,969,580
------------
6,471,755
------------
FEDERAL HOME LOAN
MORTGAGE
CORPORATION -- 22.6%
4.75% 10/03/94 7,550 7,548,008
4.75% 05/15/96 2,000 1,928,482
4.75% 03/15/97 3,000 2,839,300
5.50% 06/15/97 5,000 4,722,693
9.50% 08/15/97 313 323,877
9.00% 09/15/97 304 310,736
8.50% 08/15/98 218 220,758
8.50% 09/15/98 69 69,895
9.00% 09/15/98 38 38,906
8.50% 10/15/98 68 69,247
7.00% 07/15/00 716 687,071
7.00% 08/15/00 1,318 1,264,345
9.00% 12/01/01 85 87,278
9.50% 07/01/03 175 180,786
7.05% 03/24/04 1,500 1,378,125
7.74% 06/01/04 2,000 1,942,940
9.50% 11/01/04 309 319,211
8.50% 01/01/05 67 68,172
9.50% 01/01/05 328 339,642
9.00% 12/01/16 34 34,465
------------
24,373,937
------------
FEDERAL NATIONAL
MORTGAGE
ASSOCIATION -- 10.6%
7.60% 01/10/97 2,500 2,543,100
5.75% 06/25/98 3,304 3,114,020
7.85% 09/10/98 500 509,735
8.70% 06/10/99 1,000 1,049,300
6.35% 08/10/99 1,000 955,370
8.25% 12/18/00 2,000 2,063,020
9.00% 08/01/02 153 158,205
6.95% 09/10/02 1,000 936,870
9.50% 03/01/05 45 47,080
------------
11,376,700
------------
GOVERNMENT NATIONAL
MORTGAGE
ASSOCIATION -- 3.4%
8.00% 05/15/99 355 356,321
7.50% 04/15/07 53 52,223
7.50% 06/15/07 42 40,684
7.50% 07/15/07 59 57,462
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------- ------------
<S> <C> <C> <C>
GOVERNMENT NATIONAL
MORTGAGE
ASSOCIATION (CONTINUED)
7.50% 08/15/07 $ 40 $ 39,269
7.50% 10/15/07 82 80,795
7.50% 12/15/07 3,012 2,952,993
9.50% 08/15/18 29 30,306
9.50% 04/15/19 59 62,302
------------
3,672,355
------------
TENNESSEE VALLEY
AUTHORITY -- 0.8%
6.125% 07/15/03 1,000 888,750
------------
TOTAL AGENCY OBLIGATIONS
(Cost $47,601,953) 46,783,497
------------
ASSET BACKED
SECURITIES -- 3.3%
AUTOMOTIVE -- 2.9%
Capital Auto
Receivables
Asset Trust
4.90% 02/16/98 2,000 1,987,600
Union Federal
Master Trust
4.875% 11/15/95 1,126 1,101,458
------------
3,089,058
------------
FINANCE -- 0.4%
First Chicago Master
Trust II,
Series 1991 D
8.40% 12/15/96 500 512,050
------------
TOTAL ASSET BACKED
SECURITIES
(Cost $3,610,333) 3,601,108
------------
CORPORATE BONDS -- 17.4%
AUTOMOTIVE -- 1.7%
Ford Motor Credit Co.
5.625% 12/15/98 1,000 926,250
5.625% 01/15/99 1,000 923,750
------------
1,850,000
------------
BANKS -- 4.0%
Bank of New York, Inc.
6.50% 12/01/03 1,000 885,000
BankAmerica Corp.
6.00% 07/15/97 1,100 1,062,875
National Westminster
Bank
9.45% 05/01/01 1,250 1,340,625
Westpac Banking Corp.
9.125% 08/15/01 1,000 1,051,250
------------
4,339,750
------------
</TABLE>
See accompanying notes to financial statements.
FS-1
<PAGE> 53
INTERMEDIATE-TERM BOND PORTFOLIO
STATEMENT OF NET ASSETS (Continued)
SEPTEMBER 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------- ------------
<S> <C> <C> <C>
CORPORATE BONDS
(CONTINUED)
BROKERAGE -- 0.9%
Lehman Brothers Holdings, Inc.
5.50% 06/15/96 $ 1,000 $ 975,000
------------
FINANCE -- 3.8%
Associates Corp. of North
America
9.70% 05/01/97 1,000 1,057,500
Fleet Financial Group
7.25% 09/01/99 1,000 978,750
Grand Metropolitan
Investment
Corp.
7.125% 09/15/04 1,000 955,000
Great Western
Financial Corp.
6.375% 07/01/00 1,150 1,058,518
------------
4,049,768
------------
RETAIL DEPARTMENT STORES -- 0.9%
J.C. Penney Co.
5.375% 11/15/98 1,000 927,500
------------
TELECOMMUNICATIONS -- 2.6%
GTE Southwest, Inc.
5.82% 12/01/99 2,000 1,837,500
Southwestern Bell
Telephone Co.
6.375% 04/01/01 1,000 930,000
------------
2,767,500
------------
UTILITIES (ELECTRIC) -- 0.8%
Public Service Colorado
6.00% 01/01/01 1,000 905,000
------------
YANKEE -- 2.7%
Bell Telephone, Canada
7.75% 04/01/06 1,000 975,000
National Bank of Canada
8.125% 08/15/04 1,000 980,000
Noranda, Inc.
8.00% 06/01/03 1,000 965,490
------------
2,920,490
------------
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------- ------------
<S> <C> <C> <C>
TOTAL CORPORATE BONDS
(Cost $20,030,227) $ 18,735,008
------------
MEDIUM TERM NOTES -- 5.5%
AUTOMOTIVE
Chrysler Financial Corp.
5.08% 01/27/97 $ 3,500 3,351,250
General Motors
Acceptance Corp.
7.75% 01/24/97 2,500 2,525,000
------------
TOTAL MEDIUM TERM NOTES
(Cost $6,123,788) 5,876,250
------------
U.S. TREASURY
OBLIGATIONS -- 29.1%
U.S. TREASURY NOTES
8.625% 10/15/95 1,000 1,025,980
4.25% 05/15/96 4,000 3,869,040
6.75% 05/31/97 1,700 1,697,739
6.375% 06/30/97 1,100 1,089,682
7.875% 01/15/98 3,000 3,076,200
7.875% 04/15/98 100 102,536
5.25% 07/31/98 10,000 9,385,100
7.125% 10/15/98 1,000 1,001,170
6.375% 01/15/99 3,000 2,912,940
6.375% 01/15/00 1,000 960,320
7.75% 02/15/01 2,300 2,342,297
6.25% 02/15/03 1,000 919,160
7.25% 05/15/04 3,000 2,924,910
------------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $32,448,209) 31,307,074
------------
</TABLE>
See accompanying notes to financial statements.
FS-2
<PAGE> 54
INTERMEDIATE-TERM BOND PORTFOLIO
STATEMENT OF NET ASSETS (Continued)
SEPTEMBER 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
------------
<S> <C> <C>
TOTAL INVESTMENTS IN SECURITIES
(Cost $109,814,510*) 98.7% $106,302,937
OTHER ASSETS IN EXCESS OF
LIABILITIES 1.3% 1,444,091
------ ------------
NET ASSETS (Applicable to
7,946,735 Institutional shares,
3,952,897 Service shares and
9,630 Series A Investor shares
outstanding) 100.0% $107,747,028
====== ============
NET ASSET VALUE AND REDEMPTION
PRICE PER INSTITUTIONAL, SERVICE
AND SERIES A INVESTOR SHARE
($107,747,028 / 11,909,262) $9.05
=====
OFFERING PRICE PER INSTITUTIONAL AND
SERVICE SHARE $9.05
=====
MAXIMUM OFFERING PRICE PER SERIES A
INVESTOR SHARE ($9.05 / .955) $9.48
=====
</TABLE>
- -------------
* Also cost for Federal income tax purposes. The gross unrealized appreciation
(depreciation) on a tax basis is as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation $ 107,264
Gross unrealized depreciation (3,618,837)
-----------
$(3,511,573)
===========
</TABLE>
See accompanying notes to financial statements.
FS-3
<PAGE> 55
THE PNC(R) FUND
STATEMENTS OF OPERATIONS (Continued)
FOR THE YEAR ENDED SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
OHIO PENNSYLVANIA
TAX-FREE TAX-FREE SHORT-TERM INTERMEDIATE
INCOME INCOME BOND TERM BOND
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Investment Income:
Interest.................................. $ 380,143 $ 3,032,628 $ 1,634,723 $ 4,028,542
--------- ------------ ----------- ------------
Expenses:
Investment advisory fee................... 35,709 276,649 174,589 337,365
Administration fee........................ 14,284 109,878 69,836 134,946
Custodian fee............................. 13,706 14,992 17,095 22,453
Transfer agent fee........................ 23,124 40,804 27,286 25,286
Service fees.............................. 5,089 24,652 13,458 69,088
Distribution fees......................... -- 53,423 316 34
Legal and audit........................... 3,466 7,498 4,893 9,337
Printing.................................. 1,581 7,393 5,759 8,730
Registration fees and expenses............ 1,673 16,808 25,996 43,079
Organization.............................. 2,471 2,697 4,369 4,569
Trustees' fees and officer's salary....... 146 1,128 715 1,522
Other..................................... 10,669 14,494 1,908 4,840
--------- ------------ ----------- ------------
111,918 570,416 346,220 661,249
Less fees voluntarily waived
and expenses reimbursed................ (99,688) (330,526) (192,774) (288,499)
--------- ------------ ----------- ------------
Total expenses....................... 12,230 239,890 153,446 372,750
--------- ------------ ----------- ------------
Net investment income....................... 367,913 2,792,738 1,481,277 3,655,792
--------- ------------ ----------- ------------
Realized and unrealized gain (loss) on
investments:
Net realized loss from investment
transactions........................... (96,503) (285,131) (1,064,511) (972,851)
Change in unrealized depreciation of
investments............................ (589,748) (4,507,643) (557,603) (4,627,426)
--------- ------------ ----------- ------------
Net loss on investments................... (686,251) (4,792,774) (1,622,114) (5,600,277)
--------- ------------ ----------- ------------
Net decrease in net assets resulting from
operations............................. $(318,338) $ (2,000,036) $ (140,837) $ (1,944,485)
========== ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
FS-4
<PAGE> 56
THE PNC(R) FUND
STATEMENTS OF CHANGES IN NET ASSETS (Continued)
<TABLE>
<CAPTION>
INTERMEDIATE-TERM BOND
SHORT-TERM BOND PORTFOLIO PORTFOLIO
-------------------------- ----------------------------
FOR THE FOR THE
FOR THE PERIOD FOR THE PERIOD
YEAR 9/1/93(1) YEAR 9/17/93(1)
ENDED THROUGH ENDED THROUGH
9/30/94 9/30/93 9/30/94 9/30/93
----------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations
Net investment income.................................... $ 1,481,277 $ 11,296 $ 3,655,792 $ 102,572
Net gain (loss) on investments........................... (1,622,114) (2,937) (5,600,277) (53,408)
----------- ---------- ------------ -----------
Net increase (decrease) in net assets resulting from
operations............................................. (140,837) 8,359 (1,944,485) 49,164
----------- ---------- ------------ -----------
Distributions to shareholders from
Net investment income
Institutional Shares..................................... (1,256,883) (4,908) (2,313,063) --
Service Shares........................................... (219,277) (6,388) (1,431,162) --
Series A Investor Shares................................. (5,117) -- (531) --
Net realized gains
Institutional Shares..................................... -- -- (166,177) --
Service Shares........................................... -- -- (34,163) --
Series A Investor Shares................................. -- -- -- --
----------- ---------- ------------ -----------
Total distributions to shareholders.................. (1,481,277) (11,296) (3,945,096) --
----------- ---------- ------------ -----------
Capital share transactions................................... 19,189,531 6,561,900 56,832,649 56,754,796
----------- ---------- ------------ -----------
Total increase in net assets......................... 17,567,417 6,558,963 50,943,068 56,803,960
Net assets:
Beginning of period...................................... 6,558,963 -- 56,803,960 --
----------- ---------- ------------ -----------
End of period............................................ $24,126,380 $6,558,963 $107,747,028 $56,803,960
=========== ========== ============= ===========
</TABLE>
- -------------
(1) Commencement of operations.
See accompanying notes to financial statements.
FS-5
<PAGE> 57
THE PNC(R) FUND
FINANCIAL HIGHLIGHTS (Continued)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
INTERMEDIATE-TERM BOND PORTFOLIO
------------------------------------------------------------------------
SERIES A
INSTITUTIONAL CLASS SERVICE CLASS INVESTOR CLASS
---------------------- ---------------------- --------------
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
YEAR 9/17/93(1) YEAR 9/23/93(1) 5/20/94(1)
ENDED THROUGH ENDED THROUGH THROUGH
9/30/94 9/30/93 9/30/94 9/30/93 9/30/94
-------- ------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period........... $ 10.01 $ 10.00 $ 10.01 $ 9.99 $ 9.23
-------- ------- -------- ------ ------
Income from investment operations
Net investment income........................ 0.54 0.02 0.54 -- 0.20
Net gain (loss) on investments (both realized
and unrealized)............................ (0.88) (0.01) (0.91) 0.02 (0.17)
-------- ------- -------- ------ ------
Total from investment operations......... (0.34) 0.01 (0.37) 0.02 0.03
-------- ------- -------- ------ ------
Less distributions
Distributions from net investment income..... (0.56) -- (0.53) -- (0.21)
Distributions from net realized capital
gains...................................... (0.06) -- (0.06) -- --
-------- ------- -------- ------ ------
Total distributions...................... (0.62) -- (0.59) -- (0.21)
-------- ------- -------- ------ ------
Net asset value at end of period................. $ 9.05 $ 10.01 $ 9.05 $10.01 $ 9.05
======== ======= ======== ====== ======
Total return..................................... (3.52)% 0.10% (3.80)% 0.20% 0.31%(3)
Ratios/Supplemental data
Net assets at end of period (in thousands)... $ 71,896 $56,713 $ 35,764 $ 91 $ 87
Ratios of expenses to average net assets
After advisory/administration fee
waivers.................................. 0.45% 0.45%(2) 0.70% 0.70%(2) 0.85%(2)
Before advisory/administration fee
waivers.................................. 0.88% 0.84%(2) 1.13% 1.09%(2) 1.28%(2)
Ratios of net investment income to average
net assets
After advisory/administration fee
waivers.................................. 5.54% 4.72%(2) 5.33% 4.35%(2) 5.35%(2)
Before advisory/administration fee
waivers.................................. 5.11% 4.33%(2) 4.90% 3.96%(2) 4.92%(2)
Portfolio turnover rate.......................... 92% 4% 92% 4% 92%
</TABLE>
- -------------
(1) Commencement of operations.
(2) Annualized.
(3) Sales load not reflected in total return.
See accompanying notes to financial statements.
FS-6
<PAGE> 58
THE PNC(R) FUND
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1994
The PNC Fund (the "Fund") was organized on December 22, 1988 as a
Massachusetts business trust and is registered under the Investment Company Act
of 1940, as amended, as an open-end management investment company. The Fund
consists of twenty-five separate Portfolios: Money Market Portfolio, Municipal
Money Market Portfolio, Government Money Market Portfolio, Ohio Municipal Money
Market Portfolio, Pennsylvania Municipal Money Market Portfolio, North Carolina
Municipal Money Market Portfolio, Virginia Municipal Money Market Portfolio,
Value Equity Portfolio, Growth Equity Portfolio, Small Cap Growth Equity
Portfolio, Core Equity Portfolio, Index Equity Portfolio, Small Cap Value Equity
Portfolio, International Equity Portfolio, International Emerging Markets
Portfolio, Balanced Portfolio, Managed Income Portfolio, Tax-Free Income
Portfolio, Intermediate Government Portfolio, Ohio Tax-Free Income Portfolio,
Pennsylvania Tax-Free Income Portfolio, Short-Term Bond Portfolio,
Intermediate-Term Bond Portfolio, International Fixed Income Portfolio and
Government Income Portfolio. As of September 30, 1994, the International Fixed
Income Portfolio and Government Income Portfolio had not commenced operations.
This report relates solely to Managed Income Portfolio, Tax-Free Income
Portfolio, Intermediate Government Portfolio, Ohio Tax-Free Income Portfolio,
Pennsylvania Tax-Free Income Portfolio, Short-Term Bond Portfolio and
Intermediate-Term Bond Portfolio (the "Portfolios").
Each Portfolio has four classes of shares, one class being referred to as
the Service shares, one class being referred to as the Institutional shares, one
class being referred to as the Series A Investor shares and one class being
referred to as the Series B Investor shares. No Series B Investor shares had
been issued for any of these Portfolios through September 30, 1994. Series A
Investor, Series B Investor, Institutional and Service shares in a Portfolio
represent equal pro rata interests in such Portfolio, except that they bear
different expenses which reflect the difference in the range of services
provided to them. Series A Investor shares bear the expense of the Distribution
and Service Plan at an annual rate not to exceed .55% of the average daily net
asset value of each Portfolio's outstanding Series A Investor shares. Series B
Investor shares bear the expense of the Series B Distribution Plan at an annual
rate not to exceed .75% of the average daily net asset value of each Portfolio's
outstanding Series B Investor shares. Series B Investor shares also bear the
expense of the Series B Service Plan at an annual rate not to exceed .25% of the
average daily net asset value of each Portfolio's outstanding Series B Investor
shares. Under the Fund's Service Plan, Service shares bear the expense of fees
at an annual rate not to exceed .15% of the average daily net asset value of
each Portfolio's outstanding Service shares. Service shares also bear the
expense of a service fee at an annual rate not to exceed .15% of the average
daily net asset value of each Portfolio's outstanding Service shares for other
shareholder support activities provided by service organizations. Institutional
shares do not bear the expenses of the Distribution and Service Plan, the
Service Plan, the Series B Distribution Plan or the Series B Service Plan. The
Series A Investor and Service classes are currently bearing such respective
expenses at annual rates of 0% to .50% of the average daily net asset value of
Series A Investor shares and at rates aggregating .25% of the average daily net
asset value of Service shares.
(A) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Security Valuation -- Portfolio securities for which market quotations are
readily available are valued at market value, which is currently determined
using the last reported sales price. If no sales are reported, as in the case of
some securities traded over-the-counter, portfolio securities are valued at the
mean
FS-7
<PAGE> 59
THE PNC(R) FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 1994
between the last reported bid and asked prices. Corporate bonds and tax-exempt
bonds are valued on the basis of quotations provided by a pricing service which
uses information with respect to transactions on bonds, quotations from bond
dealers, market transactions in comparable securities and various relationships
between securities in determining value. Short-term obligations with maturities
of 60 days or less are valued at amortized cost which approximates market value.
Discounts and premiums on debt securities are amortized for book and tax
purposes using the effective yield-to-maturity method over the term of the
instrument with the exception of Managed Income Portfolio which does not
amortize discount or premium for tax purposes.
Dividends to Shareholders -- Dividends from net investment income are
declared and paid monthly for each of the Managed Income, Tax-Free Income,
Intermediate Government and Intermediate-Term Bond Portfolios. The net
investment income of each of the Pennsylvania Tax-Free Income, Ohio Tax-Free
Income and Short-Term Bond Portfolios is declared daily as a dividend to
investors who are shareholders of such Portfolio at, and whose payment for share
purchases are available to the particular Portfolio, in Federal funds by, the
close of business on the day of declaration. Net realized capital gains, if any,
will be distributed at least annually.
Federal Taxes -- No provision is made for Federal taxes as it is the Fund's
intention to have each Portfolio continue to qualify as a regulated investment
company and to make the requisite distributions to its shareholders which will
be sufficient to relieve it from Federal income and excise taxes.
Security Transactions and Investment Income -- Investment transactions are
accounted for on the trade date. The cost of investments sold is determined by
use of the specific identification method for both financial reporting and
Federal income tax purposes. Interest income is recorded on the accrual basis.
Certain expenses, principally Service and Distribution fees, are class specific
expenses. Expenses not directly attributable to a specific Portfolio or class
are allocated among all of the Portfolios or classes of the Fund based on their
relative net assets.
Repurchase Agreements -- Money market instruments may be purchased from
banks and non-bank dealers subject to the seller's agreement to repurchase them
at an agreed upon date and price. Collateral for repurchase agreements may have
longer maturities than the maximum permissible remaining maturity of portfolio
investments. The seller will be required on a daily basis to maintain the value
of the securities subject to the agreement at not less than the repurchase
price. The agreements are conditioned upon the collateral being deposited under
the Federal Reserve book-entry system or held in a separate account by the
Fund's custodian or an authorized securities depository.
Organization Costs -- Costs incurred by each Portfolio in connection with
its organization, registration and initial public offering have been deferred
and are being amortized using the straight-line method over a five-year period
beginning on the date on which each Portfolio commenced its investment
activities.
Implementation of AICPA Statement of Position 93-2: -- As of October 1,
1993, the Fund implemented AICPA Statement of Position 93-2 -- Determination,
Disclosure and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. Adoption of this
standard results in the reclassification to paid-in capital of permanent
differences between tax and financial reporting of net investment income and net
realized gain (loss). The change has had no material
FS-8
<PAGE> 60
THE PNC(R) FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 1994
effect on paid-in capital or other components of the net assets of any of the
Portfolios at October 1, 1993. Distributions to shareholders and net asset
values were not affected by this change.
(B) TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Pursuant to an Investment Advisory Agreement, PNC Institutional Management
Corporation ("PIMC"), a wholly-owned subsidiary of PNC Bank, National
Association ("PNC Bank"), serves as adviser for each of the Fund's Portfolios.
PNC Bank serves as sub-adviser for the Managed Income Portfolio, Tax-Free Income
Portfolio, Intermediate Government Portfolio, Short-Term Bond Portfolio and
Intermediate-Term Bond Portfolio. PNC Bank, Ohio, National Association ("PNC
Bank Ohio"), serves as the sub-adviser for the Ohio Tax-Free Income Portfolio.
PNC Bank and PNC Bank Ohio are indirect wholly-owned subsidiaries of PNC Bank
Corp.
For its advisory services, PIMC is entitled to receive fees at the
following annual rates, computed daily and payable monthly, based on each
Portfolio's average daily net assets: .50% of the first $1 billion, .45% of the
next $1 billion, .425% of the next $1 billion and .40% of net assets in excess
of $3 billion.
PIMC may, at its discretion, voluntarily waive all or any portion of its
advisory fee for any Portfolio. For the year ended September 30, 1994, advisory
fees and waivers and reimbursement for each Portfolio were as follows:
<TABLE>
<CAPTION>
GROSS ADVISORY NET ADVISORY
FEE WAIVER FEE
-------------- -------- --------------
<S> <C> <C> <C>
Managed Income Portfolio.................. $1,997,633 $599,290 $1,398,343
Tax-Free Income Portfolio................. 47,655 47,655 --
Intermediate Government Portfolio......... 921,365 552,819 368,546
Ohio Tax-Free Income Portfolio............ 35,709 35,709 --
Pennsylvania Tax-Free Income Portfolio.... 276,649 227,003 49,646
Short-Term Bond Portfolio................. 174,589 137,696 36,893
Intermediate-Term Bond Portfolio.......... 337,365 206,071 131,294
</TABLE>
PIMC pays PNC Bank and PNC Bank Ohio fees for their sub-advisory services.
PFPC Inc. ("PFPC"), an indirect wholly-owned subsidiary of PNC Bank Corp.,
and Provident Distributors, Inc. ("PDI") act as co-administrators for the Fund.
The combined administration fee is computed daily and payable monthly, based on
a percentage of the average daily net assets of each Portfolio, at the following
annual rates: .20% of the first $500 million, .18% of the next $500 million,
.16% of the next $1 billion and .15% of net assets in excess of $2 billion.
FS-9
<PAGE> 61
THE PNC(R) FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 1994
PFPC and PDI may, at their discretion, voluntarily waive all or any portion
of their administration fees for any Portfolio. For the year ended September 30,
1994, administration fees and waivers for each Portfolio were as follows:
<TABLE>
<CAPTION>
GROSS NET
ADMINISTRATION ADMINISTRATION
FEE WAIVER FEE
-------------- -------- --------------
<S> <C> <C> <C>
Managed Income Portfolio.................. $799,053 $277,849 $521,204
Tax-Free Income Portfolio................. 19,062 19,062 --
Intermediate Government Portfolio......... 368,546 181,804 186,742
Ohio Tax-Free Income Portfolio............ 14,284 14,284 --
Pennsylvania Tax-Free Income Portfolio.... 109,878 90,020 19,858
Short-Term Bond Portfolio................. 69,836 55,078 14,758
Intermediate-Term Bond Portfolio.......... 134,946 82,428 52,518
</TABLE>
In addition, PNC Bank serves as custodian for each of the Fund's
Portfolios. PFPC serves as transfer and dividend disbursing agent.
PIMC, PFPC and PDI have also voluntarily agreed to reimburse for expenses
in the amount of $50,257 with respect to the Tax-Free Income Portfolio, $49,695
with respect to the Ohio Tax-Free Income Portfolio and $13,503 with respect to
the Pennsylvania Tax-Free Income Portfolio for the year ended September 30,
1994.
PIMC, PFPC and PDI have also agreed to reimburse each Portfolio for the
amount, if any, by which the total operating and management expenses of such
Portfolio for any fiscal year exceed the most restrictive state blue sky expense
limitation in effect from time to time, to the extent required by such
limitation. No such reimbursements were necessary for the year ended September
30, 1994.
(C) PURCHASES AND SALES OF SECURITIES
For the year ended September 30, 1994, purchases and sales of securities,
other than short-term and government securities, were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
------------ -------------
<S> <C> <C>
Managed Income Portfolio................................ $239,730,336 $ 179,162,722
Tax-Free Income Portfolio............................... 4,861,671 3,624,546
Intermediate Government Portfolio....................... 83,492,343 2,186,302
Ohio Tax-Free Income Portfolio.......................... 8,601,801 4,236,805
Pennsylvania Tax-Free Income Portfolio.................. 40,026,196 17,022,412
Short-Term Bond Portfolio............................... 40,258,016 20,671,871
Intermediate-Term Bond Portfolio........................ 87,171,760 39,944,186
</TABLE>
FS-10
<PAGE> 62
THE PNC(R) FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 1994
For the year ended September 30, 1994, purchases and sales of government
securities were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
------------ ------------
<S> <C> <C>
Managed Income Portfolio................................. $141,530,574 $51,423,328
Intermediate Government Portfolio........................ 31,121,094 13,793,086
Short-Term Bond Portfolio................................ 21,885,416 14,158,000
Intermediate-Term Bond Portfolio......................... 29,163,774 21,188,688
</TABLE>
(D) CAPITAL SHARES
Transactions in capital shares for each period were as follows:
<TABLE>
<CAPTION>
MANAGED INCOME PORTFOLIO
------------------------------------------------------
FOR THE YEAR ENDED FOR THE YEAR ENDED
SEPTEMBER 30, 1994 SEPTEMBER 30, 1993
------------------------- -------------------------
SHARES VALUE SHARES VALUE
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Shares sold:
Institutional Class...................... 12,186,561 $124,468,452 7,421,047 $ 80,336,982
Service Class............................ 8,352,936 87,090,065 1,389,371 15,338,120
Series A Investor Class.................. 628,230 6,631,737 542,927 5,898,085
Shares issued in acquisition:
Institutional Class...................... 3,649,044 36,599,918 290,838 3,274,839
Service Class............................ -- -- -- --
Series A Investor Class.................. -- -- -- --
Shares issued in reinvestment of dividends:
Institutional Class...................... 2,074,139 21,617,113 2,035,683 21,790,311
Service Class............................ 205,275 2,116,342 8,978 99,979
Series A Investor Class.................. 59,113 615,438 18,592 201,580
Shares redeemed:
Institutional Class...................... (8,140,174) (85,121,512) (8,404,154) (90,821,836)
Service Class............................ (3,017,544) (31,450,922) (27,163) (302,078)
Series A Investor Class.................. (220,470) (2,266,512) (44,567) (487,214)
---------- ------------ ---------- ------------
Net increase............................... 15,777,110 $160,300,119 3,231,552 $ 35,328,768
========== ============ ========== ============
</TABLE>
FS-11
<PAGE> 63
THE PNC(R) FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
SHORT-TERM BOND PORTFOLIO
----------------------------------------------------
FOR THE PERIOD
SEPTEMBER 1, 1993(1)
FOR THE YEAR ENDED THROUGH
SEPTEMBER 30, 1994 SEPTEMBER 30, 1993
------------------------- -----------------------
SHARES VALUE SHARES VALUE
---------- ------------ --------- -----------
<S> <C> <C> <C> <C>
Shares sold:
Institutional Class........................ 3,720,716 $ 37,120,901 375,000 $ 3,750,000
Service Class.............................. 755,330 7,473,735 316,515 3,165,152
Series A Investor Class.................... 29,976 294,033 -- --
Shares issued in reinvestment of dividends:
Institutional Class........................ 21,968 214,759 -- --
Service Class.............................. 14,450 141,147 -- --
Series A Investor Class.................... 532 5,175 -- --
Shares redeemed:
Institutional Class........................ (2,277,873) (22,096,796) -- --
Service Class.............................. (400,419) (3,947,645) (35,313) (353,252)
Series A Investor Class.................... (1,632) (15,778) -- --
---------- ------------ --------- -----------
Net increase................................. 1,863,048 $ 19,189,531 656,202 $ 6,561,900
========== ============ ========= ===========
</TABLE>
<TABLE>
<CAPTION>
INTERMEDIATE-TERM BOND PORTFOLIO
----------------------------------------------------
FOR THE PERIOD
SEPTEMBER 17, 1993(1)
FOR THE YEAR ENDED THROUGH
SEPTEMBER 30, 1994 SEPTEMBER 30, 1993
------------------------- -----------------------
SHARES VALUE SHARES VALUE
---------- ------------ --------- -----------
<S> <C> <C> <C> <C>
Shares sold:
Institutional Class........................ 2,440,016 $ 22,611,998 34,087 $ 341,383
Service Class.............................. 2,720,032 25,860,499 9,096 91,284
Series A Investor Class.................... 9,574 87,478 -- --
Shares issued in acquisition:
Institutional Class........................ 3,673,356 33,684,821 5,662,188 56,621,877
Service Class.............................. 3,055,695 29,793,024 -- --
Series A Investor Class.................... -- -- -- --
Shares issued in reinvestment of dividends:
Institutional Class........................ 84,197 768,975 -- --
Service Class.............................. 101,940 943,961 -- --
Series A Investor Class.................... 58 531 -- --
Shares redeemed:
Institutional Class........................ (3,917,113) (38,816,847) (29,996) (299,748)
Service Class.............................. (1,933,866) (18,101,776) -- --
Series A Investor Class.................... (2) (15) -- --
---------- ------------ --------- -----------
Net increase................................. 6,233,887 $ 56,832,649 5,675,375 $56,754,796
========== ============ ========= ===========
</TABLE>
- -------------
(1) Commencement of operations.
FS-12
<PAGE> 64
THE PNC(R) FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 1994
(E) AT SEPTEMBER 30, 1994, NET ASSETS CONSISTED OF:
<TABLE>
<CAPTION>
MANAGED TAX-FREE INTERMEDIATE
INCOME INCOME GOVERNMENT
PORTFOLIO PORTFOLIO PORTFOLIO
--------------- ----------- -------------
<S> <C> <C> <C>
Capital paid-in......................................... $ 495,845,612 $ 9,455,902 $ 209,322,348
Undistributed net investment income..................... -- 1,074 17,575
Distributions in excess of net investment income........ (1,274,878) -- --
Distributions in excess of net realized gains........... (371,881) -- --
Accumulated net realized gain (loss)
on investment transactions............................ (3,617,069) 24,640 (521,807)
Net unrealized depreciation on investments.............. (16,945,429) (268,262) (10,524,169)
------------- ----------- -------------
$ 473,636,355 $ 9,213,354 $ 198,293,947
============= =========== =============
</TABLE>
<TABLE>
<CAPTION>
OHIO PENNSYLVANIA SHORT-TERM INTERMEDIATE-
TAX-FREE INCOME TAX-FREE INCOME BOND TERM BOND
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------------- --------------- ----------- -------------
<S> <C> <C> <C> <C>
Capital paid-in........................ $ 8,951,866 $ 62,414,861 $25,751,431 $ 112,414,132
Undistributed net investment income.... -- -- -- 13,608
Distributions in excess of net
investment income.................... -- (3,258) -- --
Accumulated net realized loss on
investment transactions.............. (100,370) (288,051) (1,064,515) (1,169,139)
Net unrealized depreciation on
investments.......................... (471,272) (3,404,461) (560,536) (3,511,573)*
------------- ------------- ----------- -------------
$ 8,380,224 $ 58,719,091 $24,126,380 $ 107,747,028
============= ============= =========== =============
</TABLE>
- -------------
* Includes $1,173,313 of unrealized appreciation, at time of acquisition.
(F) CAPITAL LOSS CARRYOVERS
At September 30, 1994, capital loss carryovers were available to offset
possible future realized capital gains as follows: $3,617,069 in the Managed
Income Portfolio which expire in the year 2002, $521,807 in the Intermediate
Government Portfolio which expire in the year 2002, and $1,064,515 in the
Short-Term Bond Portfolio which expire in the year 2002. At September 30, 1994,
the deferred post-October losses were as follows: $371,881 for the Managed
Income Portfolio, $100,370 for the Ohio Tax-Free Income Portfolio, $285,131 for
the Pennsylvania Tax-Free Income Portfolio, and $1,155,530 for the
Intermediate-Term Bond Portfolio.
(G) ACQUISITION OF PNC COLLECTIVE FUNDS
On September 16, 1993, The PNC Fund acquired all the assets of the Citizens
Fidelity Institutional Active Fixed Income Fund from the participants of such
fund. The acquisition was accomplished by a taxable exchange of assets with a
value of $3,274,839 for 290,838 Institutional shares of the Managed Income
Portfolio at $11.26 per share.
FS-13
<PAGE> 65
THE PNC(R) FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 1994
On September 16, 1993, The PNC Fund acquired all the assets of the Citizens
Fidelity Institutional Bond Fund from participants of such fund. The acquisition
was accomplished by a taxable exchange of assets with a value of $56,621,877 for
5,662,188 Institutional shares of the Intermediate-Term Bond Portfolio at $10.00
per share.
On December 28, 1993, The PNC Fund acquired all the assets of the PNC
Financial Common Trust for Retirement Assets Fixed Income Portfolio from
participants of such fund. The acquisition was accomplished by a tax-free
exchange of assets with a value of $29,793,024 for 3,055,695 Service shares of
the Intermediate-Term Bond Portfolio at $9.75 per share. The Fixed Income
Portfolio's net assets on that date included $1,173,313 in unrealized
appreciation of securities.
On May 26, 1994, The PNC Fund acquired all the assets of the PNC Pension
Plan Assets Fixed Income Portfolio from participants of such fund. The
acquisition was accomplished by a tax-free exchange of assets with a value of
$22,388,535 for 2,444,163 Institutional shares of the Intermediate-Term Bond
Portfolio at $9.16 per share and a value of $24,915,125 for 2,484,060
Institutional shares of the Managed Income Portfolio at $10.03 per share.
On June 21, 1994, The PNC Fund acquired all the assets of the PNC Incentive
Savings Plan Assets Fixed Income Portfolio from participants of such fund. The
acquisition was accomplished by a tax-free exchange of assets with a value of
$11,296,286 for 1,229,193 Institutional shares of the Intermediate-Term Bond
Portfolio at $9.19 per share and a value of $11,684,793 for 1,164,984
Institutional shares of the Managed Income Portfolio at $10.03 per share.
FS-14
<PAGE> 66
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF THE PNC FUND:
We have audited the accompanying statements of net assets of The PNC Fund
(Managed Income, Tax-Free Income, Intermediate Government, Ohio Tax-Free Income,
Pennsylvania Tax-Free Income, Short-Term Bond, and the Intermediate Term-Bond
Portfolios), as of September 30, 1994, and the related statements of operations
for the year (or period) then ended, the statements of changes in net assets for
each of the two years (or periods) in the period then ended, and the financial
highlights for each of the periods presented. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments held by the
custodian as of September 30, 1994. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of The
PNC Fund (Managed Income, Tax-Free Income, Intermediate Government, Ohio
Tax-Free Income, Pennsylvania Tax-Free Income, Short-Term Bond, and the
Intermediate Term-Bond Portfolios), as of September 30, 1994, and the results of
their operations for the year (or period) then ended, the changes in their net
assets for each of the two years (or periods) in the period then ended, and the
financial highlights for each of the periods presented, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND, L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
November 23, 1994
FS-15
<PAGE> 67
FIXED INCOME FUND
SEMI-ANNUAL INVESTMENT ADVISER'S REPORT
DECEMBER 31, 1994
The first half of the Fund's fiscal year ended with the economy continuing on
its improving trend. Continued strong economic growth in the second half of
1994 and the anticipation of future inflation caused the Federal Reserve to
raise the Fed Funds rate by a total of 125 basis points during the period.
Volatility in the foreign exchange markets caused foreign investors to limit
investments in dollar denominated securities.
The yield on the 30 year Treasury started the second half of 1994 at 7.61% and
increased 27 basis points to end 1994 at 7.88%. Yield on the 10 year Treasury
increased from 7.32% to 7.83%, a 51 basis point increase. During the period,
the yield curve from 3 month bills to the 30 year bond shifted from 332 basis
points in early July to 220 basis points at the end of December, a flattening
of 112 basis points. Corporates underperformed Treasuries due to rising
concerns about credit and event risk. The banking and brokerage industries
came under the most pressure due to the unexpected rapid rise in rates
experienced during 1994.
The Fixed Income Fund reduced its holding in corporates and eliminated its
holdings of mortgage securities to increase liquidity. During this
restructuring the Portfolio's duration was shortened which helped performance.
The Portfolio's total return for the last six months was 0.88% compared to the
Lipper Intermediate Investment Grade average return of 0.57% and the Lehman
Intermediate Government Corporate Index of 0.71%
PNC Institutional Management Corporation
January 31, 1995
FS-16
<PAGE> 68
FIXED INCOME FUND
PORTFOLIOS FOR DIVERSIFIED INVESTMENT
Statement of Net Assets
December 31, 1994
(Unaudited)
<TABLE>
<CAPTION>
Par
Maturity (000) Value
-------- ------- -----------
<S> <C> <C> <C>
UNITED STATES TREASURY AND AGENCY
OBLIGATIONS - 80.2%
FEDERAL FARM CREDIT BANK - 7.1%
5.85% . . . . . . . . . . . . . . . . . . . . . 04/29/96 $1,000 $ 979,340
FEDERAL HOME LOAN BANK
NOTES - 28.6%
5.45% . . . . . . . . . . . . . . . . . . . . . 01/25/95 1,000 999,550
5.70% . . . . . . . . . . . . . . . . . . . . . 05/26/95 1,000 995,940
5.82% . . . . . . . . . . . . . . . . . . . . . 05/17/96 1,000 991,250
7.04% . . . . . . . . . . . . . . . . . . . . . 05/24/99 1,000 959,930
-----------
3,946,670
-----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
DISCOUNT NOTES - 9.0%
5.92% . . . . . . . . . . . . . . . . . . . . . 01/04/95 300 299,951
7.30% . . . . . . . . . . . . . . . . . . . . . 07/10/02 1,000 941,670
-----------
1,241,621
-----------
U.S. TREASURY BONDS - 7.3%
8.125% . . . . . . . . . . . . . . . . . . . . 08/15/19 1,000 1,014,290
-----------
U.S. TREASURY NOTES - 28.2%
7.625% . . . . . . . . . . . . . . . . . . . . 12/31/94 900 900,000
5.875% . . . . . . . . . . . . . . . . . . . . 05/15/95 1,000 998,040
7.875% . . . . . . . . . . . . . . . . . . . . 02/15/00 1,000 1,003,000
7.875% . . . . . . . . . . . . . . . . . . . . 11/15/04 1,000 1,003,580
-----------
3,904,620
-----------
TOTAL UNITED STATES TREASURY
AND AGENCY OBLIGATIONS
(Cost $11,302,134) 11,086,541
-----------
CORPORATE BONDS -11.0%
BANKS - 7.3%
North Carolina National Bank (A3,A)
8.50% . . . . . . . . . . . . . . . . . . . . . 11/01/96 1,000 1,005,000
-----------
PETROLEUM REFINING - 3.7%
Texaco Capital Co. (A1,A+)
9.00% . . . . . . . . . . . . . . . . . . . . . 12/15/99 500 516,250
-----------
TOTAL CORPORATE BONDS
(Cost $1,525,941) 1,521,250
-----------
</TABLE>
See Notes to Financial Statements.
FS-17
<PAGE> 69
FIXED INCOME FUND
PORTFOLIOS FOR DIVERSIFIED INVESTMENT
Statement of Net Assets (Concluded)
December 31, 1994
(Unaudited)
<TABLE>
<CAPTION>
Par
Maturity (000) Value
-------- ------- -----------
<S> <C> <C> <C>
VARIABLE RATE OBLIGATIONS - 7.3%
BROKERAGE SERVICES - 7.3%
Morgan Stanley Group, Inc.(A1,A+)
7.36%+
(Cost $1,000,000) . . . . . . . . . . . . . . . . 03/09/95 $1,000 $ 1,000,000
-----------
TOTAL INVESTMENT IN SECURITIES - 98.5%
(Cost $13,828,075*) 13,607,791
OTHER ASSETS IN EXCESS OF
LIABILITIES - 1.5% . . . . . . . . . . . . . . . . . 213,603
-----------
NET ASSETS (100.0%) (Equivalent to
$9.37 per share based on 1,424,033
Fixed Income shares and 50,634
Fixed Income Dollar shares of
beneficial interest outstanding) . . . . . . . . . . $13,821,394
===========
NET ASSET VALUE,
offering and redemption price per
Fixed Income and Fixed Income Dollar
share
($13,821,394/1,474,667) . . . . . . . . . . . . . . $ 9.37
===========
</TABLE>
- -----------------------
* Aggregate cost for federal income tax purposes. The aggregate
gross unrealized appreciation (depreciation) for all
securities is as follows: Excess of value over tax cost
$7,170, excess of tax cost over value ($227,454).
+ Floating Rate Note - The rate shown is the rate as of December
31, 1994, and the maturity shown is the next interest
readjustment date.
Average Weighted Maturity of the Portfolio - 3.9 years.
The Moody's Investors Service, Inc. and Standard and Poor's
Ratings Group, Division of McGraw Hill ratings indicated are
the most recent ratings available at December 31, 1994.
See Notes to Financial Statements.
FS-18
<PAGE> 70
FIXED INCOME FUND
PORTFOLIOS FOR DIVERSIFIED INVESTMENT
Statement of Operations
Six Months Ended December 31, 1994
(Unaudited)
<TABLE>
<S> <C>
Investment income:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 710,274
---------
Expenses:
Investment advisory fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,855
Administrative fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,855
Trustees' fees and officer's salary . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,729
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,672
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,484
Registration fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,242
Custodian fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,573
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,614
Printing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,861
Service Organization fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 599
Transfer agent fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,484
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 975
---------
116,943
Less fees waived and expenses reimbursed . . . . . . . . . . . . . . . . . . . . . . . . . (70,637)
---------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,306
---------
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 663,968
---------
Realized and unrealized gain (loss) from investment activities:
Net realized loss from securities transactions . . . . . . . . . . . . . . . . . . . . . . (704,021)
Change in unrealized appreciation of investments . . . . . . . . . . . . . . . . . . . . . 349,614
---------
Net loss on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (354,407)
---------
Net increase in net assets resulting from operations . . . . . . . . . . . . . . . . . . . . . . . $ 309,561
=========
</TABLE>
See Notes to Financial Statements.
FS-19
<PAGE> 71
FIXED INCOME FUND
PORTFOLIOS FOR DIVERSIFIED INVESTMENT
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Six Months
Ended Year
December 31, 1994 Ended
(Unaudited) June 30, 1994
----------------- -----------------
<S> <C> <C>
Decrease in net assets:
Operations:
Net investment income . . . . . . . . . . . . . . . . . . . . . $ 663,968 $ 2,028,531
Net realized gain (loss) from securities
transactions . . . . . . . . . . . . . . . . . . . . . . . . (704,021) 62,893
Change in unrealized appreciation (depreciation)
on investments . . . . . . . . . . . . . . . . . . . . . . . 349,614 (2,540,325)
----------- ------------
Net increase (decrease) in net assets
resulting from operations . . . . . . . . . . . . . . . . . 309,561 (448,901)
----------- ------------
Dividends to shareholders from:
Net investment income:
Fixed Income shares . . . . . . . . . . . . . . . . . . . . . (650,589) (1,997,498)
Fixed Income Dollar shares . . . . . . . . . . . . . . . . . (13,379) (31,047)
Distributions to shareholders from:
Net capital gain:
Fixed Income shares . . . . . . . . . . . . . . . . . . . . . 0 (129,153)
Fixed Income Dollar shares . . . . . . . . . . . . . . . . . 0 (2,054)
In excess of net capital gain:
Fixed Income shares . . . . . . . . . . . . . . . . . . . . . 0 (145,828)
Fixed Income Dollar shares . . . . . . . . . . . . . . . . . 0 (2,320)
----------- -------------
Total dividends and distributions
to shareholders . . . . . . . . . . . . . . . . . . . . . . (663,968) (2,307,900)
----------- ------------
Capital share transactions:
Sales of shares . . . . . . . . . . . . . . . . . . . . . . . . 1,674,074 12,284,599
Shares issued in reinvestment of dividends . . . . . . . . . . . 232,844 976,863
Shares repurchased . . . . . . . . . . . . . . . . . . . . . . . (19,625,913) (18,027,816)
------------ ------------
Net decrease in net assets derived
from capital share transactions . . . . . . . . . . . . . . (17,718,995) (4,766,354)
------------ ------------
Total decrease in net assets . . . . . . . . . . . . . . . . (18,073,402) (7,523,155)
Net Assets:
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . 31,894,796 39,417,951
----------- ------------
End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,821,394 $ 31,894,796
=========== ===========
</TABLE>
See Notes to Financial Statements.
FS-20
<PAGE> 72
FIXED INCOME FUND
Fixed Income Shares
PORTFOLIOS FOR DIVERSIFIED INVESTMENT
Financial Highlights
The table below sets forth selected financial data for a share of capital stock
outstanding throughout each period presented.
<TABLE>
<CAPTION>
Six Months
Ended
December 31, Year Ended Year Ended Year Ended Year Ended Year Ended
1994 June 30, June 30, June 30, June 30, June 30,
(Unaudited) 1994 1993 1992 1991 1990
------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning . . . . . $ 9.57 $ 10.41 $ 9.88 $ 9.32 $ 9.25 $ 9.47
---------- --------- -------- -------- -------- --------
Income from investment operations:
Net investment income . . . . . . . . 0.28 0.61 0.66 0.71 0.76 0.77
Net gain (loss) on securities
(realized and unrealized) . . . . . (0.20) (0.75) 0.53 0.56 0.07 (0.22)
---------- --------- -------- -------- -------- --------
Total income (loss) from
investment operations . . . . . 0.08 (0.14) 1.19 1.27 0.83 0.55
---------- --------- -------- -------- -------- --------
Less distributions:
Dividends from net investment
income . . . . . . . . . . . . . . (0.28) (0.62) (0.66) (0.71) (0.76) (0.77)
Distributions from capital gains . . 0.00 (0.04) 0.00 0.00 0.00 0.00
Distributions in excess of
capital gains . . . . . . . . . . . 0.00 (0.04) 0.00 0.00 0.00 0.00
--------- --------- -------- -------- -------- --------
Total distributions . . . . . . . (0.28) (0.70) (0.66) (0.71) (0.76) (0.77)
--------- --------- -------- -------- -------- --------
Net asset value, end of period . . . $ 9.37 $ 9.57 $ 10.41 $ 9.88 $ 9.32 $ 9.25
========= ========= ======== ======== ======== ========
Total return . . . . . . . . . . . . (3.52%)(a) (1.54%) 12.41% 14.07% 9.43% 6.09%
Ratios/supplemental data:
Net assets, end of period
(in 000's) . . . . . . . . . . . . $ 13,347 $ 31,392 $ 38,963 $ 29,739 $ 13,896 $ 12,599
Ratio of expenses to average daily
net assets . . . . . . . . . . . . 0.40%(a)(b) 0.40%(b) 0.40%(b) 0.40%(b) 0.40%(b) 0.40%(b)
Ratio of net investment income to
average daily net assets . . . . . 5.82%(a) 6.04% 6.48% 7.34% 8.29% 8.27%
Portfolio turnover rate . . . . . . . 65%(a) 85% 103% 94% 52% 38%
</TABLE>
- ---------------------------------
(a) Annualized.
(b) Without the waiver of administrative fees, advisory fees,
trustees' fees and officer's salary and expense reimbursements,
the ratios of expenses to average daily net assets would have been
1.02% (annualized), .96%, .93%, 1.00%, 1.34% and 1.22% for the
period ended December 31, 1994 and the years ended June 30, 1994,
1993, 1992, 1991 and 1990, respectively.
See Notes to Financial Statements.
FS-21
<PAGE> 73
FIXED INCOME FUND
Fixed Income Dollar Shares
PORTFOLIOS FOR DIVERSIFIED INVESTMENT
Financial Highlights
The table below sets forth selected financial data for a share of capital stock
outstanding throughout each period presented.
<TABLE>
<CAPTION>
Six Months
Ended June 28,(d)
December 31, Year Ended Year Ended Year Ended through Year Ended
1994 June 30, June 30, June 30, June 30, June 30,
(Unaudited) 1994 1993 1992 1991 1990(c)
------------- ---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period . . . . . . . . . . . $ 9.57 $ 10.41 $ 9.88 $ 9.32 $ 9.30 $ 9.47
--------- --------- -------- --------- --------- ---------
Income from investment operations:
Net investment income . . . . . . 0.27 0.58 0.64 0.69 0.01 0.74
Net gain(loss) on securities
(realized and unrealized) . . . (0.20) (0.75) 0.53 0.56 0.02 (0.22)
--------- --------- -------- --------- --------- ---------
Total income from investment
operations . . . . . . . . . . 0.07 (0.17) 1.17 1.25 0.03 0.52
--------- --------- -------- --------- --------- ---------
Less distributions:
Dividends from net investment income (0.27) (0.59) (0.64) (0.69) (0.01) (0.74)
Distributions from capital
gains . . . . . . . . . . . . 0.00 (0.04) 0.00 0.00 0.00 0.00
Distributions in excess of
capital gains . . . . . . . . . 0.00 (0.04) 0.00 0.00 0.00 0.00
--------- --------- -------- --------- --------- ---------
Total distributions . . . . . . (0.27) (0.67) (0.64) (0.69) (0.01) (0.74)
--------- --------- -------- --------- --------- ---------
Net asset value, end of
period . . . . . . . . . . . . $ 9.37 $ 9.57 $ 10.41 $ 9.88 $ 9.32 $ 9.25
========= ========= ======== ========= ========= =========
Total return . . . . . . . . . . (3.77%)(a) (1.79%) 12.13% 13.75% 0.28% 5.75%
Ratios/supplemental data:
Net assets, end of period (in 000's) $ 474 $ 503 $ 455 $ 417 $ 214 $ 0
Ratio of expenses to average daily
net assets . . . . . . . . . . 0.65%(a)(b) 0.65%(b) 0.65%(b) 0.65%(b) 0.65%(a)(b) 0.65%(b)
Ratios of net investment income to
average daily net assets . . . 5.57%(a) 5.79% 6.25% 6.98% 7.69%(a) 8.11%
Portfolio turnover rate . . . . . 65%(a) 85% 103% 94% 52%(a) 38%
</TABLE>
- ----------------------
(a) Annualized.
(b) Without the waiver of administrative fees, advisory fees, trustees' fees
and officer's salary and expense reimbursements, the ratios of expenses to
average daily net assets would have been 1.27%(annualized), 1.21%, 1.18%,
1.25%, 1.59%(annualized), and 1.48% for the period ended December 31, 1994
and the years ended June 30, 1994, 1993 and 1992, the period ended June 30,
1991 and the year ended June 30, 1990, respectively.
(c) No shares were outstanding June 30, 1990.
(d) Reissuance of shares.
See Notes to Financial Statements.
FS-22
<PAGE> 74
NOTES TO FINANCIAL STATEMENTS
A. Portfolios for Diversified Investment (the Company) was incorporated in
Maryland on January 18, 1984 and was reorganized as a Massachusetts business
trust on October 31, 1985. The Company is registered under the Investment
Company Act of 1940, as amended, as diversified, open-end management investment
company. The Company consists of one portfolio, Fixed Income Fund ("Income
Fund").
The Company's Declaration of Trust authorizes the Board of Trustees to
issue an unlimited number of shares of beneficial interest in the Company and
to classify or reclassify any uninsured shares into one or more classes of
shares. The Declaration of Trust further authorizes the trustees to classify
or reclassify any class of shares into one or more subclasses.
Income Fund has two classes of shares, one class being referred to as
Dollar shares. Dollar shares and the other class of shares are identical in
all respects, except that Dollar shares are sold to institutions (Service
Organizations) which provide support services to their customers who
beneficially own such shares, in consideration of Income Fund's payment of
O.25% (on an annualized basis) of the average daily net asset value of the
Dollar shares held by the institutions for the benefit of their customers. The
Service Organization fee is applicable only to the Dollar shares.
B. Significant accounting policies relating to the Company are as follows:
Security Valuation -- Portfolio securities which are listed on an exchange
are valued at the last quoted sales price on that exchange, or, if there has
been no such reported sale on that day, at the mean between the closing bid and
asked price. If a security is traded on more than one exchange, the security
is valued at the last quoted sales price on the exchange where the security is
primarily traded. Unlisted securities for which market quotations are not
readily available are valued at the most recent quoted bid price. Short-term
investments having a maturity of sixty days or less are valued on the basis of
amortized cost.
Securities Transactions and Investment Income -- Securities transactions
are accounted for on the trade date. The cost of investments sold is
determined by the use of the specific identification method for both financial
reporting and income tax purposes. Interest income is recorded on an accrual
basis.
Dividends and Distributions to Shareholders -- Substantially all of the net
investment income of Income Fund will be distributed as dividends monthly to
shareholders. Net realized capital gains, if any, will be distributed at least
annually for purposes of relieving Income Fund of federal income and excise
taxes. Distributions necessary to relieve Income Fund of federal excise taxes
are based upon a twelve month period ended October 31 of each year and, because
of subsequently realized capital losses in the fiscal year, may exceed the net
realized capital gains.
Federal Taxes -- No provision is made for federal taxes as it is the
Company's intention to have Income Fund continue to qualify as a regulated
investment company and to make the requisite distributions to its shareholders
which will be sufficient to relieve the portfolio from all or substantially all
federal income and excise taxes.
Repurchase Agreements--Income Fund may engage in repurchase agreements of
obligations issued or guaranteed as to principal and interest by the United
States Government, its agencies or instrumentalities and other securities in
which the Fund is authorized to invest. With respect to any repurchase
FS-23
<PAGE> 75
agreement transaction engaged in by the Fund, Income Fund's investment adviser
will require the seller of the securities subject to the repurchase agreement
to maintain, on a daily basis, the value of such securities at not less than
the repurchase price (including accrued interest). The agreements are
conditioned upon the collateral being deposited under the Federal
Reserve/Treasury book-entry system or by another authorized securities
depository.
C. PNC Institutional Management Corporation ("PIMC") (formerly Provident
Institutional Management Corporation) is adviser for Income Fund and maintains
the Company's financial accounts. PNC Bank, National Association ("PNC Bank"),
serves as sub-adviser and custodian for Income Fund. PIMC is a subsidiary of
PNC Bank. PFPC Inc. ("PFPC"), an indirect wholly owned subsidiary of PNC Bank
Corp., is the Company's transfer agent. PNC Bank is a wholly owned subsidiary
of PNC Bank Corp. Provident Distributors Inc. ("PDI") serves as the Company's
distributor. No compensation is payable by the Company to PDI for its
distribution services. The Company has entered into an Administration
agreement with PFPC and PDI for certain administrative services.
In return for their advisory and administration services, PIMC and the
administrators are each entitled to receive a fee from the Company, computed
daily and payable monthly, at the annual rate of .20 %. In addition, PIMC and
the administrators each has agreed to reduce the advisory and administrative
fees otherwise payable to them and to reimburse the Company for certain of its
operating expenses to the extent necessary to ensure that the operating
expenses ratios (excluding fees paid to Service Organizations pursuant to
Servicing Agreements) do not exceed .40% of the average net assets of Income
Fund.
If expenses borne by Income Fund in any fiscal year exceed the applicable
expense limitation imposed by state securities regulation, PIMC and the
administrators have each agreed to reimburse Income Fund for one-half of any
excess expense up to the amount of fees payable to them by Income Fund (except
where such regulations require reimbursement regardless of the fees payable to
them).
During the period ended December 31, 1994 PIMC, PFPC and the Company's
trustees and officer voluntarily waived fees or salary as shown below:
<TABLE>
<S> <C>
Advisory and Administration
fees waived $ 45,711
Trustees' fees and
officer's salary waived 24,926
</TABLE>
Expenses of Income Fund include legal fees paid to Drinker Biddle & Reath.
A partner of that firm is Secretary of the Company.
D. Purchases and sales of securities, other than short-term obligations for
the period ended December 31, 1994 were as follows:
<TABLE>
<CAPTION>
Purchases Sales
--------- -----
<S> <C> <C>
Corporate Obligations $ 0 $ 7,197,799
Government Obligations 6,983,945 15,586,023
</TABLE>
FS-24
<PAGE> 76
E. At December 31, 1994 net assets consisted of:
<TABLE>
<S> <C>
Capital paid-in $14,893,856
Undistributed net
investment income 0
Accumulated net
realized loss on investments (852,178)
Net unrealized depreciation of
investments (220,284)
-------
$13,821,394
===========
</TABLE>
F. Transactions in Fixed Income shares and Fixed Income Dollar shares are
summarized as follows:
<TABLE>
<CAPTION>
INCOME SHARES INCOME DOLLAR SHARES
---------------------------------- ----------------------------------
Six Months Six Months
Ended Ended
December 31, December 31,
1994 Year Ended 1994 Year Ended
(Unaudited) June 30, 1994 (Unaudited) June 30, 1994
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Shares sold . . . . . . . . . . . . . . . . . . 170,782 1,173,487 4,629 26,640
Shares issued in reinvestment
of dividends . . . . . . . . . . . . . . . . 24,365 79,414 0 0
Shares issued in reinvestment
of capital gains . . . . . . . . . . . . . . 0 15,817 0 0
Shares repurchased . . . . . . . . . . . . . . (2,051,692) (1,731,327) (6,611) (17,714)
----------- ----------- -------- --------
Net increase
(decrease) in shares . . . . . . . . . . . . (1,856,545) (462,609) (1,982) 8,926
Shares outstanding:
Beginning of period . . . . . . . . . . . . . 3,280,578 3,743,187 52,616 43,690
----------- ----------- -------- --------
End of period . . . . . . . . . . . . . . . . 1,424,033 3,280,578 50,634 52,616
=========== =========== ======== ========
</TABLE>
FS-25
<PAGE> 77
The PNC Fund ("PNC Fund") Intermediate-Term Bond Portfolio Portfolios for
Diversified Investment (the "Trust"), Fixed Income Fund
Introduction to Proposed Merger
May 14, 1995
The accompanying unaudited Pro Forma Combined Schedule of Portfolio Investments
and Statement of Assets and Liabilities reflect the accounts of the
Intermediate-Term Bond Portfolio of PNC Fund and the Fixed Income Fund of the
Trust as of the year ended December 31, 1994, and the Pro Forma Statement of
Operations reflects the accounts for the twelve months ended September 30,
1994. These statements have been derived from the books and records of PNC
Fund and the Trust utilized in calculating daily net asset value at December
31, 1994.
FS-26
<PAGE> 78
THE PNC FUND
INTERMEDIATE-TERM BOND PORTFOLIO
INTERMEDIATE-TERM BOND PORTFOLIO OF PNC FUND
FIXED INCOME FUND OF THE TRUST
PRO-FORMA COMBINED PORTFOLIO OF INVESTMENTS
December 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
PAR (000) VALUE AT DECEMBER 31, 1994
------------------------------ --------------------------------------
PDI PNC PDI PNC
FIXED INTERMEDIATE FIXED INTERMEDIATE
INCOME TERM BOND PRO-FORMA INCOME TERM BOND PRO-FORMA
FUND PORTFOLIO COMBINED MATURITY FUND PORTFOLIO COMBINED
---- --------- -------- -------- ---- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
AGENCY OBLIGATIONS:
Federal Home Loan Bank Bonds:
$2,660 $2,660 5.60% 01/03/95 $2,659,172 $2,659,172
$1,000 $1,000 5.45% 01/25/95 $999,550 $999,550
$2,000 $2,000 5.82% 05/17/95 $1,982,500 $1,982,500
$1,000 $1,000 5.70% 05/26/95 $995,940 $995,940
$1,000 $1,000 5.82% 05/17/96 $991,250 $991,250
$2,500 $2,500 6.99% 04/25/97 $2,454,425 $2,454,425
$1,000 $2,000 $3,000 7.04% 05/24/99 $959,930 $1,919,860 $2,879,790
Federal Farm Credit Bank Notes:
$1,000 $1,000 5.85% 04/29/96 $979,340 $979,340
Federal Home Loan Mortgage Corp:
$2,000 $2,000 4.75% 05/15/96 $1,908,996 $1,908,996
$3,000 $3,000 4.75% 03/15/97 $2,781,279 $2,781,279
$5,000 $5,000 5.50% 06/15/97 $4,617,097 $4,617,097
$291 $291 9.50% 08/15/97 $302,283 $302,283
$270 $270 9.00% 09/15/97 $290,054 $290,054
$193 $193 8.50% 08/15/98 $202,184 $202,184
$67 $67 8.50% 09/15/98 $67,425 $67,425
$35 $35 9.00% 09/15/98 $35,739 $35,739
$66 $66 8.50% 10/15/98 $67,061 $67,061
$667 $667 7.00% 07/15/00 $641,667 $641,667
$1,248 $1,248 7.00% 08/15/00 $1,193,697 $1,193,697
$72 $72 9.00% 12/01/01 $76,619 $76,619
$157 $157 9.50% 07/01/03 $168,761 $168,761
$1,500 $1,500 7.05% 03/24/04 $1,379,531 $1,379,531
$2,000 $2,000 7.74% 06/01/04 $1,907,580 $1,907,580
$282 $282 9.50% 11/01/04 $292,585 $292,585
$64 $64 8.50% 01/01/05 $65,055 $65,055
$303 $303 9.50% 01/01/05 $318,855 $318,855
$31 $31 9.00% 12/01/16 $31,741 $31,741
Federal National Mortgage Assoc:
$300 $300 5.92% 01/04/95 $299,951 $299,951
$2,500 $2,500 7.60% 01/10/97 $2,487,550 $2,487,550
$3,304 $3,304 5.75% 06/25/98 $3,039,680 $3,039,680
$500 $500 7.85% 09/10/98 $497,395 $497,395
$1,000 $1,000 8.70% 06/10/99 $1,024,500 $1,024,500
$1,000 $1,000 6.35% 08/10/99 $936,300 $936,300
$2,000 $2,000 8.25% 12/18/00 $2,016,640 $2,016,640
$1,000 $1,000 7.30% 07/10/02 $941,670 $941,670
$145 $145 9.00% 08/01/02 $147,665 $147,665
$1,000 $1,000 6.95% 09/10/02 $923,700 $923,700
$42 $42 9.50% 03/01/05 $43,081 $43,081
Government National Mortgage
Association:
$348 $348 8.00% 05/15/99 $341,774 $341,774
$51 $51 7.50% 04/15/07 $48,662 $48,662
$41 $41 7.50% 06/15/07 $39,283 $39,283
$58 $58 7.50% 07/15/07 $55,492 $55,492
$40 $40 7.50% 08/15/07 $37,932 $37,932
$81 $81 7.50% 10/15/07 $78,053 $78,053
$2,829 $2,829 7.50% 12/15/07 $2,712,366 $2,712,366
$29 $29 9.50% 08/15/18 $29,706 $29,706
$59 $59 9.50% 04/15/19 $61,075 $61,075
Tennessee Valley Authority:
$1,000 $1,000 6.125% 07/15/03 $875,000 $875,000
$6,300 $42,433 $48,733 TOTAL AGENCY OBLIGATIONS: $6,167,631 $40,760,020 $46,927,651
------ ------- ------- ------------------------- ---------- ----------- -----------
</TABLE>
FS-27
<PAGE> 79
INTERMEDIATE-TERM BOND PORTFOLIO OF PNC FUND
FIXED INCOME FUND OF THE TRUST
PRO-FORMA COMBINED PORTFOLIO OF INVESTMENTS
December 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
PAR (000) VALUE AT DECEMBER 31, 1994
------------------------------ --------------------------------------
PDI PNC PDI PNC
FIXED INTERMEDIATE FIXED INTERMEDIATE
INCOME TERM BOND PRO-FORMA INCOME TERM BOND PRO-FORMA
FUND PORTFOLIO COMBINED MATURITY FUND PORTFOLIO COMBINED
---- --------- -------- -------- ---- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSET BACKED SECURITIES:
Automotive:
Capital Auto Receivable Asset Trust:
$2,000 $2,000 4.90% 02/16/98 $1,981,200 $1,981,200
Merrill Lynch Asset Backed Corp. 1992-1:
$1,757 $1,757 5.50% 07/15/95 $1,728,468 $1,728,468
Union Federal Master Trust (Aaa AAA):
$1,017 $1,017 4.875% 11/15/95 $980,376 $980,376
Credit:
Discover Card Master Trust I (Aaa AAA):
$3,000 $3,000 6.3775% 01/15/95 $3,003,600 $3,003,600
Finance:
First Chicago Master Trust II:
$500 $500 8.40% 12/15/96 $503,600 $503,600
The Money Store Home Equity Trust:
$2,000 $2,000 7.625% 12/15/95 $1,990,000 $1,990,000
$10,274 $10,274 TOTAL ASSET BACKED SECURITIES: $0 $10,187,244 $10,187,244
------- ------- ------------------------------ -- ----------- -----------
CORPORATE BONDS:
Automotive:
Ford Motor Credit Co. (A2 A)
$1,000 $1,000 5.625% 12/15/98 $911,250 $911,250
$1,000 $1,000 5.625% 01/15/99 $911,250 $911,250
Banks:
Bank America Corp. (A2 A):
$1,100 $1,100 6.00% 07/15/97 $1,040,875 $1,040,875
Bank of New York, Inc. (Baal A-):
$1,000 $1,000 6.50% 12/01/03 $872,500 $872,500
National Westminster Bank (Aa3 AA-):
$1,250 $1,250 9.45% 05/01/01 $1,312,500 $1,312,500
North Carolina National Bank (A3 A)
$1,000 $1,000 8.50% 11/01/96 $1,005,000 $1,005,000
Westpac Banking Corp. (A3 A):
$1,000 $1,000 9.125% 08/15/01 $1,025,000 $1,025,000
Brokerage:
Lehman Brothers Holdings, Inc. (A3 A):
$1,000 $1,000 5.50% 06/15/96 $963,750 $963,750
Finance:
Associates Corp. of North America
(A1, AA-):
$1,000 $1,000 9.70% 05/01/97 $1,033,750 $1,033,750
Fleet Financial Group (A2 A-)
$1,000 $1,000 7.25% 09/01/99 $960,000 $960,000
Grand Metropolitan Investment Corp.
(A2, A+):
$1,000 $1,000 7.125% 09/15/04 $920,000 $920,000
</TABLE>
FS-28
<PAGE> 80
INTERMEDIATE-TERM BOND PORTFOLIO OF PNC FUND
FIXED INCOME FUND OF THE TRUST
PRO-FORMA COMBINED PORTFOLIO OF INVESTMENTS
December 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
PAR (000) VALUE AT DECEMBER 31, 1994
---------------------------- --------------------------------------
PDI PNC PDI PNC
FIXED INTERMEDIATE FIXED INTERMEDIATE
INCOME TERM BOND PRO-FORMA INCOME TERM BOND PRO-FORMA
FUND PORTFOLIO COMBINED MATURITY FUND PORTFOLIO COMBINED
---- --------- -------- -------- ---- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Great Western Financial Corp.
(Baa2 BBB+):
$1,150 $1,150 6.375% 07/01/00 $1,037,156 $1,037,156
Petroleum Refining:
Texaco Capital (A1 A+):
$500 $500 9.00% 12/15/99 $516,250 $516,250
Retail Department Stores:
J. C. Penney, Co., (A2, A+):
$1,000 $1,000 5.375% 11/15/98 $913,750 $913,750
Telecommunications:
GTE Southwest, Inc. (A3 A)
$2,000 $2,000 5.82% 12/01/99 $1,805,000 $1,805,000
Southwestern Bell Telephone (A1 A+)
$1,000 $1,000 6.375% 04/01/01 $913,750 $913,750
Utilities (Electric)
Public Service Colorado (Baa1 BBB+)
$1,000 $1,000 6.00% 01/01/01 $887,500 $887,500
Yankee:
Bell Telphone, Canada (Aa2 AA-):
$1,000 $1,000 7.75% 04/01/06 $961,250 $961,250
National Bank of Canada (A2 BBB+):
$1,000 $1,000 8.125% 08/15/04 $965,000 $965,000
Noranda, Inc. (Baa2 BBB-):
$1,000 $1,000 8.00% 06/01/03 $958,750 $958,750
$1,500 $19,500 $21,000 TOTAL CORPORATE BONDS: $1,521,250 $18,393,031 $19,914,281
------ ------- ------- ---------------------- ---------- ----------- -----------
MEDIUM TERM NOTES:
Automotive:
Chrysler Financial Corp. (Baa2 BBB)
$3,500 $3,500 5.08% 01/27/97 $3,316,250 $3,316,250
General Motors Acceptance Corp.
(Baal BBB+)
$2,500 $2,500 7.75% 01/24/97 $2,475,000 $2,475,000
Telecommunications:
NYNEX Capital Funding:
$1,400 $1,400 8.75% 12/01/04 $1,415,750 $1,415,750
$0 $7,400 $7,400 TOTAL MEDIUM TERM NOTES: $0 $7,207,000 $7,207,000
-- ------ ------ ------------------------ --- ---------- ----------
U.S. TREASURY OBLIGATIONS:
U.S. Treasury Notes:
$900 $900 7.625% 12/31/94 $900,000 $900,000
$1,000 $1,000 5.875% 05/15/95 $998,040 $998,040
$1,000 $1,000 8.625% 10/15/95 $1,010,700 $1,010,700
$4,000 $4,000 4.25% 05/15/95 $3,834,240 $3,834,240
$1,700 $1,700 6.75% 05/31/95 $1,662,362 $1,662,362
$1,100 $1,100 6.375% 06/30/97 $1,066,065 $1,066,065
$3,000 $3,000 7.875% 01/15/98 $3,005,818 $3,005,818
$100 $100 7.875% 04/15/98 $100,138 $100,138
$10,000 $10,000 5.25% 07/31/98 $9,204,700 $9,204,700
$1,000 $1,000 7.125% 10/15/98 $979,990 $979,990
$3,000 $3,000 6.375% 01/15/99 $2,849,370 $2,849,370
</TABLE>
FS-29
<PAGE> 81
INTERMEDIATE-TERM BOND PORTFOLIO OF PNC FUND
FIXED INCOME FUND OF THE TRUST
PRO-FORMA COMBINED PORTFOLIO OF INVESTMENTS
December 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
PAR (000) VALUE AT DECEMBER 31, 1994
---------------------------- --------------------------------------
PDI PNC PDI PNC
FIXED INTERMEDIATE FIXED INTERMEDIATE
INCOME TERM BOND PRO-FORMA INCOME TERM BOND PRO-FORMA
FUND PORTFOLIO COMBINED MATURITY FUND PORTFOLIO COMBINED
---- --------- -------- -------- ---- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
$1,000 $1,000 6.375% 01/15/00 $941,170 $941,170
$1,000 $1,000 7.875% 02/15/00 $1,003,000 $1,003,000
$2,300 $2,300 7.75% 02/15/01 $2,291,972 $2,291,972
$1,000 $1,000 6.25% 02/15/03 $905,170 $905,170
$3,000 $3,000 7.25% 05/15/04 $2,881,740 $2,881,740
$1,000 $1,000 7.875% 11/15/04 $1,003,580 $1,003,580
U.S. Treasury Bonds:
$1,000 $1,000 8.125% 08/15/19 $1,014,290 $1,014,290
$4,900 $32,200 $37,100 TOTAL U.S. TREASURY OBLIGATIONS: $4,918,910 $30,733,435 $35,652,345
------ ------- ------- -------------------------------- ---------- ----------- -----------
VARIABLE RATE OBLIGATIONS:
Brokerage Services
Morgan Stanley Group, Inc. (A1 A+)
$1,000 $1,000 7.36% 03/09/95 $1,000,000 $1,000,000
$1,000 $0 $1,000 TOTAL VARIABLE RATE OBLIGATIONS: $1,000,000 $0 $1,000,000
------ --- ------ -------------------------------- ---------- --- ----------
$13,700 $114,681 $128,381 TOTAL INVESTMENTS: $13,607,791 $107,280,730 $120,888,521
- ------- -------- -------- ------------------ ----------- ------------ ------------
</TABLE>
FS-30
<PAGE> 82
Intermediate-Term Bond Portfolio of PNC Fund
Fixed Income Fund of the Trust
Pro-Forma Combined Statement of Assets and Liabilities
(Unaudited)
<TABLE>
<CAPTION>
Dec. 31, 1994
--------------------------------------------
PDI PNC Pro-Forma
Fixed Income Inter. Term Bd. Combined
------------ --------------- ---------
<S> <C> <C>
ASSETS
Investments, @ value (Cost $13,827,976,
$112,515,252 and $126,343,228,
respectively) $13,607,791 $107,280,730 $120,888,521
Cash 69,738 5,484 75,222
Interest receivable 222,398 1,611,765 1,834,163
Capital shares sold receivable 0 3,322 3,322
Prepaid expenses 10,537 25,510 36,047
------------ ------------- -------------
TOTAL ASSETS 13,910,464 108,926,811 122,837,275
------------ ------------- -------------
LIABILITIES
Capital shares redeemed payable 15,000 266 15,266
Dividends payable 73,116 0 73,116
Accrued expenses payable 954 63,001 63,955
------------ ------------- -------------
TOTAL LIABILITES 89,070 63,267 152,337
------------ ------------- -------------
TOTAL NET ASSETS $13,821,394 $108,863,544 $122,684,938
============ ============= =============
TOTAL NET ASSETS BY CLASS OF SHARES
Institutional Class (1) $13,346,824 $74,089,569 $87,436,393
Service Class (2) $474,570 34,363,430 34,838,000
Series A Investor Class $0 410,545 410,545
------------ ------------- -------------
$13,821,394 $108,863,544 $122,684,938
============ ============= =============
SHARES OUTSTANDING
Institutional Class (1)
Pre-merger 1,424,033 8,322,586
Post-merger (3) 1,499,643 8,322,586 9,822,229
Service Class (2)
Pre-merger 50,634 3,859,638
Post-merger (4) 53,322 3,859,638 3,912,960
Series A Investor Class 0 46,128 46,128
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE (1)
(total net assets / shares outstanding)
Institutional Class (1)
Pre-merger $9.37 $8.90 $8.90
Post-merger (3) $8.90 $8.90 $8.90
Service Class (2)
Pre-merger $9.37 $8.90 $8.90
Post-merger (4) $8.90 $8.90 $8.90
Series A Investor Class $8.90 $8.90
Offering price per Series A Investor Class $9.32 $9.32
</TABLE>
(1) Pre-merger information for the Fixed Income Fund relates to its Fixed
Income Shares
(2) Pre-merger information for the Fixed Income Fund relates to its Fixed
Income Dollar Shares
(3) Post-merger information for the Fixed Income Fund relates to the
Institutional Shares of the Intermediate-Term Bond Portfolio received by
the Trust in the Reorganization.
(4) Post-merger information for the Fixed Income Fund relates to the Service
Shares of the Intermediate-Term Bond Portfolio received by the Trust in the
Reorganization.
FS-31
<PAGE> 83
Intermediate-Term Bond Portfolio of PNC Fund
Fixed Income Fund of the Trust
Pro-Forma Combined Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Sept. 30, 1994 Sept. 30, 1994
PDI PNC Pro-Forma Pro-Forma
Fixed Income Inter. Term Bd. Adjustments Combined
-------------- ----------------- ------------- -----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Interest Income $477,127 $4,350,354 $4,827,481
Amort. Market Discount 2,230 91,874 $94,104
Amort. Market Premium (27,922) (413,686) ($441,608)
----------- ------------ -------------- ------------
TOTAL INVESTMENT INCOME 451,435 4,028,542 $4,479,977
----------- ------------ -------------- ------------
EXPENSES
Investment Advisory Fees 14,514 337,365 21,770 (1) 373,649
Administration Fees 14,514 134,946 149,460
Custodian Fees 2,455 22,453 24,908
Transfer Agent Fees 1,437 25,286 2,160 (2) 28,883
Service Fees 303 69,088 69,391
Distribution Fees 0 34 34
Legal 12,855 4,156 (11,570) (3) 5,441
Audit 10,586 5,181 (9,530) (3) 6,237
Printing 2,571 8,730 (2,310) (3) 8,991
Registration Fees - SEC 0 29,760 4,135 (5) 33,895
Registration Fees - Blue Sky 4,613 13,319 17,932
Organization 0 4,569 4,569
Trustees' Fees and Officers' Salaries 13,864 1,522 (13,864) (3) 1,522
Insurance 807 1,307 (807) (3) 1,307
Miscellaneous 499 3,533 (499) (3) 3,533
----------- ------------ -------------- ------------
79,018 661,249 (10,515) 729,752
Less: Fees waived & Expenses Reimbursed (49,693) (288,499) 25,743 (4) (312,449)
----------- ------------ -------------- ------------
TOTAL EXPENSES 29,325 372,750 15,228 417,303
----------- ------------ -------------- ------------
NET INVESTMENT INCOME 422,110 3,655,792 (15,228) 4,062,674
----------- ------------ -------------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS TRANSACTIONS
Net realized loss on investment
transactions (429,931) (972,851) (1,402,782)
Change in unrealized appreciation
(depreciation) 267,522 (4,627,426) (4,359,904)
----------- ------------ -------------- ------------
NET REALIZED AND UNREALIZED
LOSS ON INVESTMENT TRANSACTIONS (162,409) (5,600,277) (5,762,686)
----------- ------------ -------------- ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $259,701 ($1,944,485) ($15,228) ($1,700,012)
=========== ============ ============== ============
</TABLE>
(1) Based on PNC Fund advisory contract.
(2) Based on PNC Fund transfer agent contract.
(3) Adjustments reflect expected savings when the two funds combine.
(4) Reflects the anticipated change in the waiver of the investment advisory
and administration fees based on expected expense ratios due to the economies
of scale realized with the additional assets after the merger.
(5) Adjustment reflects expected increase in expense when the two funds
combine.
FS-32
<PAGE> 84
NOTES TO PRO FORMA FINANCIAL STATEMENTS OF
THE INTERMEDIATE-TERM BOND PORTFOLIO OF PNC FUND AND
THE FIXED INCOME FUND OF THE TRUST
(UNAUDITED)
1. BASIS OF COMBINATION
The Pro Forma Combined Portfolio of Investments and Pro Forma Combined
Statement of Assets and Liabilities reflect the accounts of the Intermediate-
Term Bond Portfolio of PNC Fund and the Fixed Income Fund of the Trust at
December 31, 1994. The Pro Forma Combined Statement of Operations reflects
the accounts of the Intermediate-Term Bond Portfolio and the Fixed Income Fund
for the twelve months ended September 30, 1994. These statements have been
derived from the annual report of PNC Fund dated September 30, 1994, and
from the books and records of PNC Fund and the Trust utilized in calculating
daily net asset value at December 31, 1994.
The pro forma statements give effect to the proposed transfer of the assets and
stated liabilities of the Fixed Income Fund in exchange for Service and
Institutional Shares of the Intermediate-Term Bond Portfolio under generally
accepted accounting principles. The historical cost of investment securities
will be carried forward to the surviving entity and the results of operations
of the Intermediate-Term Bond Portfolio for pre-combining periods will not be
restated. The pro forma statements do not reflect the expenses of either PNC
Fund or the Trust in carrying out their obligations under the Agreement and
Plan of Reorganization. The actual fiscal year end of the combined fund will be
September 30, the fiscal year end of PNC Fund.
The Agreement and Plan of Reorganization calls for the transfer of the Fixed
Income Fund assets and known Fixed Income Fund liabilities to PNC Fund in
exchange for Service Shares and Institutional Shares of the Intermediate-Term
Bond Portfolio of PNC Fund. At the Effective Time of the Reorganization, the
Trust will make a liquidating distribution of the Intermediate-Term Bond
Portfolio Service Shares and Institutional Shares received in such exchange pro
rata to the holders of Fixed Income Dollar Shares and Fixed Income Shares,
respectively, of the Fixed Income Fund.
The investment adviser of PNC Fund will be retained as the investment adviser
of the combined fund. The expense structure of the Intermediate-Term Bond
Portfolio will apply to the combined fund subsequent to the merger. Following
the merger, the Trust will be terminated under state law and deregistered as an
investment company under the Investment Company Act of 1940. PNC Fund will be
the surviving entity.
The Pro Forma Combined Portfolio of Investments, the Pro Forma Combined
Statement of Assets and Liabilities and the Pro Forma Combined Statement of
Operations should be read in conjunction with the historical financial
statements of PNC Fund and the Trust included or incorporated by reference in
the Statement of Additional Information.
2. SHARES OF BENEFICIAL INTEREST
The pro forma net asset value per share assumes the issuance of additional
shares of Service Shares and Institutional Shares of the Intermediate-Term Bond
Portfolio to the holders of Fixed Income Dollar Shares and Fixed Income
Shares, respectively, of the Fixed Income Fund which would have been issued at
December 31, 1994 in conjunction with the proposed Reorganization.
3. PRO FORMA OPERATIONS
The Pro Forma Statement of Operations assumes similar rates of gross investment
income for the investments of the Intermediate-Term Bond Portfolio and the
Fixed Income Fund. Accordingly, the combined gross investment income is equal
to the sum of each such fund's gross investment income. Certain expenses have
been adjusted to reflect the expected expenses of the combined fund. Pro forma
operating expenses include the actual expenses of the Intermediate-Term Bond
Portfolio and the Fixed Income Fund and of the combined fund adjusted for
certain items.
FS-33
<PAGE> 85
PORTFOLIOS FOR DIVERSIFIED INVESTMENT
FIXED INCOME FUND
PROXY
THIS PROXY IS SOLICITED BY THE BOARD OF TRUSTEES of Portfolios for
Diversified Investment (the "Trust") for use at a Special Meeting of
Shareholders (the "Meeting") to be held at the Bellevue Park Corporate Center,
400 Bellevue Parkway, 4th Floor Conference Room, Wilmington, DE 19809 on June
12, 1995 at 10:00 A.M.
The undersigned hereby appoints Edward J. Roach and G. Willing Pepper, and
either of them, with full power of substitution, as proxies of the undersigned
to vote at the above-stated Meeting, and at all adjournments or postponements
thereof, all shares of beneficial interest of the Fixed Income Fund that are
held of record by the undersigned on the record date for the Meeting, upon the
following matters AND UPON ANY OTHER MATTER WHICH MAY COME BEFORE THE MEETING,
IN THEIR DISCRETION:
PLEASE MARK BOX IN BLUE OR BLACK INK.
(1) Proposal to approve or disapprove the Agreement and Plan of Reorganization,
attached as Exhibit A to the Combined Proxy Statement/Prospectus for the
Meeting, and the transactions contemplated thereby, including (a) the
transfer of all of the assets and known liabilities of the Fixed Income Fund
to the Intermediate-Term Bond Portfolio of The PNC Fund (the "PNC Fund") in
exchange for Service Shares and Institutional Shares of PNC Fund; and (b)
the distribution of the Service Shares and Institutional Shares of PNC Fund
so received to the holders of Fixed Income Dollar Shares and Fixed Income
Shares, respectively, of the Fixed Income Fund.
/ / APPROVE / / DISAPPROVE / / ABSTAIN
(2) In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the Meeting or any adjournment thereof.
EVERY PROPERLY SIGNED AND RETURNED PROXY WILL BE VOTED IN THE MANNER SPECIFIED
THEREON AND, IN THE ABSENCE OF SPECIFICATION, WILL BE TREATED AS GRANTING
AUTHORITY TO VOTE TO APPROVE ITEM 1 ABOVE.
Receipt of Notice of the Meeting and the Combined Proxy Statement/Prospectus is
hereby acknowledged.
PLEASE SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
Please sign exactly as name appears
hereon. When shares are held by
joint tenants, both should sign.
When signing as attorney or as
executor, administrator, trustee or
guardian, please give full title as
such. If a corporation, please sign
in full corporate name by president
or other authorized officer. If a
partnership, please sign in
partnership name by authorized
person.
Dated
-----------------------------------
Signature
-----------------------------------
Signature, if held jointly
