BOSTON PARTNERS
FAMILY OF FUNDS
OF
THE RBB FUND, INC.
Institutional and Investor Classes
Boston Partners Large Cap Value Fund
Boston Partners Mid Cap Value Fund
Boston Partners Small Cap Value Fund II
Boston Partners Bond Fund
Boston Partners Market Neutral Fund
STATEMENT OF ADDITIONAL INFORMATION
December 1, 1999
(as revised March 31, 2000)
This Statement of Additional Information ("SAI") provides information
about the, Boston Partners Large Cap Value Fund (the "Large Cap Value Fund"),
Boston Partners Mid Cap Value Fund (the "Mid Cap Value Fund"), Boston Partners
Small Cap Value Fund II (the "Small Cap Value Fund II"), Boston Partners Bond
Fund (the "Bond Fund") and the Boston Partners Market Neutral Fund (the "Market
Neutral Fund"),(each a "Fund" and collectively, the "Funds") of The RBB Fund,
Inc. (the "Company"). This information is in addition to the information
contained in Boston Partners Family of Funds Prospectus dated December 1, 1999
(as revised March 28, 2000) (the "Prospectus").
This SAI is not a prospectus. It should be read in conjunction with the
Prospectus and the Funds' Annual Report dated August 31, 1999. The financial
statements and notes contained in the Annual Report are incorporated by
reference into this SAI. Copies of the Prospectus and Annual Report may be
obtained by calling toll-free (888) 261-4073.
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TABLE OF CONTENTS
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GENERAL INFORMATION.......................................................... 1
INVESTMENT INSTRUMENTS AND POLICIES.......................................... 1
INVESTMENT LIMITATIONS.......................................................20
MANAGEMENT OF THE COMPANY....................................................23
Directors and Officers..............................................23
Directors' Compensation.............................................24
CONTROL PERSONS..............................................................24
INVESTMENT ADVISORY, DISTRIBUTION AND SERVICING
ARRANGEMENTS........................................................33
Advisory Agreements.................................................33
Custodian and Transfer Agency Agreements............................35
Administration Agreement............................................36
Distribution Agreement..............................................37
Administrative Services Agent.......................................40
PORTFOLIO TRANSACTIONS.......................................................41
PURCHASE AND REDEMPTION INFORMATION..........................................42
VALUATION OF SHARES..........................................................43
PERFORMANCE INFORMATION......................................................44
TAXES........................................................................46
ADDITIONAL INFORMATION CONCERNING RBB SHARES ................................47
MISCELLANEOUS................................................................50
Counsel.............................................................50
Independent Accountants.............................................50
FINANCIAL STATEMENTS.........................................................50
APPENDIX A..................................................................A-1
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GENERAL INFORMATION
RBB was organized as a Maryland corporation on February 29, 1988 and is
an open-end management investment company currently operating or proposing to
operate 17 separate investment portfolios. This Statement of Additional
Information pertains to Institutional and Investor Shares representing interests
in the diversified Funds offered by the Prospectus dated December 1, 1999 (as
revised March 28,2000).
INVESTMENT INSTRUMENTS AND POLICIES
The following supplements the information contained in the Prospectus
concerning the investment objectives and policies of the Funds.
EQUITY MARKETS
The Funds, with the exception of the Bond Fund, invest primarily in
equity markets at all times. Equity markets can be highly volatile, so that
investing in the Funds involves substantial risk. As a result, investing in the
Funds involves the risk of loss of capital.
MICRO CAP, SMALL CAP AND MID CAP STOCKS
Securities of companies with micro, small and mid-size capitalizations
tend to be riskier than securities of companies with large capitalizations. This
is because micro, small and mid cap companies typically have smaller product
lines and less access to liquidity than large cap companies, and are therefore
more sensitive to economic downturns. In addition, growth prospects of micro,
small and mid cap companies tend to be less certain than large cap companies,
and the dividends paid on micro, small and mid cap stocks are frequently
negligible. Moreover, micro, small and mid cap stocks have, on occasion,
fluctuated in the opposite direction of large cap stocks or the general stock
market. Consequently, securities of micro, small and mid cap companies tend to
be more volatile than those of large cap companies. The market for micro and
small cap securities may be thinly traded and as a result, greater fluctuations
in the price of micro and small cap securities may occur.
MARKET FLUCTUATION
Because the investment alternatives available to each Fund may be
limited by the specific objectives of that Fund, investors should be aware that
an investment in a particular Fund may be subject to greater market fluctuation
than an investment in a portfolio of securities representing a broader range of
investment alternatives. In view of the specialized nature of the investment
activities of each Fund, an investment in any single fund should not be
considered a complete investment program.
LENDING OF PORTFOLIO SECURITIES
Each Fund may lend its portfolio securities to financial institutions
in accordance with the investment restrictions described below. Such loans would
involve risks of delay in receiving additional collateral in the event the value
of the collateral decreased below the value of the securities loaned or of delay
in recovering the securities loaned or even loss of rights in the collateral
should the borrower of the securities fail financially. However, loans will be
made only to borrowers deemed by the Funds' investment adviser to be of good
standing and only
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when, in the Adviser's judgment, the income to be earned from the loans
justifies the attendant risks. Any loans of a Fund's securities will be fully
collateralized and marked to market daily.
BORROWING
The Market Neutral Fund may borrow up to 33 1/3 percent of its
respective total assets. The Adviser intends to borrow only for temporary or
emergency purposes, including to meet portfolio redemption requests so as to
permit the orderly disposition of portfolio securities, or to facilitate
settlement transactions on portfolio securities. Investments will not be made
when borrowings exceed 5% of a fund's total assets. Although the principal of
such borrowings will be fixed, the Fund's assets may change in value during the
time the borrowing is outstanding. The Fund expects that some of its borrowings
may be made on a secured basis. In such situations, either the custodian will
segregate the pledged assets for the benefit of the lender or arrangements will
be made with a suitable subcustodian, which may include the lender. If the
securities held by a fund should decline in value while borrowings are
outstanding, the net asset value of a Fund's outstanding shares will decline in
value by proportionately more than the decline in value suffered by a Fund's
securities. As a result, a Fund's share price may be subject to greater
fluctuation until the borrowing is paid off.
INDEXED SECURITIES
The Funds may invest in indexed securities whose value is linked to
securities indices. Most such securities have values which rise and fall
according to the change in one or more specified indices, and may have
characteristics similar to direct investments in the underlying securities.
Depending on the index, such securities may have greater volatility than the
market as a whole. Each of the Bond, Large Cap Value, Mid Cap Value and Small
Cap Value Funds do not presently intend to invest more than 5% of their
respective net assets in indexed securities.
REPURCHASE AGREEMENTS
The Funds may agree to purchase securities from financial institutions
subject to the seller's agreement to repurchase them at an agreed-upon time and
price ("repurchase agreements"). The securities held subject to a repurchase
agreement may have stated maturities exceeding 13 months, provided the
repurchase agreement itself matures in less than 13 months. The financial
institutions with whom the Fund may enter into repurchase agreements will be
banks which the Adviser considers creditworthy pursuant to criteria approved by
the Board of Directors and non-bank dealers of U.S. Government securities that
are listed on the Federal Reserve Bank of New York's list of reporting dealers.
The Adviser will consider the creditworthiness of a seller in determining
whether to have the Fund enter into a repurchase agreement. The seller under a
repurchase agreement will be required to maintain the value of the securities
subject to the agreement at not less than the repurchase price plus accrued
interest. The Adviser will mark to market daily the value of the securities, and
will, if necessary, require the seller to maintain additional securities, to
ensure that the value is not less than the repurchase price. Default by or
bankruptcy of the seller would, however, expose the Fund to possible loss
because of adverse market action or delays in connection with the disposition of
the underlying obligations.
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REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
The Funds may enter into reverse repurchase agreements with respect to
portfolio securities for temporary purposes (such as to obtain cash to meet
redemption requests) when the liquidation of portfolio securities is deemed
disadvantageous or inconvenient by the Adviser. Reverse repurchase agreements
involve the sale of securities held by a Fund pursuant to the Fund's agreement
to repurchase the securities at an agreed-upon price, date and rate of interest.
Such agreements are considered to be borrowings under the Investment Company Act
of 1940 (the "1940 Act"), and may be entered into only for temporary or
emergency purposes. While reverse repurchase transactions are outstanding, a
Fund will maintain in a segregated account with the Fund's custodian or a
qualified sub-custodian, cash or liquid securities of an amount at least equal
to the market value of the securities, plus accrued interest, subject to the
agreement and will monitor the account to ensure that such value is maintained.
Reverse repurchase agreements involve the risk that the market value of the
securities sold by the Fund may decline below the price of the securities the
Fund is obligated to repurchase and the interest received on the cash exchanged
for the securities. The Bond, Large Cap Value, Mid Cap Value and Small Cap Value
Funds may also enter into "dollar rolls," in which it sells fixed income
securities for delivery in the current month and simultaneously contracts to
repurchase substantially similar (same type, coupon and maturity) securities on
a specified future date. During the roll period, a Fund would forgo principal
and interest paid on such securities. The Fund would be compensated by the
difference between the current sales price and the forward price for the future
purchase, as well as by the interest earned on the cash proceeds of the initial
sale. The return on dollar rolls may be negatively impacted by fluctuations in
interest rates. The Funds do not presently intend to engage in reverse
repurchase transactions involving more than 5% of each Fund's respective net
assets. The Bond, Large Cap Value, Mid Cap Value and Small Cap Value Funds do
not presently intend to engage in dollar roll transactions involving more than
5% of each Fund's respective net assets.
U.S. GOVERNMENT OBLIGATIONS
The Funds may purchase U.S. Government agency and instrumentality
obligations that are debt securities issued by U.S. Government-sponsored
enterprises and federal agencies. Some obligations of agencies and
instrumentalities of the U.S. Government are supported by the full faith and
credit of the U.S. Government or by U.S. Treasury guarantees, such as securities
of the Government National Mortgage Association and the Federal Housing
Authority; others, by the ability of the issuer to borrow, provided approval is
granted, from the U.S. Treasury, such as securities of the Federal Home Loan
Mortgage Corporation and others, only by the credit of the agency or
instrumentality issuing the obligation, such as securities of the Federal
National Mortgage Association and the Federal Loan Banks. U.S. government
obligations that are not backed by the full faith and credit of the U.S.
government are subject to greater risks than those that are. U.S. government
obligations that are backed by the full faith and credit of the U.S. government
are subject to interest rate risk.
Each Fund's net assets may be invested in obligations issued or
guaranteed by the U.S. Treasury or the agencies or instrumentalities of the U.S.
Government, including options and futures on such obligations. The maturities of
U.S. Government securities usually range from three months to thirty years.
Examples of types of U.S. Government obligations include U.S. Treasury Bills,
Treasury Notes and Treasury Bonds and the obligations of Federal Home Loan
Banks, Federal Farm Credit Banks, Federal Land Banks, the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Federal National Mortgage Association,
Government National Mortgage
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Association, General Services Administration, Student Loan Marketing
Association, Central Bank for Cooperatives, Federal Home Loan Mortgage
Corporation, Federal Intermediate Credit Banks, the Maritime Administration, the
Asian-American Development Bank and the Inter-American Development Bank. The
Bond, Large Cap Value, Mid Cap Value and Small Cap Value Funds do not presently
intend to invest more than 5% of each Fund's respective net assets in U.S.
Government obligations.
ILLIQUID SECURITIES
A Fund may not invest more than 15% of its net assets in illiquid
securities (including repurchase agreements that have a maturity of longer than
seven days), including securities that are illiquid by virtue of the absence of
a readily available market or legal or contractual restrictions on resale.
Securities that have legal or contractual restrictions on resale but have a
readily available market are not considered illiquid for purposes of this
limitation. With respect to each Fund, repurchase agreements subject to demand
are deemed to have a maturity equal to the notice period.
Mutual funds do not typically hold a significant amount of restricted
or other illiquid securities because of the potential for delays on resale and
uncertainty in valuation. Limitations on resale may have an adverse effect on
the marketability of portfolio securities and a mutual fund might be unable to
dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemptions within
seven days. A mutual fund might also have to register such restricted securities
in order to dispose of them resulting in additional expense and delay. Adverse
market conditions could impede such a public offering of securities.
Each Fund may purchase securities which are not registered under the
Securities Act but which may be sold to "qualified institutional buyers" in
accordance with Rule 144A under the Securities Act. These securities will not be
considered illiquid so long as it is determined by the Funds' adviser that an
adequate trading market exists for the securities. This investment practice
could have the effect of increasing the level of illiquidity in a Fund during
any period that qualified institutional buyers become uninterested in purchasing
restricted securities.
The Adviser will monitor the liquidity of restricted securities held by
a Fund under the supervision of the Board of Directors. In reaching liquidity
decisions, the Adviser may consider, among others, the following factors: (1)
the unregistered nature of the security; (2) the frequency of trades and quotes
for the security; (3) the number of dealers wishing to purchase or sell the
security and the number of other potential purchasers; (4) dealer undertakings
to make a market in the security; and (5) the nature of the security and the
nature of the marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers and the mechanics of the transfer).
SECURITIES OF UNSEASONED ISSUERS
The Market Neutral Fund may invest in securities of unseasoned issuers,
including equity securities of unseasoned issuers which are not readily
marketable,
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provided the aggregate investment in such securities would not exceed 5% of such
Fund's net assets. The term "unseasoned" refers to issuers which, together with
their predecessors, have been in operation for less than three years.
CONVERTIBLE SECURITIES
The Bond and Large Cap Value Funds may invest in convertible
securities. A convertible security is a bond, debenture, note, preferred stock
or other security that may be converted into or exchanged for a prescribed
amount of common stock of the same or a different issuer within a particular
period of time at a specified price or formula. A convertible security entitles
the holder to receive interest paid or accrued on debt or the dividend paid on
preferred stock until the convertible security matures or is redeemed, converted
or exchanged. Before conversion, convertible securities have characteristics
similar to nonconvertible debt securities in that they ordinarily provide a
stable stream of income with generally higher yields than those of common stocks
of the same or similar issuers. Convertible securities rank senior to common
stock in a corporation's capital structure but are usually subordinated to
comparable nonconvertible securities. While no securities investment is
completely without risk, investments in convertible securities generally entail
less risk than the corporation's common stock, although the extent to which such
risk is reduced depends in large measure upon the degree to which the
convertible security sells above its value as a fixed income security.
Convertible securities have unique investment characteristics in that they
generally: (1) have higher yields than common stocks, but lower yields than
comparable non-convertible securities; (2) are less subject to fluctuation in
value than the underlying stock since they have fixed income characteristics;
and (3) provide the potential for capital appreciation if the market price of
the underlying common stock increases.
The value of a convertible security is a function of its "investment
value" (determined by its yield in comparison with the yields of other
securities of comparable maturity and quality that do not have a conversion
privilege) and its "conversion value" (the security's worth, at market value, if
converted into the underlying common stock). The investment value of a
convertible security is influenced by changes in interest rates, with investment
value declining as interest rates increase and increasing as interest rates
decline. The credit standing of the issuer and other factors also may have an
effect on the convertible security's investment value. The conversion value of a
convertible security is determined by the market price of the underlying common
stock. If the conversion value is low relative to the investment value, the
price of the convertible security is governed principally by its investment
value. Generally the conversion value decreases as the convertible security
approaches maturity. To the extent the market price of the underlying common
stock approaches or exceeds the conversion price, the price of the convertible
security will be increasingly influenced by its conversion value. A convertible
security generally will sell at a premium over its conversion value by the
extent to which investors place value on the right to acquire the underlying
common stock while holding a fixed income security.
A convertible security might be subject to redemption at the option of
the issuer at a price established in the convertible security's governing
instrument. If a convertible security held by either the Bond or Large Cap Value
Fund is called for redemption, that Fund will be required to
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permit the issuer to redeem the security, convert it into the underlying common
stock or sell it to a third party. The Bond and Large Cap Value Funds do not
presently intend to invest more than 5% of each Fund's respective net assets in
convertible securities, or securities received by a Fund upon conversion
thereof.
HEDGING INVESTMENTS
At such times as the Adviser deems it appropriate and consistent with a
Fund's investment objective, the Large Cap Value, Mid Cap Value and Small Cap
Value Funds may invest in financial futures contracts and options on financial
futures contracts. The purpose of such transactions is to hedge against changes
in the market value of securities in a Fund caused by fluctuating interest rates
and to close out or offset its existing positions in such futures contracts or
options as described below. Such instruments will not be used for speculation.
Futures contracts and options on futures are discussed below.
FUTURES CONTRACTS
The Large Cap Value, Mid Cap Value and Small Cap Value Funds may invest
in financial futures contracts with respect to those securities listed on the S
& P 500 Stock Index ("Index Futures"). The Bond Fund may enter into futures
contracts based on various securities (such as U.S. Government Securities),
foreign securities, securities indices and other financial instruments and
indices. Financial futures contracts obligate the seller to deliver a specific
type of security called for in the contract, at a specified future time, and for
a specified price. Financial futures contracts may be satisfied by actual
delivery of the securities or, more typically, by entering into an offsetting
transaction. In contrast to purchases of a common stock, no price is paid or
received by a Fund upon the purchase of a futures contract. Upon entering into a
futures contract, the Fund will be required to deposit with its custodian in a
segregated account in the name of the futures broker a specified amount of cash
or securities. This is known by participants in the market as "initial margin."
The type of instruments that may be deposited as initial margin, and the
required amount of initial margin, are determined by the futures exchange(s) on
which the Index Futures are traded. The nature of initial margin in futures
transactions is different from that of margin in securities transactions in that
futures contract margin does not involve the borrowing of funds by the customer
to finance the transactions. Rather, the initial margin is in the nature of a
performance bond or good faith deposit on the contract which is returned to the
Fund upon termination of the futures contract, assuming all contractual
obligations have been satisfied. Subsequent payments, called "variation margin,"
to and from the broker, will be made on a daily basis as the price of the S&P
500 Index fluctuates, making the position in the futures contract more or less
valuable, a process known as "marking to the market." For example, when a Fund
has purchased an Index Future and the price of the S&P 500 Index has risen, that
position will have increased in value and the Fund will receive from the broker
a variation margin payment equal to that increase in value. Conversely, when a
Fund has purchased an Index Future and the price of the S&P 500 Index has
declined, the position would be less valuable and the Fund would be required to
make a variation margin payment to the broker. When a Fund terminates a position
in a futures contract, a final determination of variation margin is made,
additional cash is paid by or to the Fund, and the Fund realizes a gain or a
loss.
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The price of Index Futures may not correlate perfectly with movement in
the underlying index due to certain market distortions. First, all participants
in the futures market are subject to margin deposit and maintenance
requirements. Rather than meeting additional margin deposit requirements,
investors may close futures contracts through offsetting transactions which
could distort the normal relationship between the S&P 500 Index and futures
markets. Secondly, the deposit requirements in the futures market are less
onerous than margin requirements in the securities market, and as a result the
futures market may attract more speculators than does the securities market.
Increased participation by speculators in the futures market may also cause
temporary price distortions.
There are risks that are associated with the use of futures contracts
for hedging purposes. In certain market conditions, as in a rising interest rate
environment, sales of futures contracts may not completely offset a decline in
value of the portfolio securities against which the futures contracts are being
sold. In the futures market, it may not always be possible to execute a buy or
sell order at the desired price, or to close out an open position due to market
conditions, limits on open positions, and/or daily price fluctuations. Risks in
the use of futures contracts also result from the possibility that changes in
the market interest rates may differ substantially from the changes anticipated
by the Fund's investment adviser when hedge positions were established. Futures
markets are highly volatile and the use of futures may increase the volatility
of a Fund's net asset value. The Large Cap Value, Mid Cap Value and Small Cap
Value Funds do not presently intend to invest more than 5% of each Fund's
respective net assets in futures contracts. The Bond Fund may not purchase or
sell futures contracts to seek to increase total return, except for closing
purchase or sale transactions, if immediately thereafter the sum of the amount
of initial margin deposits and premiums paid on the Fund's outstanding positions
in futures entered into for the purpose of seeking to increase total return
would exceed 5% of the market value of the Fund's net assets.
OPTIONS ON FUTURES
The Large Cap Value, Mid Cap Value and Small Cap Value Funds may
purchase and write call and put options on futures contracts with respect to
those securities listed on the S & P 500 Stock Index and enter into closing
transactions with respect to such options to terminate an existing position. The
Bond Fund may purchase and write call and put options on futures contracts based
on various securities (such as U.S. Government Securities), foreign securities,
securities indices and other financial instruments and indices. The Bond Fund
may not purchase or sell options on futures contracts to seek to increase total
return, except for closing purchase or sale transactions, if immediately
thereafter the sum of the amount of initial margin deposits and premiums paid on
the Fund's outstanding positions in futures entered into for the purpose of
seeking to increase total return would exceed 5% of the market value of the
Fund's net assets. An option on a futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in a futures
contract. The Funds may use options on futures contracts in connection with
hedging strategies. The purchase of put options on futures contracts is a means
of hedging against the risk of rising interest rates. The purchase of call
options on futures contracts is a means of hedging against a market advance when
a Fund is not fully invested.
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Options trading is a highly specialized activity which entails greater
than ordinary investment risks. Options on particular securities may be more
volatile than the underlying securities, and therefore, on a percentage basis,
an investment in the underlying securities themselves. A Fund will write call
options only if they are "covered." In the case of a call option on a security,
the option is "covered" if a Fund owns the security underlying the call or has
an absolute and immediate right to acquire that security without additional cash
consideration (or, if additional cash consideration is required, liquid assets
in such amount as are held in a segregated account by its custodian) upon
conversion or exchange of other securities held by it. For a call option on an
index, the option is covered if a Fund maintains with its custodian liquid
assets equal to the contract value. A call option is also covered if a Fund
holds a call on the same security or index as the call written where the
exercise price of the call held is (i) equal to or less than the exercise price
of the call written, or (ii) greater than the exercise price of the call written
provided the difference is maintained by the Fund in liquid assets in a
segregated account with its custodian.
When a Fund purchases a put option, the premium paid by it is recorded
as an asset of the Fund. When a Fund writes an option, an amount equal to the
net premium (the premium less the commission) received by the Fund is included
in the liability section of the Fund's statement of assets and liabilities as a
deferred credit. The amount of this asset or deferred credit will be
subsequently marked-to-market to reflect the current value of the option
purchased or written. The current value of the traded option is the last sale
price or, in the absence of a sale, the mean between the last bid and asked
prices. If an option purchased by a Fund expires unexercised the Fund realizes a
loss equal to the premium paid. If the Fund enters into a closing sale
transaction on an option purchased by it, the Fund will realize a gain if the
premium received by the Fund on the closing transaction is more than the premium
paid to purchase the option, or a loss if it is less. If an option written by a
Fund expires on the stipulated expiration date or if the Fund enters into a
closing purchase transaction, it will realize a gain (or loss if the cost of a
closing purchase transaction exceeds the net premium received when the option is
sold) and the deferred credit related to such option will be eliminated. If an
option written by a Fund is exercised, the proceeds of the sale will be
increased by the net premium originally received and the Fund will realize a
gain or loss.
In addition, a liquid secondary market for particular options, whether
traded over-the-counter or on a national securities exchange ("Exchange"), may
be absent for reasons which include the following: there may be insufficient
trading interest in certain options; restrictions may be imposed by 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.
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There is no assurance that a Fund will be able to close out its
financial futures positions at any time, in which case it would be required to
maintain the margin deposits on the contract. There can be no assurance that
hedging transactions will be successful, as there may be imperfect correlations
(or no correlations) between movements in the prices of the futures contracts
and of the securities being hedged, or price distortions due to market
conditions in the futures markets. Such imperfect correlations could have an
impact on the Fund's ability to effectively hedge its securities. The Bond,
Large Cap Value, Mid Cap Value and Small Cap Value Funds do not presently intend
to invest more than 5% of each Fund's respective net assets in options on
futures.
BANK AND CORPORATE OBLIGATIONS
The Large Cap Value, Mid Cap Value and Small Cap Value Funds may
purchase obligations of issuers in the banking industry, such as short-term
obligations of bank holding companies, certificates of deposit, bankers'
acceptances and time deposits issued by U.S. or foreign banks or savings
institutions having total assets at the time of purchase in excess of $1
billion. Investment in obligations of foreign banks or foreign branches of U.S.
banks may entail risks that are different from those of investments in
obligations of U.S. banks due to differences in political, regulatory and
economic systems and conditions. The Funds may also make interest-bearing
savings deposits in commercial and savings banks in amounts not in excess of 5%
of its total assets.
The Large Cap Value, Mid Cap Value and Small Cap Value Funds may invest
in debt obligations, such as bonds and debentures, issued by corporations and
other business organizations that are rated at the time of purchase within the
three highest ratings categories of S&P or Moody's (or which, if unrated, are
determined by the Adviser to be of comparable quality). Unrated securities will
be determined to be of comparable quality to rated debt obligations if, among
other things, other outstanding obligations of the issuers of such securities
are rated A or better. See Appendix "A" for a description of corporate debt
ratings. An issuer of debt obligations may default on its obligation to pay
interest and repay principal. Also, changes in the financial strength of an
issuer or changes in the credit rating of a security may affect its value.
COMMERCIAL PAPER
Each Fund may purchase commercial paper rated (at the time of purchase)
"A-1" by S&P or "Prime-1" by Moody's or, when deemed advisable by the Fund's
Adviser, issues rated "A-2" or "Prime-2" by S&P or Moody's, respectively. These
rating symbols are described in Appendix "A" hereto. The Funds may also purchase
unrated commercial paper provided that such paper is determined to be of
comparable quality by the Funds' Adviser pursuant to guidelines approved by the
Board of Directors. Commercial paper issues in which a Fund may invest include
securities issued by corporations without registration under the Securities Act
of 1933, as amended (the "Securities Act") in reliance on the exemption from
such registration afforded by Section 3(a)(3) thereof, and commercial paper
issued in reliance on the so-called "private placement" exemption from
registration, which is afforded by Section 4(2) of the Securities Act ("Section
4(2) paper"). Section 4(2) paper is restricted as to disposition under the
federal securities laws in that any resale must similarly be made in an exempt
transaction. Section 4(2) paper is normally resold to other institutional
investors through or with the assistance of
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investment dealers who make a market in Section 4(2) paper, thus providing
liquidity. Each Fund does not presently intend to invest more than 5% of its net
assets in commercial paper.
FOREIGN SECURITIES
Each of the Funds may invest in foreign securities, either directly or
indirectly through American Depository Receipts and, in the case of the Bond and
Market Neutral Funds, through European Depository Receipts. ADRs are receipts
issued by an American bank or trust company evidencing ownership of underlying
securities issued by a foreign issuer. ADRs may be listed on a national
securities exchange or may trade in the over-the-counter market. ADR prices are
denominated in United States dollars; the underlying security may be denominated
in a foreign currency. The underlying security may be subject to foreign
government taxes which would reduce the yield on such securities. Investments in
foreign securities involve higher costs than investments in U.S. securities,
including higher transaction costs as well as the imposition of additional taxes
by foreign governments. In addition, foreign investments may include additional
risks associated with currency exchange rates, less complete financial
information about the issuers, less market liquidity and political stability.
Future political and economic information, the possible imposition of
withholding taxes on interest income, the possible seizure or nationalization of
foreign holdings, the possible establishment of exchange controls, or the
adoption of other governmental restrictions, might adversely affect the payment
of principal and interest on foreign obligations.
Fixed commissions on foreign securities exchanges are generally higher
than negotiated commissions on U.S. exchanges, although the Funds endeavor to
achieve the most favorable net results on their portfolio transactions. There is
generally less government supervision and regulation of securities exchanges,
brokers, dealers and listed companies than in the United States. Settlement
mechanics (e.g., mail service between the United States and foreign countries)
may be slower or less reliable than within the United States, thus increasing
the risk of delayed settlements of portfolio transactions or loss of
certificates for portfolio securities.
Foreign markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Such delays in settlement could result
in temporary periods when a portion of the assets of a Fund is uninvested and no
return is earned thereon. The inability of the Funds to make intended security
purchases due to settlement problems could cause a Fund to miss attractive
investment opportunities. Inability to dispose of Fund securities due to
settlement problems could result either in losses to the Fund due to subsequent
declines in value of the securities, or, if a Fund has entered into a contract
to sell the securities, could result in possible liability to the purchaser.
Individual foreign economies may differ favorably or unfavorably from the U.S.
economy in such respects as growth or gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position.
Although the Funds may invest in securities denominated in foreign
currencies, each Fund values its securities and other assets in U.S. dollars. As
a result, the net asset value of a Fund's shares may fluctuate with U.S. dollar
exchange rates as well as the price changes of the
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Fund's securities in the various local markets and currencies. Thus, an increase
in the value of the U.S. dollar compared to the currencies in which a Fund makes
its investments could reduce the effect of increases and magnify the effect of
decreases in the price of the Fund's securities in their local markets.
Conversely, a decrease in the value of the U.S. dollar may have the opposite
effect of magnifying the effect of increases and reducing the effect of
decreases in the prices of a Fund's securities in its foreign markets. In
addition to favorable and unfavorable currency exchange rate developments, each
Fund is subject to the possible imposition of exchange control regulations or
freezes on convertibility of currency.
The Bond Fund may purchase debt obligations issued or guaranteed by
governments (including states, provinces or municipalities) of countries other
than the United States, or by their agencies, authorities or instrumentalities.
The Bond Fund may purchase debt obligations issued or guaranteed by
supranational entities organized or supported by several national governments,
such as the International Bank for Reconstruction and Development (the "World
Bank"), the Inter-American Development Bank, the Asian Development Bank and the
European Investment Bank. The Bond Fund may purchase debt obligations of foreign
corporations or financial institutions, such as Yankee bonds (dollar-denominated
bonds sold in the United States by non-U.S. issuers) and Euro bonds (bonds not
issued in the country (and possibly not in the currency) of the issuer).
SHORT SALES
The Market Neutral Fund may enter into short sales. Short sales are
transactions in which a Fund sells a security it does not own in anticipation of
a decline in the market value of that security. To complete such a transaction,
the Fund must borrow the security to make delivery to the buyer. The Fund then
is obligated to replace the security borrowed by purchasing it at the market
price at the time of replacement. The price at such time may be more or less
than the price at which the security was sold by the Fund. Until the security is
replaced, the Fund is required to pay to the lender amounts equal to any
dividend which accrues during the period of the loan. To borrow the security,
the Fund also may be required to pay a premium, which would increase the cost of
the security sold. The proceeds of the short sale will be retained by the
broker, to the extent necessary to meet margin requirements, until the short
position is closed out.
Until a Fund replaces a borrowed security in connection with a short
sale, the Fund will: (a) maintain daily a segregated account, containing cash,
cash equivalents, or liquid marketable securities, at such a level that (i) the
amount deposited in the account plus the amount deposited with the broker as
collateral will equal the current value of the security sold short and (ii) the
amount deposited in the segregated account plus the amount deposited with the
broker as collateral will not be less than the market value of the security at
the time it was sold short; or (b) otherwise cover its short position in
accordance with positions taken by the Staff of the Securities and Exchange
Commission.
A Fund will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on which
the Fund replaces the borrowed security. The Fund will realize a gain if the
security declines in price between those dates. This result is the opposite of
what one would expect from a cash purchase of a long position in a security. The
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amount of any gain will be decreased, and the amount of any loss increased, by
the amount of any premium or amounts in lieu of interest the Fund may be
required to pay in connection with a short sale. A Fund may purchase call
options to provide a hedge against an increase in the price of a security sold
short by the Fund. See "Futures and Options" above.
The Funds anticipate that the frequency of short sales will vary
substantially in different periods, and they do not intend that any specified
portion of their assets, as a matter of practice, will be invested in short
sales. However, no securities will be sold short if, after effect is given to
any such short sale, the total market value of all securities sold short would
exceed 25% of the value of a Fund's net assets.
SHORT SALES "AGAINST THE BOX"
In addition to the short sales discussed above, the Market Neutral Fund
may make short sales "against the box," a transaction in which a Fund enters
into a short sale of a security that the Fund owns. The proceeds of the short
sale will be held by a broker until the settlement date at which time the Fund
delivers the security to close the short position. The Fund receives the net
proceeds from the short sale. It currently is anticipated that the Funds will
make short sales against the box for purposes of protecting the value of the
Funds' net assets.
In a short sale, a Fund sells a borrowed security and has a
corresponding obligation to the lender to return the identical security. A Fund
may engage in short sales if at the time of the short sale it owns or has the
right to obtain, at no additional cost, an equal amount of the security being
sold short. This investment technique is known as a short sale "against the
box." In a short sale, a seller does not immediately deliver the securities sold
and is said to have a short position in those securities until delivery occurs.
If a Fund engages in a short sale, the collateral for the short position will be
maintained by the Fund's custodian or a qualified sub-custodian. While the short
sale is open, the Fund will maintain in a segregated account an amount of
securities equal in kind and amount to the securities sold short or securities
convertible into or exchangeable for such equivalent securities. These
securities constitute a Fund's long position. The Funds will not engage in short
sales against the box for speculative purposes. A Fund may, however, make a
short sale as a hedge, when it believes that the price of a security may
decline, causing a decline in the value of a security owned by the Fund (or a
security convertible or exchangeable for such security), or when the Fund wants
to sell the security at an attractive current price, but also wishes possibly to
defer recognition of gain or loss for federal income tax purposes. (A short sale
against the box will defer recognition of gain for federal income tax purposes
only if the Portfolio subsequently closes the short position by making a
purchase of the relevant securities no later than 30 days after the end of the
taxable year. The original long positiion must also be held for the sixty days
after the short position is closed.) In such case, any future losses in a Fund's
long position should be reduced by a gain in the short position. Conversely, any
gain in the long position should be reduced by a loss in the short position. The
extent to which such gains or losses are reduced will depend upon the amount of
the security sold short relative to the amount a Fund owns. There will be
certain additional transaction costs associated with short sales against the
box, but the Funds will endeavor to offset these costs with the income from the
investment of the cash proceeds of short sales.
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EUROPEAN CURRENCY UNIFICATION
Many European countries have adopted a single European currency, the
euro. On January 1, 1999, the euro became legal tender for all countries
participating in the Economic and Monetary Union ("EMU"). A new European Central
Bank has been created to manage the monetary policy of the new unified region.
On the same date, the exchange rates were irrevocably fixed between the EMU
member countries. National currencies will continue to circulate until they are
replaced by euro coins and bank notes by the middle of 2002.
This change is likely to significantly impact the European capital
markets in which the Funds may invest and may result in a Fund facing additional
risks in pursuing its investment objective. These risks, which include, but are
not limited to, uncertainty as to proper tax treatment of the currency
conversion, volatility of currency exchange rates as a result of the conversion,
uncertainty as to capital market reaction, conversion costs that may affect
issuer profitability and creditworthiness, and lack of participation by some
European countries, may increase the volatility of a Fund's net asset value per
share.
ADDITIONAL INFORMATION ON BOND FUND INVESTMENTS
The Adviser will select certain mortgage-backed and asset-backed
securities which it believes have superior risk/return characteristics versus
other fixed income instruments. Mortgage-backed securities represent pools of
mortgage loans assembled for sale to investors by various governmental agencies
as well as by private issuers. Asset-backed securities represent pools of other
assets (such as automobile installment purchase obligations and credit card
receivables) similarly assembled for sale by private issuers.
MORTGAGE-RELATED SECURITIES. There are a number of important
differences among the agencies and instrumentalities of the U.S. Government that
issue mortgage-related securities and among the securities that they issue.
Mortgage-related securities guaranteed by the Government National Mortgage
Association ("GNMA") include GNMA Mortgage Pass-Through Certificates (also known
as "Ginnie Maes"), which are guaranteed as to the timely payment of principal
and interest by GNMA and such guarantee is backed by the full faith and credit
of the United States. GNMA is a wholly-owned U.S. Government corporation within
the Department of Housing and Urban Development. GNMA certificates also are
supported by the authority of GNMA to borrow funds from the U.S. Treasury to
make payments under its guarantee. Mortgage-related securities issued by the
Federal National Mortgage Association ("FNMA") include FNMA guaranteed Mortgage
Pass-Through Certificates (also known as "Fannie Maes"), which are solely the
obligations of the FNMA, are not backed by or entitled to the full faith and
credit of the United States and are supported by the right of the issuer to
borrow from the Treasury. FNMA is a government-sponsored organization owned
entirely by private stockholders. Fannie Maes are guaranteed as to timely
payment of principal and interest by FNMA. Mortgage-related securities issued by
the Federal Home Loan Mortgage Corporation ("FHLMC") include FHLMC Mortgage
Participation Certificates (also known as "Freddie Macs" or "PCs"). FHLMC is a
corporate instrumentality of the United States, created pursuant to an Act of
Congress, which is owned entirely by Federal Home Loan Banks. Freddie Macs are
not guaranteed by the United States or by any Federal Home Loan Banks and do not
constitute a debt or obligation of the
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United States or of any Federal Home Loan Bank. Freddie Macs entitle the holder
to timely payment of interest, which is guaranteed by the FHLMC. FHLMC
guarantees either ultimate collection or timely payment of all principal
payments on the underlying mortgage loans. When FHLMC does not guarantee timely
payment of principal, FHLMC may remit the amount due on account of its guarantee
of ultimate payment of principal at any time after default on an underlying
mortgage, but in no event later than one year after it becomes payable.
The Fund may invest in multiple class pass-through securities,
including collateralized mortgage obligations ("CMOs") and real estate mortgage
investment conduit ("REMIC") pass-through or participation certificates ("REMIC
Certificates"). These multiple class securities may be issued by U.S. Government
agencies or instrumentalities, including FNMA and FHLMC, or by trusts formed by
private originators of, or investors in, mortgage loans. In general, CMOs and
REMICs are debt obligations of a legal entity that are collateralized by, and
multiple class pass-through securities represent direct ownership interests in,
a pool of residential mortgage loans or mortgage pass-through securities (the
"Mortgage Assets"), the payments on which are used to make payments on the CMOs
or multiple pass-through securities. Investors may purchase beneficial interests
in REMICs, which are known as "regular" interests or "residual" interests. The
Fund does not intend to purchase residual interests.
Each class of CMOs or REMIC Certificates, often referred to as a
"tranche," is issued at a specific adjustable or fixed interest rate and must be
fully retired no later than its final distribution date. Principal prepayments
on the Mortgage Assets underlying the CMOs or REMIC Certificates may cause some
or all of the classes of CMOs or REMIC Certificates to be retired substantially
earlier than their final distribution dates. Generally, interest is paid or
accrues on all classes of CMOs or REMIC Certificates on a monthly basis.
The principal of and interest on the Mortgage Assets may be allocated
among the several classes of CMOs or REMIC Certificates in various ways. In
certain structures (known as "sequential pay" CMOs or REMIC Certificates),
payments of principal, including any principal prepayments, on the Mortgage
Assets generally are applied to the classes of CMOs or REMIC Certificates in the
order of their respective final distribution dates. Thus no payment of principal
will be made on any class of sequential pay CMOs or REMIC Certificates until all
other classes having an earlier final distribution date have been paid in full.
Additional structures of CMOs or REMIC Certificates include, among
others, "parallel pay" CMOs and REMIC Certificates. Parallel pay CMOs or REMIC
Certificates are those which are structured to apply principal payments and
prepayments of the Mortgage Assets to two or more classes concurrently on a
proportionate or disproportionate basis. These simultaneous payments are taken
into account in calculating the final distribution date of each class.
The relative payment rights of the various CMO classes may be subject
to greater volatility and interest-rate risk than other types of mortgage-backed
securities. The average life of asset-backed securities varies with the
underlying instruments or assets and market conditions, which in the case of
mortgages have maximum maturities of forty years. The average life of a
mortgage-backed instrument, in particular, is likely to be substantially less
than the original maturity of the mortgages underlying the securities as the
result of unscheduled principal payments and mortgage prepayments. The
relationship between mortgage prepayment and interest rates may give some
high-yielding mortgage-backed securities less potential for growth in value than
conventional bonds with comparable maturities. In addition, in periods of
falling interest rates, the rate of mortgage prepayments tends to increase.
During such periods, the reinvestment of prepayment proceeds by a Portfolio will
generally be at lower rates than the rates that were carried by the obligations
that have been prepaid. 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. Because of these and other reasons, an
asset-backed security's total return my be difficult to predict precisely.
A wide variety of REMIC Certificates may be issued in the parallel pay
or sequential pay structures. These securities include accrual certificates
(also known as "Z-Bonds"), which only accrue interest at a specified rate until
all other certificates having an earlier final distribution date have been
retired and are converted thereafter to an interest-paying security, and planned
amortization class ("PAC") certificates, which are parallel pay REMIC
Certificates that generally require that specified amounts of principal be
applied on each payment date to one or more
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classes of REMIC Certificates (the "PAC Certificates"), even though all other
principal payments and prepayments of the Mortgage Assets are then required to
be applied to one or more other classes of the Certificates. The scheduled
principal payments for the PAC Certificates generally have the highest priority
on each payment date after interest due has been paid to all classes entitled to
receive interest currently. Shortfalls, if any, are added to the amount payable
on the next payment date. The PAC Certificate payment schedule is taken into
account in calculating the final distribution date of each class of PAC. In
order to create PAC tranches, one or more tranches generally must be created
that absorb most of the volatility in the underlying Mortgage Assets. These
tranches tend to have market prices and yields that are much more volatile than
the PAC classes.
FNMA REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by FNMA. In addition, FNMA will be
obligated to distribute on a timely basis to holders of FNMA REMIC Certificates
required installments of principal and interest and to distribute the principal
balance of each class of REMIC Certificates in full, whether or not sufficient
funds are otherwise available.
For FHLMC REMIC Certificates, FHLMC guarantees the timely payment of
interest, and also guarantees the ultimate payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("PCs"). PCs represent undivided interests in specified level payment,
residential mortgages or participation therein purchased by FHLMC and placed in
a PC pool. With respect to principal payments on PCs, FHLMC generally guarantees
ultimate collection of all principal of the related mortgage loans without
offset or deduction. FHLMC also guarantees timely payment of principal on
certain PCs, referred to as "Gold PCs."
ASSET-BACKED SECURITIES. Asset-backed securities are generally issued
as pass-through certificates, which represent undivided fractional ownership
interests in an underlying pool of assets, or as debt instruments, which are
also known as collateralized obligations, and are generally issued as the debt
of a special purpose entity organized solely for the purpose of owning such
assets and issuing such debt. Asset-backed securities are often backed by a pool
of assets representing the obligations of a number of different parties.
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 (i.e.,
loans) 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.
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WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. When the Fund agrees to
purchase securities on a when-issued basis or enters into a forward commitment
to purchase securities, the Custodian will set aside cash, U.S. government
securities or other liquid assets equal to the amount of the purchase or the
commitment in a separate account. The market value of the separate account will
be monitored and if such market value declines, the Fund will be required
subsequently to place additional assets in the separate account in order to
ensure that the value of the account remains equal to the amount of the Fund's
commitments.
The Fund will make commitments to purchase securities on a when-issued
basis or to purchase or sell securities on a forward commitment basis only with
the intention of completing the transaction and actually purchasing or selling
the securities. If deemed advisable as a matter of investment strategy, however,
the Fund may dispose of or renegotiate a commitment after it is entered into,
and may sell securities it has committed to purchase before those securities are
delivered to the Fund on the settlement date. In these cases, the Fund may
realize a capital gain or loss.
The value of the securities underlying a when-issued purchase or a
forward commitment to purchase securities, and any subsequent fluctuations in
their value, is taken into account when determining the Fund's net asset value
starting on the day that the Fund agrees to purchase the securities. The Fund
does not earn interest on the securities it has committed to purchase until they
are paid for and delivered on the settlement date. When the Fund makes a forward
commitment to sell securities it owns, the proceeds to be received upon
settlement are included in the Fund's assets, and fluctuations in the value of
the underlying securities are not reflected in the Fund's net asset value as
long as the commitment remains in effect.
FORWARD CURRENCY TRANSACTIONS. The Fund's participation in forward
currency contracts will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging involves the purchase
or sale of foreign currency with respect to specific receivables or payables of
the Fund generally arising in connection with the purchase or sale of its
portfolio securities. The purpose of transaction hedging is to "lock in" the
U.S. dollar equivalent price of such specific securities. Position hedging is
the sale of foreign currency with respect to portfolio security positions
denominated or quoted in that currency. The Funds will not speculate in foreign
currency exchange transactions. Transaction and position hedging will not be
limited to an overall percentage of the Fund's assets, but will be employed as
necessary to correspond to particular transactions or positions. The Fund may
not hedge its currency positions to an extent greater than the aggregate market
value (at the time of entering into the forward contract) of the securities held
in its portfolio denominated, quoted in, or currently convertible into that
particular currency. When the Fund engages in forward currency transactions,
certain asset segregation requirements must be satisfied to ensure that the use
of foreign currency transactions is unleveraged. When a Fund takes a long
position in a forward currency contract, it must maintain a segregated account
containing liquid assets equal to the purchase price of the contract, less any
margin or deposit. When a Fund takes a short position in a forward currency
contract, the Fund must maintain a segregated account containing liquid assets
in an amount equal to the market value of the currency underlying such contract
(less any margin or deposit), which amount must be at least equal to the market
price at which the short
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position was established. Asset segregation requirements are not applicable when
a Fund "covers" a forward currency position generally by entering into an
offsetting position.
The transaction costs to the Fund of engaging in forward currency
transactions vary with factors such as the currency involved, the length of the
contract period and prevailing currency market conditions. Because currency
transactions are usually conducted on a principal basis, no fees or commissions
are involved. The use of forward currency contracts does not eliminate
fluctuations in the underlying prices of the securities being hedged, but it
does establish a rate of exchange that can be achieved in the future. Thus,
although forward currency contracts used for transaction or position hedging
purposes may limit the risk of loss due to an increase in the value of the
hedged currency, at the same time they limit potential gain that might result
were the contracts not entered into. Further, the Adviser may be incorrect in
its expectations as to currency fluctuations, and the Fund may incur losses in
connection with its currency transactions that it would not otherwise incur. If
a price movement in a particular currency is generally anticipated, a Fund may
not be able to contract to sell or purchase that currency at an advantageous
price.
At or before the maturity of a forward sale contract, the Fund may sell
a portfolio security and make delivery of the currency, or retain the security
and offset its contractual obligation to deliver the currency by purchasing a
second contract pursuant to which the Fund will obtain, on the same maturity
date, the same amount of the currency which it is obligated to deliver. If the
Fund retains the portfolio security and engages in an offsetting transaction,
the Fund, at the time of execution of the offsetting transaction, will incur a
gain or a loss to the extent that movement has occurred in forward contract
prices. Should forward prices decline during the period between a Fund's
entering into a forward contract for the sale of a currency and the date it
enters into an offsetting contract for the purchase of the currency, the Fund
will realize a gain to the extent the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Fund will suffer a loss to the extent the price of the
currency it has agreed to sell is less than the price of the currency it has
agreed to purchase in the offsetting contract. The foregoing principles
generally apply also to forward purchase contracts.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. In order to protect against a
possible loss on investments resulting from a decline or appreciation in the
value of a particular foreign currency against the U.S. dollar or another
foreign currency or for other reasons, the Fund is authorized to enter into
forward currency exchange contracts. These contracts involve an obligation to
purchase or sell a specified currency at a future date at a price set at the
time of the contract. Forward currency contracts do not eliminate fluctuations
in the values of portfolio securities but rather may allow the Fund to establish
a rate of exchange for a future point in time.
The Fund may enter into forward foreign currency exchange contracts in
several circumstances. When entering into a contract for the purchase or sale of
a security, the Fund may enter into a contract for the amount of the purchase or
sale price to protect against variations, between the date the security is
purchased or sold and the date on which payment is made or received, in the
value of the foreign currency relative to the U.S. dollar or other foreign
currency.
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When the Adviser anticipates that a particular foreign currency may
decline substantially relative to the U.S. dollar or other leading currencies,
in order to reduce risk, the Fund may enter into a forward contract to sell, for
a fixed amount, the amount of foreign currency approximating the value of some
or all of the Fund's securities denominated in such foreign currency. Similarly,
when the securities held by the Fund create a short position in a foreign
currency, the Fund may enter into a forward contract to buy, for a fixed amount,
an amount of foreign currency approximating the short position. With respect to
any forward foreign currency contract, it will generally not be possible to
precisely match the amount covered by that contract and the value of the
securities involved due to the changes in the values of such securities
resulting from market movements between the date the forward contract is entered
into and the date it matures. While forward contracts may offer protection from
losses resulting from declines or appreciation in the value of a particular
foreign currency, they also limit potential gains which might result from
changes in the value of such currency. The Fund will also incur costs in
connection with forward foreign currency exchange contracts and conversions of
foreign currencies and U.S. dollars. In addition, the Adviser may purchase or
sell forward foreign currency exchange contracts for the Fund for non-hedging
purposes when the Adviser anticipates that the foreign currency will appreciate
or depreciate in value.
A separate account consisting of liquid assets, such as cash, U.S.
Government securities or other liquid high grade debt obligations, equal to the
amount of the Fund's assets that could be required to consummate forward
contracts will be established with the Fund's Custodian except to the extent the
contracts are otherwise "covered." For the purpose of determining the adequacy
of the securities in the account, the deposited securities will be valued at
market or fair value. If the market or fair value of such securities declines,
additional cash or securities will be placed in the account daily so that the
value of the account will equal the amount of such commitments by the Fund. A
forward contract to sell a foreign currency is "covered" if the Fund owns the
currency (or securities denominated in the currency) underlying the contract, or
holds a forward contract (or call option) permitting the Fund to buy the same
currency at a price no higher than the Fund's price to sell the currency. A
forward contract to buy a foreign currency is "covered" if the Fund holds a
forward contract (or put option) permitting the Fund to sell the same currency
at a price as high as or higher than the Fund's price to buy the currency.
STRIPPED SECURITIES. The Federal Reserve has established an investment
program known as "STRIPS" or "Separate Trading of Registered Interest and
Principal of Securities." The Fund may purchase securities registered under this
program. This program allows the Fund to be able to have beneficial ownership of
zero coupon securities recorded directly in the book-entry record-keeping system
in lieu of having to hold certificates or other evidences of ownership of the
underlying U.S. Treasury securities. The Treasury Department has, within the
past several years, facilitated transfers of such securities by accounting
separately for the beneficial ownership of particular interest coupon and
principal payments on Treasury securities through the Federal Reserve book-entry
record-keeping system.
In addition, the Fund may acquire U.S. Government Obligations and their
unmatured interest coupons that have been separated ("stripped") by their
holder, typically a custodian bank or investment brokerage firm. Having
separated the interest coupons from the underlying principal of the U.S.
Government Obligations, the holder will resell the stripped securities in
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custodial receipt programs with a number of different names, including "Treasury
Income Growth Receipts" ("TIGRs") and "Certificate of Accrual on Treasury
Securities" ("CATS"). The stripped coupons are sold separately from the
underlying principal, which is usually sold at a deep discount because the buyer
receives only the right to receive a future fixed payment on the security and
does not receive any rights to periodic interest (cash) payments. The underlying
U.S. Treasury bonds and notes themselves are held in book-entry form at the
Federal Reserve Bank or, in the case of bearer securities (i.e., unregistered
securities which are ostensibly owned by the bearer or holder), in trust on
behalf of the owners.
MONEY MARKET INSTRUMENTS. The Fund may invest in "money market
instruments," for purposes of temporary defensive measures which include, among
other things, bank obligations. Bank obligations include bankers' acceptances,
negotiable certificates of deposit, and non-negotiable time deposits earning a
specified return and issued by a U.S. bank which is a member of the Federal
Reserve System or insured by the Bank Insurance Fund of the Federal Deposit
Insurance Corporation ("FDIC"), or by a savings and loan association or savings
bank which is insured by the Savings Association Insurance Fund of the FDIC.
Such deposits are not FDIC insured and the Fund bears the risk of bank failure.
Bank obligations also include U.S. dollar-denominated obligations of foreign
branches of U.S. banks and obligations of domestic branches of foreign banks.
Such investments may involve risks that are different from investments in
securities 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 in the Fund.
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 Fund
will invest in obligations of domestic branches of foreign banks and foreign
branches of domestic banks only when the Adviser believes that the risks
associated with such investment are minimal. The value of money market
instruments tends to fall when current interest rates rise. Money market
instruments are generally less sensitive to interest rate changes than
longer-term securities.
DURATION. Although the Fund has no restriction as to the maximum or
minimum duration of any individual security held by it, during normal market
conditions the Fund's average effective duration will generally be within 5% of
the duration of the Lehman Brothers Aggregate Bond Index. "Duration" is a term
used by investment managers to express the average time to receipt of expected
cash flows (discounted to their present value) on a particular fixed income
instrument or a portfolio of instruments. Duration takes into account the
pattern of a security's cash flow over time, including how cash flow is affected
by prepayments and changes in interest rates. For example, the duration of a
five-year zero coupon bond that pays no interest or principal until the maturity
of the bond is five years. This is because a zero coupon bond produces no cash
flow until the maturity date. On the other hand, a coupon bond that pays
interest semi-annually and matures in five years will have a duration of less
than five years, which reflects the semi-annual cash flows resulting from coupon
payments. Duration also generally defines the effect of interest rate changes on
bond prices. Generally, if interest rates increase by one percent, the value of
a security having an effective duration of five years would decrease in value by
five percent.
19
<PAGE>
INVESTMENT LIMITATIONS
The Funds have adopted the following fundamental investment limitations
which may not be changed without the affirmative vote of the holders of a
majority of the Funds' outstanding shares (as defined in Section 2(a)(42) of the
1940 Act). As used in this Statement of Additional Information and in the
Prospectus, "shareholder approval" and a "majority of the outstanding shares" of
a class, series or Fund means, with respect to the approval of an investment
advisory agreement, a distribution plan or a change in a fundamental investment
limitation, the lesser of (1) 67% of the shares of the particular class, series
or Fund represented at a meeting at which the holders of more than 50% of the
outstanding shares of such class, series or Fund are present in person or by
proxy, or (2) more than 50% of the outstanding shares of such class, series or
Fund. Each Fund's investment goals and strategies described in the Prospectuses
may be changed by the Company's Board of Directors without the approval of the
Fund's shareholders. Each Fund may not:
1. Borrow money or issue senior securities, except that each Fund may
borrow from banks and enter into reverse repurchase agreements and the
Bond, Large Cap Value, Mid Cap Value and Small Cap Value Funds may
enter into dollar rolls for temporary purposes in amounts up to
one-third of the value of each Fund's respective total assets at the
time of such borrowing and provided that, for any borrowing with
respect to the Large Cap Value, Mid Cap Value and Market Neutral Funds,
there is at least 300% asset coverage for the borrowings of the Fund. A
Fund may not mortgage, pledge or hypothecate any assets, except in
connection with any such borrowing and then in amounts not in excess of
one-third of the value of the Fund's total assets at the time of such
borrowing. However, with respect to the Large Cap Value, Mid Cap Value
and Market Neutral Funds, the amount shall not be in excess of lesser
of the dollar amounts borrowed or 33 1/3% of the value of the Fund's
total assets at the time of such borrowing, provided that for the
Market Neutral and Long-Short Equity Funds: (a) short sales and related
borrowings of securities are not subject to this restriction; and (b)
for the purposes of this restriction, collateral arrangements with
respect to options, short sales, stock index, interest rate, currency
or other futures, options on futures contracts, collateral arrangements
with respect to initial and variation margin and collateral
arrangements with respect to swaps and other derivatives are not deemed
to be a pledge or other encumbrance of assets, and provided that for
the Large Cap Value and Mid Cap Value Funds, any collateral
arrangements with respect to the writing of options, futures contracts
and options on futures contracts and collateral arrangements with
respect to initial and variation margin are not deemed to be a pledge
of assets. The Small Cap Value, Large Cap Value and Bond Funds will not
purchase securities while aggregate borrowings (including reverse
repurchase agreements, dollar rolls and borrowings from banks) are in
excess of 5% of total assets. Securities held in escrow or separate
accounts in connection with a Fund's investment practices are not
considered to be borrowings or deemed to be pledged for purposes of
this limitation; (For purposes of this Limitation No. 1, any collateral
arrangements with respect to, if applicable, the writing of options and
futures contracts, options on futures contracts, and collateral
arrangements with respect to initial and variation margin are not
deemed to be a pledge of assets.)
20
<PAGE>
2. Issue any senior securities, except as permitted under the 1940 Act;
(For purposes of this Limitation No. 2, neither the collateral
arrangements with respect to options and futures identified in
Limitation No. 1, nor the purchase or sale of futures or related
options are deemed to be the issuance of senior securities.)
3. Act as an underwriter of securities within the meaning of the
Securities Act, except insofar as it might be deemed to be an
underwriter upon disposition of certain portfolio securities acquired
within the limitation on purchases of restricted securities;
4. Purchase or sell real estate (including real estate limited partnership
interests), provided that the Fund may invest: (a) in securities
secured by real estate or interests therein or issued by companies that
invest in real estate or interests therein; or (b) in real estate
investment trusts;
5. Purchase or sell commodities or commodity contracts, except that a Fund
may deal in forward foreign exchanges between currencies of the
different countries in which it may invest and purchase and sell stock
index and currency options, stock index futures, financial futures and
currency futures contracts and related options on such futures;
6. Make loans, except through loans of portfolio instruments and
repurchase agreements, provided that for purposes of this restriction
the acquisition of bonds, debentures or other debt instruments or
interests therein and investment in government obligations, loan
participations and assignments, short-term commercial paper,
certificates of deposit and bankers' acceptances shall not be deemed to
be the making of a loan;
7. Invest 25% or more of its total assets, taken at market value at the
time of each investment, in the securities of issuers in any particular
industry (excluding the U.S. Government and its agencies and
instrumentalities); or
8. Purchase the securities of any one issuer, other than securities issued
or guaranteed by the U.S. Government or its agencies or
instrumentalities, if immediately after and as a result of such
purchase, more than 5% of the value of the Fund's total assets would be
invested in the securities of such issuer, or more than 10% of the
outstanding voting securities of such issuer would be owned by the
Fund, except that up to 25% of the value of the Fund's total assets may
be invested without regard to such limitations.
In addition to the fundamental investment limitations specified above,
the Market Neutral Fund may:
Purchase any securities which would cause 25% or more of the value of
the Fund's 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, provided that (a) there is no limitation with respect to (i)
instruments issued or guaranteed by the United States, any state, territory or
possession of the United States, the District of Columbia or any of their
authorities, agencies, instrumentalities or political subdivisions, and (ii)
repurchase agreements secured by the instruments described in clause (i); (b)
wholly-owned finance companies will be considered to be in the industries of
their parents if their activities are primarily related to financing the
activities of the parents; and (c) utilities will be divided according to their
services, for example, gas, gas transmission, electric and gas, electric and
telephone will each be considered a separate industry;
For purposes of Investment Limitation No. 1, collateral arrangements
with respect to, if applicable, the writing of options, futures contracts,
options on futures contracts, forward currency contracts and collateral
arrangements with respect to initial and variation margin are not deemed to be a
pledge of assets and neither such arrangements nor the purchase or sale of
futures
21
<PAGE>
or related options are deemed to be the issuance of a senior security for
purposes of Investment Limitation No. 2.
In addition to the fundamental investment limitations specified above,
the Market Neutral Fund is subject to the following nonfundamental
limitations. The Market Neutral Fund may not:
1. Make investments for the purpose of exercising control or management,
but investments by a Fund in wholly-owned investment entities created
under the laws of certain countries will not be deemed the making of
investments for the purpose of exercising control or management; or
2. Purchase securities on margin, except for short-term credits necessary
for clearance of portfolio transactions, and except that a Fund may
make margin deposits in connection with its use of options, futures
contracts, options on futures contracts and forward contracts.
The Funds may invest in securities issued by other investment companies
within the limits prescribed by the 1940 Act. As a shareholder of another
investment company, a Fund would bear, along with other shareholders, its pro
rata portion of the other investment company's expenses, including advisory
fees. These expenses would be in addition to the advisory and other expenses
that a Fund bears directly in connection with its own operations.
Securities held by a Fund generally may not be purchased from, sold or
loaned to the Adviser or its affiliates or any of their directors, officers or
employees, acting as principal, unless pursuant to a rule or exemptive order
under the 1940 Act.
If a percentage restriction under one of a Fund's investment policies
or limitations or the use of assets is adhered to at the time a transaction is
effected, later changes in percentages resulting from changing values will not
be considered a violation (except with respect to any restrictions that may
apply to borrowings or senior securities issued by the Fund).
22
<PAGE>
MANAGEMENT OF THE COMPANY
DIRECTORS AND OFFICERS
The business and affairs of the Company are managed under the direction
of the Company's Board of Directors. The directors and executive officers of the
Company, their ages, business addresses and principal occupations during the
past five years are:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS AND AGE POSITION WITH FUND DURING PAST FIVE YEARS
- ------------------------ ------------------ -----------------------
<S> <C> <C>
Arnold M. Reichman - 51 Director Chief Operating Officer of Warburg Pincus
c/o 400 Bellevue Parkway Asset Management, Inc., Executive Officer
Wilmington, DE 19809 and Director of Counsellors Securities Inc.
and Director/Trustee of various investment
companies advised by Warburg Pincus Asset
Management, Inc. until September 15, 1999;
Prior to 1997, Managing Director of Warburg
Pincus Asset Management, Inc.
*Robert Sablowsky - 61 Director Executive Vice President of Fahnestock Co.,
Fahnestock & Company, Inc. Inc. (a registered broker-dealer); Prior to
125 Broad Street October 1996, Executive Vice President of
New York, NY 10004 Gruntal & Co., Inc. (a registered
broker-dealer).
Francis J. McKay - 64 Director Since 1963, Executive Vice President, Fox
Fox Chase Cancer Center Chase Cancer Center (biomedical research and
7701 Burholme Avenue medical care).
Philadelphia, PA 19111
*Marvin E. Sternberg - 65 Director Since 1974, Chairman, Director and
Moyco Technologies, Inc. President, Moyco Technologies, Inc.
200 Commerce Drive (manufacturer of dental supplies and
Montgomeryville, PA 18936 precision coated abrasives).
Julian A. Brodsky - 65 Director Director and Vice Chairman, since 1969
Comcast Corporation Comcast Corporation (cable television and
1500 Market Street communications); Director, Comcast U.K.
35th Floor
Philadelphia, PA 19102
-23-
<PAGE>
Donald van Roden - 75 Director and Chairman of the Self-employed businessman. From February
1200 Old Mill Lane Board 1980 to March 1987, Vice Chairman,
Wyomissing, PA 19610 SmithKline Beecham Corporation
(pharmaceuticals); Director AAA Mid-Atlantic
(auto service); Director, Keystone Insurance
Co.
Edward J. Roach - 75 President and Treasurer Certified Public Accountant; Vice Chairman
400 Bellevue Parkway of the Board, Fox Chase Cancer Center;
Wilmington, DE 19809 Trustee Emeritus, Pennsylvania School for
the Deaf; Trustee Emeritus, Immaculata College;
President or Vice President and Treasurer
of various investment companies advised by
subsidiaries of PNC Bank Corp. (1981-1997);
Treasurer of Chestnut Street Exchange Fund; Vice
President and Treasurer of Independence Square
Income Securities, Inc.; Director of the
Bradford Funds, Inc.
<FN>
* Each of Mr. Sablowsky and Mr. Sternberg is an "interested person" of RBB, as
that term is defined in the 1940 Act.
Messrs. McKay, Sternberg and Brodsky are members of the Audit Committee
of the Board of Directors. The Audit Committee, among other things, reviews
results of the annual audit and recommends to the Company the firm to be
selected as independent auditors.
Messrs. Reichman, McKay and van Roden are members of the Executive
Committee of the Board of Directors. The Executive Committee may generally carry
on and manage the business of the Company when the Board of Directors is not in
session.
Messrs. McKay, Sternberg, Brodsky and van Roden are members of the
Nominating Committee of the Board of Directors. The Nominating Committee
recommends to the Board all persons to be nominated as directors of the Company.
</FN>
</TABLE>
DIRECTORS' COMPENSATION
The Company currently pays directors $15,000 annually and $1,000 per
meeting of the Board or any committee thereof that is not held in conjunction
with a Board meeting. In addition, the Chairman of the Board receives an
additional fee of $6,000 per year for his services in this capacity. Directors
are reimbursed for any expenses incurred in attending meetings of the Board of
Directors or any committee thereof. For the year ended August 31, 1999, each of
the following members of the Board of Directors received compensation from RBB
in the following amounts:
24
<PAGE>
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT
AGGREGATE BENEFITS TOTAL COMPENSATION
COMPENSATION ACCRUED AS ESTIMATED FROM FUND AND
FROM PART OF ANNUAL BENEFITS FUND COMPLEX
NAME OF PERSON/POSITION REGISTRANT FUND EXPENSES UPON RETIREMENT PAID TO DIRECTORS
- -------------------------------------- ------------ ------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Julian A. Brodsky, Director $19,250 N/A $19,250 $19,250
Francis J. McKay, Director $16,750 N/A $16,750 $16,750
Arnold M. Reichman, Director $ 0 N/A $ 0 $ 0
Robert Sablowsky, Director $18,250 N/A $18,250 $18,250
Marvin E. Sternberg, Director $19,250 N/A $19,250 $19,250
Donald van Roden, Director and $25,250 N/A $25,250 $25,250
Chairman
</TABLE>
On October 24, 1990, the Company adopted, as a participating employer,
the Fund Office Retirement Profit-Sharing Plan and Trust Agreement, a retirement
plan for employees (currently Edward J. Roach) pursuant to which the Company
will contribute on a quarterly basis amounts equal to 10% of the quarterly
compensation of each eligible employee. By virtue of the services performed by
the Company's advisers, custodians, administrators and distributor, the Company
itself requires only one part-time employee. No officer, director or employee of
the Adviser or the Distributor currently receives any compensation from the
Company.
CONTROL PERSONS
As of November 17, 1999, to the Company's knowledge, the following
named persons at the addresses shown below owned of record approximately 5% or
more of the total outstanding shares of the class of the Company indicated
below. See "Additional Information Concerning Fund Shares" above. The Company
does not know whether such persons also beneficially own such shares.
<TABLE>
<CAPTION>
- ------------------------------------- ------------------------------------------------------- ------------------------
FUND NAME SHAREHOLDER NAME AND ADDRESS PERCENTAGE OF FUND HELD
- ------------------------------------- ------------------------------------------------------- ------------------------
<S> <C> <C>
BEDFORD MUNICIPAL MONEY MARKET Gabe Nechamkin 7.40%
27 Muchmore Road
Harrison, NY 10528-1109
- ------------------------------------- ------------------------------------------------------- ------------------------
CASH PRESERVATION MONEY MARKET Harold T. Erfer 6.349%
414 Charles Ln.
Wynnewood, PA 19096
- ------------------------------------- ------------------------------------------------------- ------------------------
Marian E. Kunz 15.602%
52 Weiss Ave.
Flourtown, PA 19031
- ------------------------------------- ------------------------------------------------------- ------------------------
Karen M. McElhinny and Contribution Account 8.227%
4943 King Arthur Dr.
Erie, PA 16506
- ------------------------------------- ------------------------------------------------------- ------------------------
Luanne M. Garvey and Robert J. Garvey 15.438%
2729 Woodland Ave.
Trooper, PA 19403
- ------------------------------------- ------------------------------------------------------- ------------------------
John Robert Estrada and Shirley Ann Estrada 5.260%
1700 Raton Dr.
Arlington, TX 76018
- ------------------------------------- ------------------------------------------------------- ------------------------
Dominic and Barbara Pisciotta and Successors in Tr. 12.785%
Under the Dominic Trst. And Barbara Pisciotta Caring
Tr. Dtd. 01/24/92
207 Woodmere Way
St. Charles, MO 63303
- ------------------------------------- ------------------------------------------------------- ------------------------
Michael W. Preble 7.456%
1505 W. Cheyenne Dr.
Chandler, AZ 85224
- ------------------------------------- ------------------------------------------------------- ------------------------
Anthony K. Bailey and 5.085%
Laura A. Bailey
5819 E. 35th Street
Tuscon AZ 85711
- ------------------------------------- ------------------------------------------------------- ------------------------
SANSOM STREET MONEY MARKET Saxon and Co. 65.047%
FBO Paine Webber
A/C 32 32 400 4000038
P.O. Box 7780 1888
Phila., PA 19182
- ------------------------------------- ------------------------------------------------------- ------------------------
Saxon and Co. 34.953%
c/o PNC Bank, N. A.
F3-F076-02-2
200 Stevens Drive Ste. 260/ACI
Lester, PA 19113
- ------------------------------------- ------------------------------------------------------- ------------------------
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------- ------------------------------------------------------- ------------------------
FUND NAME SHAREHOLDER NAME AND ADDRESS PERCENTAGE OF FUND HELD
- ------------------------------------- ------------------------------------------------------- ------------------------
<S> <C> <C>
CASH PRESERVATION Gary L. Lange 72.206%
MUNICIPAL MONEY MARKET and Susan D. Lange
JT TEN
837 Timber Glen Ln.
Ballwin, MO 63021-6066
- ------------------------------------- ------------------------------------------------------- ------------------------
Mark Koehler and 5.800%
Suzanne Koehler
JT TEN WROS
3925 Bower St.
St. Louis, MO 63116
- ------------------------------------- ------------------------------------------------------- ------------------------
RBB SELECT MONEY MARKET Warburg Pincus Capital Appreciation Fund 10.649%
Attn. Joe Gajewski / PFPC, Inc.
MS W3-F400-03-2
400 Bellevue Parkway
Wilmington, DE 19809
- ------------------------------------- ------------------------------------------------------- ------------------------
Warburg Pincus Emerging Growth Fund 21.770%
Attn. Joe Gajewski / PFPC, Inc.
MS W3-F400-03-2
400 Bellevue Parkway
Wilmington, DE 19809
- ------------------------------------- ------------------------------------------------------- ------------------------
Warburg Pincus Growth & Income Fund 6.831%
Attn. Joe Gajewski / PFPC, Inc.
MS W3-F400-03-2
400 Bellevue Parkway
Wilmington, DE 19809
- ------------------------------------- ------------------------------------------------------- ------------------------
Warburg Pincus Trust Small Company Growth Portfolio 12.161%
Attn. Joe Gajewski / PFPC, Inc.
MS W3-F400-03-2
400 Bellevue Parkway
Wilmington, DE 19809
- ------------------------------------- ------------------------------------------------------- ------------------------
Warburg Pincus Trust-International Equity Portfolio 15.203%
Attn. Joe Gajewski / PFPC, Inc.
MS W3-F400-03-2
400 Bellevue Parkway
Wilmington, DE 19809
- ------------------------------------- ------------------------------------------------------- ------------------------
Warburg Pincus Japan Growth Fund 5.365%
Attn. Joe Gajewski / PFPC, Inc.
MS W3-F400-03-2
400 Bellevue Parkway
Wilmington, DE 19809
- ------------------------------------- ------------------------------------------------------- ------------------------
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------- ------------------------------------------------------- ------------------------
FUND NAME SHAREHOLDER NAME AND ADDRESS PERCENTAGE OF FUND HELD
- ------------------------------------- ------------------------------------------------------- ------------------------
<S> <C> <C>
Warburg Pincus Institutional Fund 12.823%
Japan Small Company Fund
Attn: Joe Gajewski/PFPC Inc.
MS W3-F400-03-2
400 Bellevue Parkway
Wilmington, DE 19809
- ------------------------------------- ------------------------------------------------------- ------------------------
Warburg Pincus Institutional Fund 6.290%
International Equity Portfolio
Attn: Joe Gajewski/PFPC Inc.
MS W3-F400-03-2
400 Bellevue Parkway
Wilmington, DE 19809
- ------------------------------------- ------------------------------------------------------- ------------------------
N/I MICRO CAP FUND Charles Schwab & Co. Inc 11.431%
Special Custody Account for the Exclusive Benefit of
Customers
Attn: Mutual Funds A/C 3143-0251
101 Montgomery St.
San Francisco, CA 94104
- ------------------------------------- ------------------------------------------------------- ------------------------
Gerald T. Reilly 11.249%
TRST RCAB Collective Investors Partnership
U/A DTD 9/19/95 2121 Commonwealth Avenue
Brighton, MA 02135
- ------------------------------------- ------------------------------------------------------- ------------------------
Janis Claflin, Bruce Fetzer and 9.068%
Winston Franklin
Robert Lehman Trst.
The John E. Fetzer Institute, Inc.
U/A DTD 06-1992
Attn: Christina Adams
9292 West KL Ave.
Kalamazoo, MI 49009
- ------------------------------------- ------------------------------------------------------- ------------------------
Public Inst. For Social Security 17.814%
1001 19th St., N. 16th Flr.
Arlington, VA 22209
- ------------------------------------- ------------------------------------------------------- ------------------------
N/I GROWTH FUND Charles Schwab & Co. Inc 7.515%
Special Custody Account for the Exclusive Benefit of
Customers
Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104
- ------------------------------------- ------------------------------------------------------- ------------------------
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------- ------------------------------------------------------- ------------------------
FUND NAME SHAREHOLDER NAME AND ADDRESS PERCENTAGE OF FUND HELD
- ------------------------------------- ------------------------------------------------------- ------------------------
<S> <C> <C>
Citibank North America Inc. 43.606%
Trst. Sargent & Lundy Retirement Trust
DTD. 06/01/96
Mutual Fund Unit
Bld. B Floor 1 Zone 7
3800 Citibank Center Tampa
Tampa, FL 33610-9122
- ------------------------------------- ------------------------------------------------------- ------------------------
Louisa Stude Sarofim Foundation 6.333%
c/o Nancy Head
DTD. 01/04/91
1001 Fannin 4700
Houston, TX 77002
- ------------------------------------- ------------------------------------------------------- ------------------------
U.S. Equity Investment Portfolio LP 7.965%
1001 N. US Hwy. One Suite 800
Jupiter, FL 33477
- ------------------------------------- ------------------------------------------------------- ------------------------
N/I MID CAP FUND Charles Schwab & Co. Inc. 20.546%
Special Custody Account for the
Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104
- ------------------------------------- ------------------------------------------------------- ------------------------
National Investors Services Corp. 7.177%
For the Exclusive Benefit of our Customers
S. 55 Water St. 32nd Floor
New York, NY 10041-3299
- ------------------------------------- ------------------------------------------------------- ------------------------
N/I LARGER CAP VALUE FUND Charles Schwab & Co. Inc 57.838%
Special Custody Account for the Exclusive
Benefit of Customers
Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104
- ------------------------------------- ------------------------------------------------------- ------------------------
FTC & Co. 10.526%
Attn: Datalynx 241
Attn: Datalynx 273
P. O. Box 173736
Denver, CO 80217-3736
- ------------------------------------- ------------------------------------------------------- ------------------------
N/I SMALL CAP VALUE FUND State Street Bank and Trust Company 54.161%
FBO Yale Univ. Ret. Pl. for Staff Emp.
State Street Bank & Tr. Co. Master Tr. Div.
Attn: Kevin Sutton
Solomon Williard Bldg.
One Enterprise Dr.
North Quincy, MA 02171
- ------------------------------------- ------------------------------------------------------- ------------------------
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------- ------------------------------------------------------- ------------------------
FUND NAME SHAREHOLDER NAME AND ADDRESS PERCENTAGE OF FUND HELD
- ------------------------------------- ------------------------------------------------------- ------------------------
<S> <C> <C>
Yale University 26.939%
Trst. Yale University Ret. Health Bene. Tr.
Attention: Seth Alexander
230 Prospect St.
New Haven, CT 06511
- ------------------------------------- ------------------------------------------------------- ------------------------
BOSTON PARTNERS LARGE CAP FUND INST Shady Side Academy Endowment 5.631%
SHARES 423 Fox Chapel Rd.
Pittsburgh, PA 15238
- ------------------------------------- ------------------------------------------------------- ------------------------
Charles Schwab & Co., Inc. 7.311%
Special Custody Account for Bene. of Cust.
Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104
- ------------------------------------- ------------------------------------------------------- ------------------------
Swanee Hunt and Charles Ansbacher 17.122%
Trst.
The Hunt Alternatives Fund
c/o Elizabeth Alberti
168 Brattle St.
Cambridge, MA 02138
- ------------------------------------- ------------------------------------------------------- ------------------------
Union Bank of California 9.643%
FBO Service Employees BP 610001265-01
P. O. Box 85484
San Diego, CA 92186
- ------------------------------------- ------------------------------------------------------- ------------------------
US Bank National Association 17.536%
FBO A-Dec Inc. DOT 093098
Attn: Mutual Funds A/C 97307536
P. O. Box 64010
St. Paul, MN 55164-0010
- ------------------------------------- ------------------------------------------------------- ------------------------
Northern Trust Company 16.644%
FBO AEFC Pension Trust
A/C 22-53582
P. O. Box 92956
Chicago, IL 60675
- ------------------------------------- ------------------------------------------------------- ------------------------
James B. Beam 5.206%
Trst World Publishing Co. Pft Shr Trust
P.O. Box 1511
Wenatchee, WA 98807
- ------------------------------------- ------------------------------------------------------- ------------------------
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------- ------------------------------------------------------- ------------------------
FUND NAME SHAREHOLDER NAME AND ADDRESS PERCENTAGE OF FUND HELD
- ------------------------------------- ------------------------------------------------------- ------------------------
<S> <C> <C>
BOSTON PARTNERS LARGE CAP FUND Charles Schwab & Co. Inc. 66.397%
INVESTOR SHARES Special Custody Account for Bene. of Cust.
Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104
- ------------------------------------- ------------------------------------------------------- ------------------------
Jupiter & Co. 6.380%
c/o Investors Bank
PO Box 9130 FPG90
Boston, MA 02110
- ------------------------------------- ------------------------------------------------------- ------------------------
BOSTON PARTNERS MID CAP VALUE FUND MAC & CO. 5.642%
INST. SHARES A/C CHIF1001182
FBO Childrens Hospital LA
P.O. Box 3198
Pittsburgh, PA 15230-3198
- ------------------------------------- ------------------------------------------------------- ------------------------
John M. Pontius, Jr. 6.234%
FBO Hartwick College
West Street
Queens, NY 13820
- ------------------------------------- ------------------------------------------------------- ------------------------
MAC & CO. 7.976%
A/C LEMF5044062
Mutual Funds Operations
P.O. Box 3198
Pittsburgh, PA 15230-3198
- ------------------------------------- ------------------------------------------------------- ------------------------
The Northern Trust Company 5.046%
FBO Thomas & Betts Master Retirement Trust
Attn: Ellen Shea
8155 T&B Blvd.
Memphis, TN 38123
- ------------------------------------- ------------------------------------------------------- ------------------------
Norwest Bank Minnesota 5.194%
FBO McCormick & Co.
PEN-BOSTON A/C 12778825
P.O. Box 1533
Minneapolis, MN 55480
- ------------------------------------- ------------------------------------------------------- ------------------------
BOSTON PARTNERS MID CAP VALUE FUND National Financial Svcs. Corp. for Exclusive 17.061%
INV SHARES Bene. of Our Customers
Sal Vella
200 Liberty St.
New York, NY 10281
- ------------------------------------- ------------------------------------------------------- ------------------------
Charles Schwab & Co. Inc. 47.450%
Special Custody Account for Bene. of Cust.
Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104
- ------------------------------------- ------------------------------------------------------- ------------------------
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------- ------------------------------------------------------- ------------------------
FUND NAME SHAREHOLDER NAME AND ADDRESS PERCENTAGE OF FUND HELD
- ------------------------------------- ------------------------------------------------------- ------------------------
<S> <C> <C>
BOSTON PARTNERS BOND FUND Boston Partners Asset Mgmt. L. P. 26.464 %
INSTITUTIONAL SHARES Attn: Jan Penney
28 State St.
Boston, MA 02109
- ------------------------------------- ------------------------------------------------------- ------------------------
Chiles Foundation 8.499%
111 S.W. Fifth Ave.
Ste. 4050
Portland, OR 97204
- ------------------------------------- ------------------------------------------------------- ------------------------
The Roman Catholic Diocese of 53.382%
Raleigh, NC
General Endowment
715 Nazareth St.
Raleigh, NC 27606
- ------------------------------------- ------------------------------------------------------- ------------------------
The Roman Catholic Diocese of 11.654%
Raleigh, NC
Clergy Trust
715 Nazareth St.
Raleigh, NC 27606
- ------------------------------------- ------------------------------------------------------- ------------------------
BOSTON PARTNERS BOND FUND INVESTOR Charles Schwab & Co. Inc 81.125%
SHARES Special Custody Account for Bene. of Cust.
Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104
- ------------------------------------- ------------------------------------------------------- ------------------------
Stephen W. Hamilton 16.094%
17 Lakeside Ln.
N. Barrington, IL 60010
- ------------------------------------- ------------------------------------------------------- ------------------------
BOSTON PARTNERS SMALL CAP VALUE Desmond J. Heathwood 8.329%
FUND II- INSTITUTIONAL SHARES 41 Chestnut St.
Boston, MA 02108
- ------------------------------------- ------------------------------------------------------- ------------------------
Boston Partners Asset Mgmt. L. P. 65.889%
Attn: Jan Penney
28 State St.
Boston, MA 02109
- ------------------------------------- ------------------------------------------------------- ------------------------
Wayne Archambo 6.622%
42 DeLopa Circle
Westwood, MA 02090
- ------------------------------------- ------------------------------------------------------- ------------------------
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------- ------------------------------------------------------- ------------------------
FUND NAME SHAREHOLDER NAME AND ADDRESS PERCENTAGE OF FUND HELD
- ------------------------------------- ------------------------------------------------------- ------------------------
<S> <C> <C>
David M. Dabora 6.622%
11 White Plains Ct.
San Anselmo, CA 94960
- ------------------------------------- ------------------------------------------------------- ------------------------
BOSTON PARTNERS SMALL CAP VALUE National Financial Services Corp. 29.153%
FUND II- INVESTOR SHARES For the Exclusive Bene. of our Customers
Attn: Mutual Funds 5th Floor
200 Liberty St.
1 World Financial Center
New York, NY 10281
- ------------------------------------- ------------------------------------------------------- ------------------------
Charles Schwab & Co., Inc. 25.078%
Special Custody Account for Bene. of Cust.
Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104
- ------------------------------------- ------------------------------------------------------- ------------------------
Scott J. Harrington 36.112%
54 Torino Ct.
Danville, CA 94526
- ------------------------------------- ------------------------------------------------------- ------------------------
BOSTON PARTNERS MARKET NEUTRAL Boston Partners Asset Mgmt. L. P. 100.000%
FUND- INSTITUTIONAL SHARES Attn: Jan Penney
28 State St.
Boston, MA 02109
- ------------------------------------- ------------------------------------------------------- ------------------------
BOSTON PARTNERS MARKET NEUTRAL Glenn P. Verrette and Laurie Jo Verrette 6.690%
FUND- INVESTOR SHARES Jt. Ten. Wros.
156 Osgood St.
Andover, MA 01810
- ------------------------------------- ------------------------------------------------------- ------------------------
Thomas Lannan and Kathleen Lannan 89.987%
Jt. Ten. Wros.
P. O. Box 312
Osterville, MA 02655
- ------------------------------------- ------------------------------------------------------- ------------------------
SCHNEIDER SMALL CAP VALUE FUND Arnold C. Schneider III 13.637%
SEP IRA
826 Turnbridge Rd.
Wayne, PA 19087
- ------------------------------------- ------------------------------------------------------- ------------------------
SCM Retirement Plan 5.466%
Profit Sharing Plan
460 E. Swedesford Rd. Ste. 1080
Wayne, PA 19087
- ------------------------------------- ------------------------------------------------------- ------------------------
Ronald L. Gault 5.399%
IRA
439 W. Nelson St.
Lexington VA 24450
- ------------------------------------- ------------------------------------------------------- ------------------------
John Frederick Lyness 12.964%
81 Hillcrest Ave.
Summit, NJ 07901
- ------------------------------------- ------------------------------------------------------- ------------------------
Mark Shevitz 7.206%
Rollover IRA
65 Wardell St.
Rumson, NJ 07760
- ------------------------------------- ------------------------------------------------------- ------------------------
</TABLE>
32
<PAGE>
As of November 17, 1999, the directors and officers as a group owned
less than 1% of the Company's Shares.
INVESTMENT ADVISORY, DISTRIBUTION
AND SERVICING ARRANGEMENTS
ADVISORY AGREEMENTS
Boston Partners renders advisory services to the Funds pursuant to
Investment Advisory Agreements dated October 16, 1996 with respect to the Bond
and Large Cap Value Funds, May 30, 1997 with respect to the Mid Cap Value Fund,
July 1, 1998 with respect to the Small Cap Value Fund II (formerly the Micro Cap
Value Fund) and November 13, 1998 with respect to the Market Neutral Fund (the
"Advisory Agreements"). Boston Partners' general partner is Boston Partners,
Inc.
Boston Partners has investment discretion for the Funds and will make
all decisions affecting the assets of the Funds under the supervision of the
Company's Board of Directors and in accordance with each Fund's stated policies.
Boston Partners will select investments for the Funds. For its services to the
Funds, Boston Partners is entitled to receive a monthly advisory
33
<PAGE>
fee under the Advisory Agreements computed at an annual rate of 0.40% of the
Bond Fund's average daily net assets, 2.25% of the Market Neutral Fund's average
daily net assets, 0.75% of the Large Cap Value Fund's average daily net assets,
0.80% of the Mid Cap Value Fund's average daily net assets and 1.25% of the
Small Cap Value Fund's average daily net assets. Until December 31, 2000, Boston
Partners has agreed to waive its fees to the extent necessary to maintain an
annualized expense ratio for: the 1) Institutional Class of the Boston Partners
Bond Fund, Boston Partners Market Neutral Fund, Boston Partners Large Cap Value
Fund, Boston Partners Mid Cap Value Fund and Boston Partners Small Cap Value
Fund II of 0.60%, 2.95%, 1.00%, 1.00% and 1.55% respectively, and 2) the
Investor Class of the Boston Partners Bond Fund, Boston Partners Market Neutral
Fund, Boston Partners Large Cap Value Fund, Boston Partners Mid Cap Value Fund
and Boston Partners Small Cap Value Fund II of 0.82%, 3.17%, 1.22%, 1.22% and
1.77% respectively. There can be no assurance that Boston Partners will continue
such waivers thereafter.
For the fiscal years ended August 31, 1999, 1998 and 1997 the Fund paid
Boston Partners advisory fees and Boston Partners waived advisory fees as
follows:
ADVISORY FEES PAID
(AFTER WAIVERS AND
FUND REIMBURSEMENTS) WAIVERS REIMBURSEMENTS
- ---- ------------------ ------- --------------
FISCAL YEAR ENDED AUGUST 31, 1999
Bond $ 0 $ 56,220 $ 72,841
Market Neutral 1 $ 0 $ 12,727 $121,414
Large Cap Value $450,337 $109,852 $ 0
Mid Cap Value $926,862 $128,384 $ 0
Small Cap Value $ 0 $ 18,140 $129,809
FISCAL YEAR ENDED AUGUST 31, 1998
Bond 2 $ 0 $ 34,418 $ 54,244
Large Cap Value $250,634 $112,482 $ 0
Mid Cap Value $235,623 $ 84,082 $ 30,520
Small Cap Value 3 $ 0 $ 3,155 $ 19,063
FISCAL YEAR ENDED AUGUST 31, 1997
Large Cap Value 4 $ 5,635 $ 57,752 $ 26,104
Mid Cap Value 5 $ 0 $ 3,606 $ 32,554
1 Commenced operations November 17, 1998.
2 Commenced operations December 30, 1997.
3 Commenced operations July 1, 1998.
4 Institutional class commenced operations January 2, 1997 and Investor Class
commenced operations January 16, 1997.
5 Commenced operations June 2, 1997.
Each class of the Funds bears its own expenses not specifically assumed
by Boston Partners. General expenses of the Company not readily identifiable as
belonging to a portfolio of the Company are allocated among all investment
portfolios by or under the direction of the Company's Board of Directors in such
manner as the Board determines to be fair and equitable. Expenses borne by a
portfolio include, but are not limited to, the following (or a portfolio's share
of the following): (a) the cost (including brokerage commissions) of securities
purchased or sold
34
<PAGE>
by a portfolio and any losses incurred in connection therewith; (b) fees payable
to and expenses incurred on behalf of a portfolio by Boston Partners; (c) any
costs, expenses or losses arising out of a liability of or claim for damages or
other relief asserted against the Company or a portfolio for violation of any
law; (d) any extraordinary expenses; (e) fees, voluntary assessments and other
expenses incurred in connection with membership in investment company
organizations; (f) the cost of investment company literature and other
publications provided by the Company to its directors and officers; (g)
organizational costs; (h) fees to the investment adviser and PFPC; (i) fees and
expenses of officers and directors who are not affiliated with a portfolios'
investment adviser or Distributor; (j) taxes; (k) interest; (l) legal fees; (m)
custodian fees; (n) auditing fees; (o) brokerage fees and commissions; (p)
certain of the fees and expenses of registering and qualifying the Funds and
their shares for distribution under federal and state securities laws; (q)
expenses of preparing prospectuses and statements of additional information and
distributing annually to existing shareholders that are not attributable to a
particular class of shares of the Company; (r) the expense of reports to
shareholders, shareholders' meetings and proxy solicitations that are not
attributable to a particular class of shares of the Company; (s) fidelity bond
and directors' and officers' liability insurance premiums; (t) the expense of
using independent pricing services; and (u) other expenses which are not
expressly assumed by a portfolio's investment adviser under its advisory
agreement with the portfolio. Each class of the Funds pays its own distribution
fees, if applicable, and may pay a different share than other classes of other
expenses (excluding advisory and custodial fees) if those expenses are actually
incurred in a different amount by such class or if it receives different
services.
Under the Advisory Agreement, Boston Partners will not be liable for
any error of judgment or mistake of law or for any loss suffered by the Fund or
the Company in connection with the performance of the Advisory Agreement, except
a loss resulting from willful misfeasance, bad faith or gross negligence on the
part of Boston Partners in the performance of its respective duties or from
reckless disregard of its duties and obligations thereunder.
The Advisory Agreements were most recently approved on July 28, 1999 by
vote of the Company's Board of Directors, including a majority of those
directors who are not parties to the Advisory Agreements or interested persons
(as defined in the 1940 Act) of such parties. The Advisory Agreements were
approved by the initial shareholder of each class of the Funds. The Advisory
Agreements are terminable by vote of the Company's Board of Directors or by the
holders of a majority of the outstanding voting securities of the Funds, at any
time without penalty, on 60 days' written notice to Boston Partners. The
Advisory Agreements may also be terminated by Boston Partners on 60 days'
written notice to the Company. The Advisory Agreement terminates automatically
in the event of its assignment.
CUSTODIAN AND TRANSFER AGENCY AGREEMENTS
PFPC Trust Company is custodian of the Funds' assets pursuant to a
custodian agreement dated August 16, 1988, as amended (the "Custodian
Agreement"). Under the Custodian Agreement, PFPC Trust Company: (a) maintains a
separate account or accounts in the name of each Fund; (b) holds and transfers
portfolio securities on account of each Fund; (c) accepts receipts and makes
disbursements of money on behalf of each Fund; (d) collects and receives all
income and other payments and distributions on account of each Fund's portfolio
securities; and
35
<PAGE>
(e) makes periodic reports to the Company's Board of Directors concerning the
Funds' operations. PFPC Trust Company is authorized to select one or more banks
or trust companies to serve as sub-custodian on behalf of the Funds, provided
that PFPC Trust Company remains responsible for the performance of all of its
duties under the Custodian Agreement and holds the Funds harmless from the acts
and omissions of any sub-custodian. For its services to the Funds under the
Custodian Agreement, PFPC Trust Company receives a fee, which is calculated
based upon each Fund's average daily gross assets as follows: $.18 per $1,000 on
the first $100 million of average daily gross assets; $.15 per $1,000 on the
next $400 million of average daily gross assets; $.125 per $1,000 on the next
$500 million of average daily gross assets; and $.10 per $1,000 on average daily
gross assets over $1 billion, exclusive of transaction charges and out-of-pocket
expenses, which are also charged to the Fund.
PFPC Inc. ("PFPC"), an affiliate of PFPC Trust Company, serves as the
transfer and dividend disbursing agent for the Fund pursuant to a Transfer
Agency Agreement dated November 5, 1991, as supplemented (the "Transfer Agency
Agreement"), under which PFPC: (a) issues and redeems shares of each Fund; (b)
addresses and mails all communications by the Funds to record owners of the
Shares, including reports to shareholders, dividend and distribution notices and
proxy materials for its meetings of shareholders; (c) maintains shareholder
accounts and, if requested, sub-accounts; and (d) makes periodic reports to the
Company's Board of Directors concerning the operations of the Funds. PFPC may,
on 30 days' notice to the Company, assign its duties as transfer and dividend
disbursing agent to any other affiliate of PNC Bank Corp. For its services to
the Funds under the Transfer Agency Agreement, PFPC receives a fee at the annual
rate of $10 per account in the Fund, exclusive of out-of-pocket expenses, and
also receives reimbursement of its out-of-pocket expenses.
ADMINISTRATION AGREEMENT
PFPC serves as administrator to the Funds pursuant to Administration
and Accounting Services Agreements dated October 16, 1996 with respect to the
Bond and Large Cap Value Funds, May 30, 1997 with respect to the Mid Cap Value
Fund, July 1, 1998 with respect to the Small Cap Value Fund II (formerly the
Micro Cap Value Fund), November 13, 1998 with respect to the Market Neutral Fund
(the "Administration Agreements"). PFPC has agreed to furnish to the Funds
statistical and research data, clerical, accounting and bookkeeping services,
and certain other services required by the Funds. In addition, PFPC has agreed
to prepare and file various reports with the appropriate regulatory agencies and
prepare materials required by the SEC or any state securities commission having
jurisdiction over the Funds. For its services to the Funds, PFPC is entitled to
receive a fee calculated at an annual rate of .125% of each Fund's average daily
net assets, with a minimum annual fee of $75,000 payable monthly on a pro rata
basis. PFPC is currently waiving one-half of its minimum annual fee on the Bond
Fund, Small Cap Fund and Market Neutral Fund.
For the fiscal years ended August 31, 1999, 1998 and 1997, the Funds
paid PFPC administration fees as follows:
36
<PAGE>
ADMINISTRATION FEES PAID
(AFTER WAIVERS AND
FUND REIMBURSEMENTS) WAIVERS REIMBURSEMENTS
- ---- ------------------ ------- --------------
FISCAL YEAR ENDED AUGUST 31, 1999
Bond $ 37,499 $37,501 $0
Market Neutral 1 $ 31,250 $31,250 $0
Large Cap Value $ 93,735 $ 0 $0
Mid Cap Value $164,882 $ 0 $0
Small Cap Value $ 37,500 $37,500 $0
FISCAL YEAR ENDED AUGUST 31, 1998
Bond 2 $ 25,201 $25,202 $0
Large Cap Value $ 55,792 $22,142 $0
Mid Cap Value $ 57,653 $22,352 $0
Small Cap Value 3 $ 6,250 $ 6,250 $0
FISCAL YEAR ENDED AUGUST 31, 1997
Large Cap Value 4 $ 25,000 $25,000 $0
Mid Cap Value 5 $ 9,166 $ 9,167 $0
1 Commenced operations November 17, 1998.
2 Commenced operations December 30, 1997.
3 Commenced operations July 1, 1998.
4 Institutional class commenced operations January 2, 1997 and Investor Class
commenced operations January 16, 1997.
5 Commenced operations June 2, 1997.
The Administration Agreements provide that PFPC shall not be liable for
any error of judgment or mistake of law or any loss suffered by the Company or a
Fund in connection with the performance of the agreement, except a loss
resulting from willful misfeasance, gross negligence or reckless disregard by it
of its duties and obligations thereunder.
DISTRIBUTION AGREEMENT
Provident Distributors, Inc. ("PDI"), whose principal business address
is Four Falls Corporate Center, 6th Floor, West Conshohocken, PA 19428-2961,
serves as the distributor of the Funds pursuant to the terms of a distribution
agreement, dated as of June 25, 1999, (the "Distribution Agreement") on behalf
of the Institutional and Investor Classes. Pursuant to the Distribution
Agreement and the Plans of Distribution, as amended, for the Investor Class
(together, the "Plans"), which were adopted by the Company in the manner
prescribed by Rule 12b-1 under the 1940 Act, the Distributor will use
appropriate efforts to solicit orders for the sale of each Fund's Shares.
Payments to the Distributor under the Plans are to compensate it for
distribution assistance and expenses assumed and activities intended to result
in the sale of shares of the Investor Class. As compensation for its
distribution services, the Distributor receives, pursuant to the terms of the
Distribution Agreement, a distribution fee under the Plans, to be
37
<PAGE>
calculated daily and paid monthly by the Investor Class, at the annual rate set
forth in the Prospectus.
For the fiscal years ended August 31, 1999, 1998 and 1997, the Investor
Class of each of the Funds below paid the Distributor fees as follows: 1
DISTRIBUTION FEES PAID
(AFTER WAIVERS AND
FUND REIMBURSEMENTS) WAIVERS REIMBURSEMENTS
- ---- ------------------ ------- --------------
FISCAL YEAR ENDED AUGUST 31, 1999
Bond $ 4,158 $ 16,630 $0
Market Neutral 2 $ 219 $ 874 $0
Large Cap Value Fund $20,836 $ 83,346 $0
Mid Cap Value $38,745 $154,978 $0
Small Cap Value $ 365 $ 1,458 $0
FOR THE PERIOD MAY 29, 1998 THROUGH AUGUST 31, 1998
Bond $1,294 $ 4,063 $0
Large Cap Value Fund $3,387 $ 22 $0
Mid Cap Value $6,827 $ 21,843 $0
Small Cap Value 3 $ 54 $ 0 $0
1 Of the fee amounts disclosed above, $0 was retained by the Distributor.
2 Commenced operations November 17, 1998.
3 Commenced operations July 1, 1998.
For the period September 1, 1997 through May 29, 1998, both the
Institutional Class and Investor Class of the Fund paid the Company's previous
distributor, Counsellors Securities, Inc. ("Counsellors"), a wholly-owned
subsidiary of Warburg Pincus Asset Management, Inc., with a principal business
address of 466 Lexington Avenue, New York, New York 10071, distribution fees as
follows:
38
<PAGE>
DISTRIBUTION FEES PAID
(AFTER WAIVERS AND
FUND REIMBURSEMENTS) WAIVERS REIMBURSEMENTS
- ---- ------------------ ------- --------------
Bond (Institutional)3 $ 1,986 $ 5,461 $0
Bond (Investor)3 $ 54 $ 0 $0
Large Cap Value $10,283 $28,278 $0
(Institutional)
Large Cap Value $ 878 $ 1,317 $0
(Investor)
Mid Cap Value $ 8,284 $22,780 $0
(Institutional)
Mid Cap Value $ 950 $ 1,425 $0
(Investor)
3 Commenced operations December 30, 1997.
For the period ended August 31, 1997, the Large Cap Value and Mid Cap
Value Funds paid Counsellors fees as follows:
DISTRIBUTION FEES PAID
(AFTER WAIVERS AND
FUND REIMBURSEMENTS) WAIVERS REIMBURSEMENTS
- ---- ------------------ ------- --------------
Large Cap Value Fund $3,325 $0 $0
(Institutional)4
Large Cap Value Fund $ 155 $0 $0
(Investor)5
Mid Cap Value $ 161 $0 $0
(Institutional)6
Mid Cap Value $ 77 $0 $0
(Investor)6
4 Commenced operations January 2, 1997.
5 Commenced operations January 16, 1997.
6 Commenced operations June 2, 1997.
Among other things, the Plans provide that: (1) the Distributor shall
be required to submit quarterly reports to the directors of the Company
regarding all amounts expended under the Plans and the purposes for which such
expenditures were made, including commissions, advertising, printing, interest,
carrying charges and any allocated overhead expenses; (2) the Plans will
continue in effect only so long as they are approved at least annually, and any
material amendment thereto is approved, by the Company's directors, including
the 12b-1 Directors, acting in person at a meeting called for said purpose; (3)
the aggregate amount to be spent by each Fund on the distribution of the Fund's
shares of the Investor Class under the Plans shall not be materially increased
without shareholder approval; and (4) while the Plans remain in effect,
39
<PAGE>
the selection and nomination of the Company's directors who are not "interested
persons" of the Company (as defined in the 1940 Act) shall be committed to the
discretion of such Directors who are not "interested persons" of the Company.
Mr. Sablowsky, a Director of the Company, had an indirect interest in
the operation of the Plans by virtue of his position with Fahnestock Co., Inc.,
a broker-dealer.
ADMINISTRATIVE SERVICES AGENT
Provident Distributors, Inc. ("PDI") provides certain administrative
services to the Institutional Class of each Fund that are not provided by PFPC,
pursuant to an Administrative Services Agreement, dated June 25, 1999, between
the Company and PDI. These services include furnishing data processing and
clerical services, acting as liaison between the Funds and various service
providers and coordinating the preparation of annual, semi-annual and quarterly
reports. As compensation for such administrative services, PDI is entitled to a
monthly fee calculated at the annual rate of .15% of the average daily net
assets of the Institutional Class. PDI is currently waiving fees in excess of
.03% of each Fund's average daily net assets. For the fiscal years ended August
31, 1999 and August 31, 1998, PDI received administrative services fees from the
Institutional Class of the Funds below as follows:
ADMINISTRATIVE SERVICES
FUND FEES (AFTER WAIVERS) WAIVERS
- ---- ----------------------- -----------
FISCAL YEAR ENDED AUGUST 31, 1999
Bond $ 4,158 $ 16,630
Market Neutral 1 $ 219 $ 874
Large Cap Value $20,836 $ 83,346
Mid Cap Value $38,745 $154,978
Small Cap Value $ 365 $ 1,458
PERIOD MAY 29, 1998 THROUGH AUGUST 31, 1998
Bond $ 3,155 $ 9,524
Large Cap Value $24,042 $ 6,662
Mid Cap Value $13,741 $ 44,606
Small Cap Value 2 $ 69 $ 2,277
1 Commenced operations November 17, 1998.
2 Commenced operations July 1, 1998.
40
<PAGE>
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors and
applicable rules, Boston Partners is responsible for the execution of portfolio
transactions and the allocation of brokerage transactions for the Funds. In
executing portfolio transactions, Boston Partners seeks to obtain the best price
and most favorable execution for the Funds, taking into account such factors as
the price (including the applicable brokerage commission or dealer spread), size
of the order, difficulty of execution and operational facilities of the firm
involved. While Boston Partners generally seeks reasonably competitive
commission rates, payment of the lowest commission or spread is not necessarily
consistent with obtaining the best price and execution in particular
transactions.
No Fund has any obligation to deal with any broker or group of brokers
in the execution of portfolio transactions. Boston Partners may, consistent with
the interests of the Funds and subject to the approval of the Board of
Directors, select brokers on the basis of the research, statistical and pricing
services they provide to the Funds and other clients of Boston Partners.
Information and research received from such brokers will be in addition to, and
not in lieu of, the services required to be performed by Boston Partners under
its respective contracts. A commission paid to such brokers may be higher than
that which another qualified broker would have charged for effecting the same
transaction, provided that Boston Partners determines in good faith that such
commission is reasonable in terms either of the transaction or the overall
responsibility of Boston Partners to a Fund and its other clients and that the
total commissions paid by a Fund will be reasonable in relation to the benefits
to a Fund over the long-term.
The following chart shows the aggregate brokerage commissions paid by
each Fund for the past three fiscal years:
FUND 1999 1998 1997
- ---- ---- ---- ----
Bond 1 $ 665 $ 804 N/A
Market Neutral 2 $ 19,409 N/A N/A
Large Cap Value 3 $211,118 $165,408 N/A
Mid Cap Value 4 $790,052 $326,951 N/A
Small Cap Value 5 $ 3,631 N/A N/A
1 Commenced operations December 30, 1997.
2 Commenced operations November 17, 1998.
3 Institutional class commenced operations January 2, 1997 and Investor Class
commenced operations on January 16, 1997.
4 Commenced operations June 2, 1997.
5 Commenced operations July 1, 1998.
The Funds are required to identify any securities of the Company's
regular broker dealers (as defined in Rule 10b-1 under the 1940 Act) or their
parents held by the Funds as of the end of the most recent fiscal year.
As of August 31, 1999, the following Funds held the following securities:
FUND SECURITY VALUE
- ---- -------- -----
Bond None $ 0
Market Neutral Goldman Sachs Group, Inc. $ 11,963
Large Cap Value Morgan Stanley & Co. $257,437
Mid Cap Value None $ 0
Small Cap Value None $ 0
Investment decisions for each Fund and for other investment accounts
managed by Boston Partners are made independently of each other in the light of
differing conditions.
41
<PAGE>
However, the same investment decision may be made for two or more of such
accounts. In such cases, simultaneous transactions are inevitable. Purchases or
sales are then averaged as to price and allocated as to amount according to a
formula deemed equitable to each such account. While in some cases this practice
could have a detrimental effect upon the price or value of the security as far
as a Fund is concerned, in other cases it is believed to be beneficial to a
Fund.
PURCHASE AND REDEMPTION INFORMATION
You may purchase shares through an account maintained by your brokerage
firm and you may also purchase shares directly by mail or wire. The Company
reserves the right, if conditions exist which make cash payments undesirable, to
honor any request for redemption or repurchase of a Fund's shares by making
payment in whole or in part in securities chosen by the Company and valued in
the same way as they would be valued for purposes of computing that Fund's net
asset value. If payment is made in securities, a shareholder may incur
transaction costs in converting these securities into cash. A shareholder will
also bear any market risk or tax consequences as a result of a payment in
securities. The Company has elected, however, to be governed by Rule 18f-1 under
the 1940 Act so that each Fund is obligated to redeem its shares solely in cash
up to the lesser of $250,000 or 1% of its net asset value during any 90-day
period for any one shareholder of the Fund. A shareholder will bear the risk of
a decline in market value and any tax consequences associated with a redemption
in securities.
Under the 1940 Act, the Company may suspend the right to redemption or
postpone the date of payment upon redemption for any period during which the New
York Stock Exchange, Inc. (the "NYSE") is closed (other than customary weekend
and holiday closings), or during which the SEC restricts trading on the NYSE or
determines an emergency exists as a result of which disposal or valuation of
portfolio securities is not reasonably practicable, or for such other periods as
the SEC may permit. (The Company may also suspend or postpone the recordation of
the transfer of its shares upon the occurrence of any of the foregoing
conditions.)
Shares of the Company are subject to redemption by the Company, at the
redemption price of such shares as in effect from time to time, including,
without limitation: to reimburse a Fund for any loss sustained by reason of the
failure of a shareholder to make full payment for shares purchased by the
shareholder or to collect any charge relating to a transaction effected for the
benefit of a shareholder as provided in the Prospectus from time to time; if
such redemption is, in the opinion of the Company's Board of Directors,
desirable in order to prevent the Company or any Fund from being deemed a
"personal holding company" within the meaning of the Internal Revenue Code of
1986, as amended; or if the net income with respect to any particular class of
common stock should be negative or it should otherwise be appropriate to carry
out the Company's responsibilities under the 1940 Act.
The computation of the hypothetical offering price per share of an
Institutional and Investor Share of the Funds based on the value of each Fund's
net assets on August 31, 1999 and each Fund's Institutional and Investor Shares
outstanding on such date is as follows:
<TABLE>
<CAPTION>
INSTITUTIONAL CLASS
MARKET LARGE CAP MID CAP SMALL CAP
BOND NEUTRAL VALUE VALUE VALUE
----------- -------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Net assets $12,041,031 $940,793 $53,111,553 $173,223,501 $1,308,557
Outstanding shares 1,280,021 99,500 4,388,660 15,100,118 150,988
Net asset value per share $ 9.41 $ 9.46 $ 12.24 $ 11.47 $ 8.67
Maximum sales charge -- -- -- -- --
Maximum offering
price to public $ 9.41 $ 9.46 $ 12.24 $ 11.47 $ 8.67
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
INVESTOR CLASS
MARKET LARGE CAP MID CAP SMALL CAP
BOND NEUTRAL VALUE VALUE VALUE
----------- -------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Net assets $ 188,379 $230,714 $ 1,637,506 $ 2,762,170 $ 292,973
Outstanding shares 19,900 24,477 132,520 242,821 33,859
Net asset value per share $ 9.47 $ 9.43 $ 12.36 $ 11.38 $ 8.65
Maximum sales charge -- -- -- -- --
Maximum offering
price to public $ 9.47 $ 9.43 $ 12.36 $ 11.38 $ 8.65
</TABLE>
VALUATION OF SHARES
The net asset values per share of each class of the Fund are calculated
as of the close of the NYSE, generally 4:00 p.m. Eastern Time on each Business
Day. "Business Day" means each weekday when the NYSE is open. Currently, the
NYSE is closed on New Year's Day, Dr. Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day and on the preceding Friday or subsequent Monday when one of
these holidays falls on a Saturday or Sunday. Net asset value per share, the
value of an individual share in a fund, is computed by adding the value of the
proportionate interest of each class in a Fund's securities, cash and other
assets, subtracting the actual and accrued liabilities of the class and dividing
the result by the number of outstanding shares of the class. The net asset
values of each class are calculated independently of the other classes.
Securities that are listed on stock exchanges are valued at the last sale price
on the day the securities are valued or, lacking any sales on such day, at the
mean of the bid and asked prices available prior to the evaluation. In cases
where securities are traded on more than one exchange,
43
<PAGE>
the securities are generally valued on the exchange designated by the Board of
Directors as the primary market. Securities traded in the over-the-counter
market and listed on the National Association of Securities Dealers Automatic
Quotation System ("NASDAQ") are valued at the last trade price listed on the
NASDAQ at the close of regular trading (generally 4:00 p.m. Eastern Time);
securities listed on NASDAQ for which there were no sales on that day and other
over-the-counter securities are valued at the mean of the bid and asked prices
available prior to valuation. Securities for which market quotations are not
readily available are valued at fair value as determined in good faith by or
under the direction of the Company's Board of Directors. The amortized cost
method of valuation may also be used with respect to debt obligations with sixty
days or less remaining to maturity.
In determining the approximate market value of portfolio investments,
the Funds may employ outside organizations, which may use a matrix or formula
method that takes into consideration market indices, matrices, yield curves and
other specific adjustments. This may result in the securities being valued at a
price different from the price that would have been determined had the matrix or
formula method not been used. All cash, receivables and current payables are
carried on a Fund's books at their face value. Other assets, if any, are valued
at fair value as determined in good faith by the Company's Board of Directors.
PERFORMANCE INFORMATION
TOTAL RETURN
The Funds may from time to time advertise "average annual total
return." Each Fund computes such return separately for each class of shares by
determining the average annual compounded rate of return during specified
periods that equates the initial amount invested to the ending redeemable value
of such investment according to the following formula:
P (l+T)n=ERV
Where : T = average annual total return;
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
1, 5 or 10 year (or other) periods at the
end of the applicable period (or a
fractional portion thereof);
P = hypothetical initial payment of $1,000; and
n = period covered by the computation, expressed
in years.
And when solving for T:
ERV 1/n
T = [(-------) -1]
P
The Funds, when advertising "aggregate total return," compute such
returns separately for each class of shares by determining the aggregate
compounded rates of return during specified
44
<PAGE>
periods that likewise equate the initial amount invested to the ending
redeemable value of such investment. The formula for calculating aggregate total
return is as follows:
ERV
Aggregate Total Return T = [(-------) - 1]
P
The calculations are made assuming that: (1) all dividends and capital
gain distributions are reinvested on the reinvestment dates at the price per
share existing on the reinvestment date; (2) all recurring fees charged to all
shareholder accounts are included; and (3) for any account fees that vary with
the size of the account, a mean (or median) account size in a Fund during the
periods is reflected. The ending redeemable value (variable "ERV" in the
formula) is determined by assuming complete redemption of the hypothetical
investment after deduction of all nonrecurring charges at the end of the
measuring period.
Calculated according to the SEC Rules, the average annual total returns
for the Funds for the fiscal years ending August 31, 1999, 1998 and 1997 were as
follows:
AVERAGE ANNUAL TOTAL RETURN
---------------------------
FUND INSTITUTIONAL INVESTOR
- ---- ------------- --------
FOR THE FISCAL YEAR ENDED AUGUST 31, 1999
Bond 3.10 % 2.85 %
Market Neutral 1 (5.40)% (5.70)%
Large Cap Value 10.67 % 9.85 %
Mid Cap Value 6.97 % 6.84 %
Small Cap Value (11.48)% (11.66)%
FOR THE FISCAL YEAR ENDED AUGUST 31, 1998
Large Cap Value 6.97% 5.75%
Mid Cap Value (3.16%) (3.19%)
FOR THE FISCAL YEAR ENDED AUGUST 1997
Large Cap Value 2 24.60% 22.06%
Mid Cap Value 3 10.10% 10.10%
1 Commenced operations November 17, 1998.
2 The Institutional Class commenced operations January 2, 1997 and the Investor
Class commenced operations January 16, 1997.
3 The Mid Cap Value Fund commenced operations June 2, 1997.
45
<PAGE>
Calculated according to the above formula, the aggregate total returns
for the Funds were as follows:
AGGREGATE TOTAL RETURN
--------------------------
FUND INSTITUTIONAL INVESTOR
- ---- ------------- ---------
FOR THE FISCAL YEAR ENDED AUGUST 31, 1999
Bond 0.42 % 0.17 %
Market Neutral (5.40)% (5.70)%
Large Cap Value 17.12 % 16.86 %
Mid Cap Value 21.08 % 20.81 %
Small Cap Value 13.78 % 13.37 %
FOR THE FISCAL YEAR ENDED AUGUST 31, 1998
Bond 4.79% 4.63%
Large Cap Value 11.85% 9.51%
Mid Cap Value (3.92%) (3.96%)
FOR THE FISCAL YEAR ENDED AUGUST 31, 1997
Large Cap Value 24.60% 22.06%
Mid Cap Value 10.10% 10.10%
Investors should note that the total return figures are based on
historical earnings and are not intended to indicate future performance.
TAXES
Each Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code, and to distribute out its income to
shareholders each year, so that a Fund itself generally will be relieved of
federal income and excise taxes. If a Fund were to fail to so qualify: (1) the
Fund would be taxed at regular corporate rates without any deduction for
distributions to shareholders; and (2) shareholders would be taxed as if they
received ordinary dividends, although corporate shareholders could be eligible
for the dividends received deduction.
The Code imposes a non-deductible 4% excise tax on regulated investment
companies that do not distribute with respect to each calendar year an amount
equal to 98% of their ordinary income for the calendar year plus 98% of their
capital gain net income for the 1-year period ending on October 31 of such
calendar year. The balance of such income must be distributed during the next
calendar year. For the foregoing purposes, a company is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such
46
<PAGE>
calendar year. Investors should note that the Funds may in certain circumstances
be required to liquidate investments in order to make sufficient distributions
to avoid excise tax liability.
Each Fund will be required in certain cases to withhold and remit to
the United States Treasury 31% of its dividends paid to any shareholder: (1) who
has provided either an incorrect tax identification number or no number at all;
(2) who is subject to backup withholding by the Internal Revenue Service for
failure to report the receipt of interest or dividend income properly; or (3)
who has failed to certify to the Fund that he is not subject to backup
withholding or that he is an "exempt recipient."
ADDITIONAL INFORMATION CONCERNING RBB SHARES
RBB has authorized capital of 30 billion shares of Common Stock at a
par value of $0.001 per share. Currently, 20.026 billion shares have been
classified into 99 classes as shown in the table below. Shares of the Classes
QQ, RR, SS, TT, UU, VV, WW, DDD, EEE, III and JJJ constitute the Fund's
described herein. Under RBB's charter, the Board of Directors has the power to
classify and reclassify any unissued shares of Common Stock from time to time.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
AUTHORIZED SHARES AUTHORIZED SHARES
CLASS OF COMMON STOCK (MILLIONS) CLASS OF COMMON STOCK (MILLIONS)
- ------------------------------------- -------------------- ----------------------------------- --------------------
<S> <C> <C> <C>
A (Growth & Income) 100 YY (Schneider Capital Small Cap
Value) 100
B 100 ZZ 100
C (Balanced) 100 AAA 100
D (Tax-Free) 100 BBB 100
E (Money) 500 CCC 100
F (Municipal Money) 500 DDD (Boston Partners
Institutional Small Cap) 100
G (Money) 500 EEE (Boston Partners Investors
Small Cap) 100
H (Municipal Money) 500 FFF 100
I (Sansom Money) 1500 GGG 100
J (Sansom Municipal Money) 500 HHH 100
K (Sansom Government Money) 500 III (Boston Partners
Institutional Market Neutral) 100
L (Bedford Money) 1500 JJJ (Boston Partners Investors
Market Neutral) 100
M (Bedford Municipal Money) 500 KKK (Boston Partners
Institutional Long-Short Equity) 100
N (Bedford Government Money) 500 LLL (Boston Partners Investors
Long-Short Equity) 100
O (Bedford N.Y. Money) 500 MMM (n/i numeric Small Cap Value) 100
P (RBB Government) 100 Class NNN (Bogle Institutional
Small Cap Growth) 100
Q 100 Class OOO (Bogle Investors Small
Cap Growth) 100
R (Municipal Money) 500 Janney (Money) 3000
S (Government Money) 500 Janney (Municipal Money) 200
T 500 Janney (Government Money) 700
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
AUTHORIZED SHARES AUTHORIZED SHARES
CLASS OF COMMON STOCK (MILLIONS) CLASS OF COMMON STOCK (MILLIONS)
- ------------------------------------- -------------------- ----------------------------------- --------------------
<S> <C> <C> <C>
U 500 Janney (N.Y. Money) 100
V 500 Select (Money) 700
W 100 Beta 2 (Municipal Money) 1
X 50 Beta 3 (Government Money) 1
Y 50 Beta 4 (N.Y. Money) 1
Z 50 Principal Class (Money) 700
AA 50 Gamma 2 (Municipal Money) 1
BB 50 Gamma 3 (Government Money) 1
CC 50 Gamma 4 (N.Y. Money) 1
DD 100 Delta 1 (Money) 1
EE 100 Delta 2 (Municipal Money) 1
FF (n/i numeric Micro Cap) 50 Delta 3 (Government Money) 1
GG (n/i numeric Growth) 50 Delta 4 (N.Y. Money) 1
HH (n/i numeric Mid Cap) 50 Epsilon 1 (Money) 1
II 100 Epsilon 2 (Municipal Money) 1
JJ 100 Epsilon 3 (Government Money) 1
KK 100 Epsilon 4 (N.Y. Money) 1
LL 100 Zeta 1 (Money) 1
MM 100 Zeta 2 (Municipal Money) 1
NN 100 Zeta 3 (Government Money) 1
OO 100 Zeta 4 (N.Y. Money) 1
PP 100 Eta 1 (Money) 1
QQ (Boston Partners Institutional
Large Cap) 100 Eta 2 (Municipal Money) 1
RR (Boston Partners Investors Large
Cap) 100 Eta 3 (Government Money) 1
SS (Boston Partners Advisor Large
Cap) 100 Eta 4 (N.Y. Money) 1
TT (Boston Partners Investors Mid
Cap) 100 Theta 1 (Money) 1
UU (Boston Partners Institutional
Mid Cap) 100 Theta 2 (Municipal Money) 1
VV (Boston Partners Institutional
Bond) 100 Theta 3 (Government Money) 1
WW (Boston Partners Investors Bond)
100 Theta 4 (N.Y. Money) 1
XX (n/i numeric Larger Cap) 50 1
</TABLE>
The classes of Common Stock have been grouped into 15 separate
"families": the Cash Preservation Family, the Sansom Street Family, the Bedford
Family, the Principal (Gamma) Family, the Janney Montgomery Scott Family, the
Select (Beta) Family, the Schneider Capital Management Family, the n/i numeric
family of funds, the Boston Partners Family, the Bogle Family, the Delta Family,
the Epsilon Family, the Theta Family, the Eta Family, and the Zeta Family. The
Cash Preservation Family represents interests in the Money Market and Municipal
Money Market Portfolios; the Sansom Street Family represents interests in the
Money Market, Municipal Money Market and Government Obligations Money Market
Portfolios; the Bedford Family represents interests in the Money Market,
Municipal Money Market and Government Obligations Money Market Portfolios; the
n/i numeric investors family of funds represents interests in five non-money
market portfolios; the Boston Partners Family represents interests in five
non-money market portfolios; the Bogle Family
48
<PAGE>
represents interests in one non-money market portfolio; the Schneider Capital
Management Family represents interests in one non-money market portfolio; the
Janney Montgomery Scott Family, the Select (Beta) Family, the Principal (Gamma)
Family and the Delta, Epsilon, Zeta, Eta and Theta Families represent interests
in the Money Market, Municipal Money Market, New York Municipal Money Market and
Government Obligations Money Market and Portfolios.
RBB does not currently intend to hold annual meetings of shareholders
except as required by the 1940 Act or other applicable law. RBB's amended
By-Laws provide that shareholders owning at least ten percent of the outstanding
shares of all classes of Common Stock of RBB have the right to call for a
meeting of shareholders to consider the removal of one or more directors. To the
extent required by law, RBB will assist in shareholder communication in such
matters.
Holders of shares of each class of RBB will vote in the aggregate and
not by class on all matters, except where otherwise required by law. Further,
shareholders of RBB will vote in the aggregate and not by portfolio except as
otherwise required by law or when the Board of Directors determines that the
matter to be voted upon affects only the interests of the shareholders of a
particular portfolio. Rule 18f-2 under the 1940 Act provides that any matter
required to be submitted by the provisions of such Act or applicable state law,
or otherwise, to the holders of the outstanding voting securities of an
investment company such as RBB shall not be deemed to have been effectively
acted upon unless approved by the holders of a majority of the outstanding
voting securities of each portfolio affected by the matter. Rule 18f-2 further
provides that a portfolio shall be deemed to be affected by a matter unless it
is clear that the interests of each portfolio in the matter are identical or
that the matter does not affect any interest of the portfolio. Under the Rule
the approval of an investment advisory agreement or any change in a fundamental
investment policy would be effectively acted upon with respect to a portfolio
only if approved by the holders of a majority of the outstanding voting
securities of such portfolio. However, the Rule also provides that the
ratification of the selection of independent public accountants and the election
of directors are not subject to the separate voting requirements and may be
effectively acted upon by shareholders of an investment company voting without
regard to portfolio.
Notwithstanding any provision of Maryland law requiring a greater vote
of shares of RBB's common stock (or of any class voting as a class) in
connection with any corporate action, unless otherwise provided by law (for
example by Rule 18f-2 discussed above), or by RBB's Articles of Incorporation,
RBB may take or authorize such action upon the favorable vote of the holders of
more than 50% of all of the outstanding shares of Common Stock voting without
regard to class (or portfolio).
49
<PAGE>
MISCELLANEOUS
COUNSEL
The law firm of Drinker Biddle & Reath LLP, One Logan Square, 18th and
Cherry Streets, Philadelphia, Pennsylvania 19103-6996, serves as counsel to the
Company and the non-interested directors.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP serves as the Company's independent
accountants. PricewaterhouseCoopers LLP performs an annual audit of the
Company's financial statements.
FINANCIAL STATEMENTS
The audited financial statements and notes thereto in the Fund's Annual
Report to Shareholders for the fiscal year ended August 31, 1999 (the "1999
Annual Report") are incorporated by reference into this Statement of Additional
Information. No other parts of the 1999 Annual Report are incorporated by
reference herein. The financial statements included in the 1999 Annual Report
have been audited by the Company's independent accountants,
PricewaterhouseCoopers LLP. The reports of PricewaterhouseCoopers LLP are
incorporated herein by reference. Such financial statements have been
incorporated herein in reliance upon such reports given upon their authority as
experts in accounting and auditing. Copies of the 1999 Annual Report may be
obtained at no charge by telephoning the Distributor at the telephone number
appearing on the front page of this Statement of Additional Information.
50
<PAGE>
APPENDIX A
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current
opinion of the creditworthiness of an obligor with respect to financial
obligations having an original maturity of no more than 365 days. The following
summarizes the rating categories used by Standard and Poor's for commercial
paper:
"A1" - Obligations are rated in the highest category
indicating that the obligor's capacity to meet its financial commitment on the
obligation is strong. Within this category, certain obligations are designated
with a plus sign (+). This indicates that the obligor's capacity to meet its
financial commitment on these obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
"B" - Obligations are regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and
are dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation.
"D" - Obligations are in payment default. The "D" rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The "D"
rating will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually senior debt obligations not having an original
maturity in excess of one year, unless explicitly noted. The following
summarizes the rating categories used by Moody's for commercial paper:
A-1
<PAGE>
"Prime-1" - Issuers (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structure with
moderate reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash generation; and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
"Prime-2" - Issuers (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuers do not fall within any of the Prime
rating categories.
The three rating categories of Duff & Phelps for investment
grade commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff &
Phelps employs three designations, "D-1+," "D-1" and "D-1-," within the highest
rating category. The following summarizes the rating categories used by Duff &
Phelps for commercial paper:
"D-1+" - Debt possesses the highest certainty of timely
payment. Short-term liquidity, including internal operating factors and/or
access to alternative sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
"D-3" - Debt possesses satisfactory liquidity and other
protection factors qualify issues as to investment grade. Risk factors are
larger and subject to more variation. Nevertheless, timely payment is expected.
A-2
<PAGE>
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer failed to meet scheduled principal and/or
interest payments.
Fitch IBCA short-term ratings apply to debt obligations that
have time horizons of less than 12 months for most obligations, or up to three
years for U.S. public finance securities. The following summarizes the rating
categories used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This
designation indicates the best capacity for timely payment of financial
commitments and may have an added "+" to denote any exceptionally strong credit
feature.
"F2" - Securities possess good credit quality. This
designation indicates a satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as in the case of the
higher ratings.
"F3" - Securities possess fair credit quality. This
designation indicates that the capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in a
reduction to non-investment grade.
"B" - Securities possess speculative credit quality. This
designation indicates minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in financial and
economic conditions.
"C" - Securities possess high default risk. This designation
indicates that default is a real possibility and that the capacity for meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.
"D" - Securities are in actual or imminent payment default.
Thomson Financial BankWatch short-term ratings assess the
likelihood of an untimely payment of principal and interest of debt instruments
with original maturities of one year or less. The following summarizes the
ratings used by Thomson Financial BankWatch:
"TBW-1" - This designation represents Thomson Financial
BankWatch's highest category and indicates a very high likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation represents Thomson Financial
BankWatch's second-highest category and indicates that while the degree of
safety regarding timely repayment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated "TBW-1."
A-3
<PAGE>
"TBW-3" - This designation represents Thomson Financial
BankWatch's lowest investment-grade category and indicates that while the
obligation is more susceptible to adverse developments (both internal and
external) than those with higher ratings, the capacity to service principal and
interest in a timely fashion is considered adequate.
"TBW-4" - This designation represents Thomson Financial
BankWatch's lowest rating category and indicates that the obligation is regarded
as non-investment grade and therefore speculative.
Corporate and Municipal Long-Term Debt Ratings
The following summarizes the ratings used by Standard & Poor's
for corporate and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating
assigned by Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
obligations in higher-rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated "BB," "B," "CCC," "CC" and "C" are regarded
as having significant speculative characteristics. "BB" indicates the least
degree of speculation and "C" the highest. While such obligations will likely
have some quality and protective characteristics, these may be outweighed by
large uncertainties or major exposures to adverse conditions.
"BB" - An obligation rated "BB" is less vulnerable to
nonpayment than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial or economic conditions
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
"B" - An obligation rated "B" is more vulnerable to nonpayment
than obligations rated "BB", but the obligor currently has the capacity to meet
its financial commitment on the obligation. Adverse business, financial or
economic conditions will likely impair the obligor's capacity or willingness to
meet its financial commitment on the obligation.
A-4
<PAGE>
"CCC" - An obligation rated "CCC" is currently vulnerable to
nonpayment, and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable
to nonpayment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action taken, but payments on this
obligation are being continued.
"D" - An obligation rated "D" is in payment default. The "D"
rating category is used when payments on an obligation are not made on the date
due even if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such grace period. The
"D" rating also will be used upon the filing of a bankruptcy petition or the
taking of a similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
"c" - The 'c' subscript is used to provide additional
information to investors that the bank may terminate its obligation to purchase
tendered bonds if the long-term credit rating of the issuer is below an
investment-grade level and/or the issuer's bonds are deemed taxable.
"p" - The letter 'p' indicates that the rating is provisional.
A provisional rating assumes the successful completion of the project financed
by the debt being rated and indicates that payment of debt service requirements
is largely or entirely dependent upon the successful, timely completion of the
project. This rating, however, while addressing credit quality subsequent to
completion of the project, makes no comment on the likelihood of or the risk of
default upon failure of such completion. The investor should exercise his own
judgment with respect to such likelihood and risk.
* Continuance of the ratings is contingent upon Standard &
Poor's receipt of an executed copy of the escrow agreement or closing
documentation confirming investments and cash flows.
"r" - The 'r' highlights derivative, hybrid, and certain other
obligations that Standard & Poor's believes may experience high volatility or
high variability in expected returns as a result of noncredit risks. Examples of
such obligations are securities with principal or interest return indexed to
equities, commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an 'r'
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
A-5
<PAGE>
N.R. Not rated. Debt obligations of issuers outside the United
States and its territories are rated on the same basis as domestic corporate and
municipal issues. The ratings measure the creditworthiness of the obligor but do
not take into account currency exchange and related uncertainties.
The following summarizes the ratings used by Moody's for
corporate and municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca" and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" indicates poor standing; "Ca" represents
obligations which are speculative in a high degree; and "C" represents the
lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operating experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
A-6
<PAGE>
Note: Moody's applies numerical modifiers 1, 2, and 3 in each
generic rating classification from "Aa" through "Caa". The modifier 1 indicates
that the obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking
in the lower end of its generic rating category.
The following summarizes the long-term debt ratings used by
Duff & Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
"AA" - Debt is considered to be of high credit quality.
Protection factors are strong. Risk is modest but may vary slightly from time to
time because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable in periods of greater economic
stress.
"BBB" - Debt possesses below-average protection factors but
such protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles. This is the
lowest investment grade category.
"BB," "B," "CCC," "DD" and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when due.
Debt rated "B" possesses the risk that obligations will not be met when due.
Debt rated "CCC" is well below investment grade and has considerable uncertainty
as to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch IBCA for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. These ratings denote the lowest expectation of credit
risk and are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
"AA" - Bonds considered to be investment grade and of very
high credit quality. These ratings denote a very low expectation of credit risk
and indicate very strong capacity for timely payment of financial commitments.
This capacity is not significantly vulnerable to foreseeable events.
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"A" - Bonds considered to be investment grade and of high
credit quality. These ratings denote a low expectation of credit risk and
indicate strong capacity for timely payment of financial commitments. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.
"BBB" - Bonds considered to be investment grade and of good
credit quality. These ratings denote that there is currently a low expectation
of credit risk. The capacity for timely payment of financial commitments is
considered adequate, but adverse changes in circumstances and in economic
conditions are more likely to impair this capacity. This is the lowest
investment grade category.
"BB" - Bonds considered to be speculative. These ratings
indicate that there is a possibility of credit risk developing, particularly as
the result of adverse economic change over time; however, business or financial
alternatives may be available to allow financial commitments to be met.
Securities rated in this category are not investment grade.
"B" - Bonds are considered highly speculative. These ratings
indicate that significant credit risk is present, but a limited margin of safety
remains. Financial commitments are currently being met; however, capacity for
continued payment is contingent upon a sustained, favorable business and
economic environment.
"CCC", "CC" and "C" - Bonds have high default risk. Default is
a real possibility, and capacity for meeting financial commitments is solely
reliant upon sustained, favorable business or economic developments. "CC"
ratings indicate that default of some kind appears probable, and "C" ratings
signal imminent default.
"DDD," "DD" and "D" - Bonds are in default. The ratings of
obligations in this category are based on their prospects for achieving partial
or full recovery in a reorganization or liquidation of the obligor. While
expected recovery values are highly speculative and cannot be estimated with any
precision, the following serve as general guidelines. "DDD" obligations have the
highest potential for recovery, around 90%-100% of outstanding amounts and
accrued interest. "DD" indicates potential recoveries in the range of 50%-90%,
and "D" the lowest recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all
of their obligations. Entities rated "DDD" have the highest prospect for
resumption of performance or continued operation with or without a formal
reorganization process. Entities rated "DD" and "D" are generally undergoing a
formal reorganization or liquidation process; those rated "DD" are likely to
satisfy a higher portion of their outstanding obligations, while entities rated
"D" have a poor prospect for repaying all obligations.
To provide more detailed indications of credit quality, the
Fitch IBCA ratings from and including "AA" to "CCC" may be modified by the
addition of a plus (+) or minus (-) sign to denote relative standing within
these major rating categories.
'NR' indicates the Fitch IBCA does not rate the issuer or
issue in question.
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'Withdrawn': A rating is withdrawn when Fitch IBCA deems the
amount of information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
RatingAlert: Ratings are placed on RatingAlert to notify
investors that there is a reasonable probability of a rating change and the
likely direction of such change. These are designated as "Positive", indicating
a potential upgrade, "Negative", for a potential downgrade, or "Evolving", if
ratings may be raised, lowered or maintained. RatingAlert is typically resolved
over a relatively short period.
Thomson Financial BankWatch assesses the likelihood of an
untimely repayment of principal or interest over the term to maturity of long
term debt and preferred stock which are issued by United States commercial
banks, thrifts and non-bank banks; non-United States banks; and broker-dealers.
The following summarizes the rating categories used by Thomson BankWatch for
long-term debt ratings:
"AAA" - This designation indicates that the ability to repay
principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to
repay principal and interest on a timely basis, with limited incremental risk
compared to issues rated in the highest category.
"A" - This designation indicates that the ability to repay
principal and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BBB" - This designation represents the lowest
investment-grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BB," "B," "CCC" and "CC" - These designations are assigned
by Thomson Financial BankWatch to non-investment grade long-term debt. Such
issues are regarded as having speculative characteristics regarding the
likelihood of timely repayment of principal and interest. "BB" indicates the
lowest degree of speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC"
may include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
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Municipal Note Ratings
A Standard and Poor's note rating reflects the liquidity
factors and market access risks unique to notes due in three years or less. The
following summarizes the ratings used by Standard & Poor's for municipal notes:
"SP-1" - The issuers of these municipal notes exhibit a strong
capacity to pay principal and interest. Those issues determined to possess a
very strong capacity to pay debt service are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit
speculative capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable Moody's Investment Grade
("VMIG"). Such ratings recognize the differences between short-term credit risk
and long-term risk. The following summarizes the ratings by Moody's Investors
Service, Inc. for short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes best quality.
There is present strong protection by established cash flows, superior liquidity
support or demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality.
Margins of protection are ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality,
with all security elements accounted for but lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - This designation denotes adequate quality.
Protection commonly regarded as required of an investment security is present
and although not distinctly or predominantly speculative, there is specific
risk.
"SG" - This designation denotes speculative quality. Debt
instruments in this category lack margins of protection.
Fitch IBCA and Duff & Phelps use the short-term ratings
described under Commercial Paper Ratings for municipal notes.
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