<PAGE> 1
As filed with the Securities and Exchange Commission on October 12, 1995
Registration No. 33-26305
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /x/
PRE-EFFECTIVE AMENDMENT NO. __ / /
POST-EFFECTIVE AMENDMENT NO. 18 /x/
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /x/
AMENDMENT NO. 20 /x/
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THE PNC(R) FUND
(Formerly, NCP Funds)
(Exact Name of Registrant as Specified in Charter)
Bellevue Corporate Center Edward J. Roach
400 Bellevue Parkway Bellevue Corporate Center
Suite 100 400 Bellevue Parkway
Wilmington, Delaware 19809 Suite 100
(Address of Principal Executive Wilmington, Delaware 19809
Offices) (Name and Address of Agent
Registrant's Telephone Number: for Service)
(302) 792-2555
Copies to:
Morgan R. Jones, Esq.
DRINKER BIDDLE & REATH
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, PA 19107-3496
------------------------------
It is proposed that this filing will become effective (check appropriate box)
/ / immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(i)
/ / on (date) pursuant to paragraph (a)(i)
/x/ 75 days after filing pursuant to paragraph (a)(ii)
/ / on (date) pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
/ / this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE> 2
Registrant has previously registered an indefinite number of shares of
beneficial interest under the Securities Act of 1933, as amended, pursuant to
Rule 24f-2 under the Investment Company Act of 1940, as amended. Registrant's
most recent 24f-2 Notice for its fiscal year ended September 30, 1994 was filed
on October 7, 1994.
<PAGE> 3
THE PNC(R) FUND
(SERVICE SHARES OF THE NEW JERSEY
TAX-FREE INCOME PORTFOLIO)
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A ITEM LOCATION
- -------------- --------
PART A PROSPECTUS
<S> <C> <C>
1. Cover page . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expense Table
3. Condensed Financial Information . . . . . . . . . . . . . . . . . Financial Highlights
4. General Description of Registrant . . . . . . . . . . . . . . . . Cover Page; Investment
Policies;
Description of
Shares
5. Management of the Fund . . . . . . . . . . . . . . . . . . . . . . Management
5A. Management's Discussion of Fund Performance . . . . . . . . . . . Inapplicable
6. Capital Stock and Other Securities . . . . . . . . . . . . . . . . Cover Page; Dividends
and Distributions;
Description of
Shares
7. Purchase of Securities Being Offered . . . . . . . . . . . . . . . Purchase and Redemption
of Shares;
Dividends and Distributions
Net Asset Value
8. Redemption or Repurchase . . . . . . . . . . . . . . . . . . . . . Purchase and Redemption
of Shares -
Redemption of
Shares
9. Pending Legal Proceedings . . . . . . . . . . . . . . . . . . . . Inapplicable
</TABLE>
<PAGE> 4
THE NEW JERSEY TAX-FREE INCOME PORTFOLIO
SERVICE CLASS
The PNC(R) Fund (the "Fund") consists of 30 investment portfolios.
This Prospectus relates to shares ("Service Shares" or "Shares") representing
interests in New Jersey Tax-Free Income Portfolio (the "Portfolio"). The
Portfolio's investment objective is to seek as high a level of current income
exempt from Federal and, to the extent possible, from New Jersey income tax as
is consistent with preservation of capital. It pursues this objective by
investing primarily in municipal obligations issued by the State of New Jersey
and its political subdivisions, agencies, instrumentalities and authorities and
tax-exempt derivative securities relating thereto ("New Jersey Municipal
Obligations").
Service Shares are sold by the Fund's distributor to institutional
investors ("Institutions") acting on behalf of their customers ("Customers").
These Customers, which may include individuals, trusts, partnerships and
corporations, must maintain accounts (such as custody, trust or escrow
accounts) with the Institutions. Service Shares are sold and redeemed at net
asset value without any purchase or redemption charge imposed by the Fund,
although the Institutions may receive compensation from the Fund for providing
various shareholder services and may charge their customer accounts for
services provided in connection with the purchase or redemption of Shares.
Shares of the Portfolio are intended for residents of New Jersey.
This Prospectus contains information that a prospective investor needs
to know before investing. Please keep it for future reference. A Statement of
Additional Information currently dated _____________ has been filed with the
Securities and Exchange Commission (the "SEC"). The current Statement of
Additional Information may be obtained free of charge from the Fund by calling
(800) 422-6538. The Statement of Additional Information, as it may be
supplemented from time to time, is incorporated by reference in this
Prospectus.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION OR ANY OTHER BANK AND SHARES
OF THE FUND ARE NOT INSURED BY, GUARANTEED
<PAGE> 5
BY, OBLIGATIONS OF OR OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT, THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENTAL AGENCY. INVESTMENTS IN SHARES OF THE FUND INVOLVE INVESTMENT
RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
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PROSPECTUS
------------
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<PAGE> 6
INTRODUCTION
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The Fund is an open-end management investment company which has
registered shares in 30 investment portfolios, of which only the New Jersey
Tax-Free Income is described in this Prospectus.
PORTFOLIO MANAGEMENT
PNC Asset Management Group, Inc. ("PAMG") serves as the Fund's
investment adviser. BlackRock Financial Management Inc. ("BlackRock") serves
as sub-adviser to the Portfolio. The investment adviser and sub-adviser are
indirect wholly-owned subsidiaries of PNC Bank Corp.
THE ADMINISTRATORS
PNC Mutual Fund Company ("PMFCO"), PFPC Inc. ("PFPC") and Provident
Distributors, Inc. ("PDI") serve as the Fund's co-administrators (collectively,
the "Administrators").
THE DISTRIBUTOR
Provident Distributors, Inc. (the "Distributor") serves as the Fund's
distributor.
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<PAGE> 7
EXPENSE TABLE
<TABLE>
<CAPTION>
NEW JERSEY
TAX-FREE
INCOME
PORTFOLIO
---------
<S> <C>
Advisory fees(1) . . . . . . . . . . . . . . . . . . . . . . . . . . .30 %
Other operating
expenses(1) . . . . . . . . . . . . . . . . . . . . . . . . . . .55 %
Total fund operating expenses . . . . . . . . . . . . . . . . . . . . .85 %
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</TABLE>
(1) Advisory fees are net of waivers of .20% for the Portfolio. In
addition, the expense table reflects reimbursements made to the
Portfolio by the Advisers. PAMG and the Administrators are under no
obligation to waive or continue waiving such fees or reimbursing such
expenses, but have informed the Fund that they expect to waive or
continue waiving such fees and reimbursing such expenses during the
current fiscal year as necessary to maintain the Portfolio's total
operating expenses at the level set forth in the table. The expenses
noted above under "Other expenses" are estimated based on the level of
such expenses for the Portfolio's current fiscal year.
EXAMPLE
An investor in Service Shares would pay the following expenses on a
$1,000 investment in Shares of the Portfolio, assuming (1) 5% annual return,
and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
FIVE TEN
ONE YEAR THREE YEARS YEARS YEARS
-------- ----------- ----- -----
<S> <C> <C> <C> <C>
New Jersey Tax-Free Income
Portfolio . . . . . . . . . . . . . . . . . . . . . . . . $9 $27 $47 $105
</TABLE>
The foregoing Expense Table and Example are intended to assist
investors in understanding the Portfolio's estimated operating expenses.
Investors bear these expenses indirectly. The information in the table for the
Portfolio has been restated based on the advisory and administration fees and
other expenses payable after fee waivers for the current fiscal year ending
September 30, 1996. Total operating expenses would have been 1.12% for the
Portfolio's Service Shares without such fee waivers and reimbursements. See
Footnote 1 to the Expense Table, "Financial Highlights - Background,"
"Distribution of Shares," "Management-Shareholder Servicing," "How to Purchase
Shares" and "Description of Shares" for a further description of shareholder
transaction expenses and operating expenses.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
INVESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND
OPERATING EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
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<PAGE> 8
CERTAIN RISK FACTORS TO CONSIDER
An investment in the Portfolio is subject to certain investment
considerations, as set forth in detail under "Investment Policies." As with
other mutual funds, there can be no assurance that the Portfolio will achieve
its investment objective. The Portfolio invests primarily in municipal
obligations of one state, New Jersey, and is thus subject to the peculiar risks
presented by the laws or economy of New Jersey. The Portfolio is classified as
non-diversified under the Investment Company Act of 1940 (the "1940 Act").
These and the other investment practices set forth below and their associated
risks deserve careful consideration by investors. See "Investment Policies."
FINANCIAL HIGHLIGHTS
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BACKGROUND
The Fund currently offers four classes of shares in the Portfolio --
Service, Series A Investor, Series B Investor and Institutional Shares.
Service, Series A Investor, Series B Investor and Institutional Shares in the
Portfolio represent equal pro-rata interests in the Portfolio, except that they
bear different expenses which reflect the difference in the range of services
provided to them. Under the Fund's Amended and Restated Distribution and
Service Plan (the "Plan"), Service Shares bear the expense of fees at an annual
rate not to exceed .15% of the average daily net asset value of the Portfolio's
outstanding Service Shares. Service Shares also bear the expense of a service
fee at an annual rate not to exceed .15% of the average daily net asset value
of the Portfolio's outstanding Shares for other shareholder support activities
provided by service organizations. See "Description of Shares" for a
description of the Plan and shareholder support activities. Series A Investor
Shares bear expenses under the Plan at an annual rate not to exceed .50% of the
average daily net asset value of the Portfolio's outstanding Series A Investor
Shares. Series B Investor Shares bear expenses under the Plan at annual rates
not to exceed 1.15% of the average daily net asset value of the Portfolio's
outstanding Series B Investor Shares. See "Description of Shares" for a
description of the Plan. Institutional Shares do not bear the fees stated
above applicable to the other share classes under the Plan.
The financial highlights set forth certain information concerning the
investment results of the Portfolio for the for the period ended August 31,
1995 and the years or period ended February 28, 1995, 1994, 1993 and 1992. The
financial statements and notes thereto for the Portfolio were audited by
Coopers & Lybrand L.L.P., independent accountants for the Portfolio, whose
report thereon is incorporated by reference into the Statement of Additional
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<PAGE> 9
Information. Additional information about the performance of the Portfolio is
contained in the Portfolio's annual report. Both the Statement of Additional
Information and the Portfolio's annual report may be obtained from the Fund
free of charge by calling the number on the front cover of this Prospectus.
During the years or period shown, the Portfolio offered one class of shares to
both institutional and retail investors.
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<PAGE> 10
<TABLE>
<CAPTION>
THE NEW JERSEY TAX-FREE INCOME PORTFOLIO+
-----------------------------------------
Period Year Year Year Period
Ended Ended Ended Ended Ended
8/31/95 2/28/95 2/28/94 2/28/93 2/28/92**
------- -------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning
of period $10.94 $11.31 $11.30 $10.46 $10.00
Income from investment
operations
Net investment income 0.25 0.51 0.54 0.52 0.34
Net (loss) gain on
investments (both
realized and unrealized) 0.28 (0.36) 0.04 0.85 0.45
----- ------ ----- ----- -----
Total from investment
operations 0.53 0.15 0.58 1.37 0.79
----- ------ ----- ----- -----
Less distributions
Distributions from net
investment income (0.25) (0.51) (0.54) (0.53) (0.33)
Distributions from net
realized capital gains ---- (0.01) (0.03) -- --
----- ------ ----- ----- -----
Total distributions (0.25) (0.52) (0.57) (0.53) (0.33)
----- ------ ----- ----- -----
Net asset value at end of
period $11.22 $10.94 $11.31 $11.30 $10.46
===== ====== ===== ===== =====
Total return 4.90% 1.49% 5.18% 13.48% 12.33%*
Ratios/Supplemental data
Net assets at end of period
(in thousands) $97,752 $96,857 $111,354 $47,169 $10,673
Ratios of expenses to
average net assets 0.88%* 0.79% 0.38% 0.48% 0.52%*
Excluding waivers 0.88%* 0.87% 0.86% 1.04% 1.29%*
Ratios of net investment
income to average net
assets 4.51%* 4.71% 4.75% 5.04% 5.35%*
Excluding waivers 4.51%* 4.63% 4.27% 4.48% 4.58%*
Portfolio turnover rate 18.47% 28.43% 12.05% 16.09% 0.00%
</TABLE>
- ------------------------------------------
+The Portfolio commenced operations on July 1, 1991 as the New Jersey Municipal
Bond Fund, a separate investment portfolio (the "Predecessor Portfolio") of The
Compass Capital Group of Funds, which was organized as a Massachusetts business
trust. On January __, 1996, the assets and liabilities of the Predecessor
Portfolio were transferred to the Portfolio, which had no prior operating
history.
** Commenced operations on July 1, 1991.
* Annualized.
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<PAGE> 11
INVESTMENT POLICIES
- ------------------------------------------------------------------------------
NEW JERSEY TAX-FREE INCOME PORTFOLIO
The Portfolio invests primarily in investment grade bonds, debentures,
and notes (including variable and floating rate notes) issued by or on behalf
of states (including the District of Columbia), territories, and possessions of
the United States, and their respective authorities, agencies,
instrumentalities, and political subdivisions, the interest on which is exempt
from federal income tax ("Municipal Obligations"). Under normal market
conditions, at least 80% of the Portfolio's total assets will be invested in
Municipal Obligations and at least 65% of the Portfolio's total assets will be
invested in New Jersey Municipal Obligations. It is anticipated that the
Portfolio's dollar weighted average portfolio maturity will range between five
and eighteen years.
Purchasable Municipal Obligations are rated within the four highest
ratings assigned by Moody's Investor Services, Inc. ("Moody's") (i.e., Aaa,
Aa, A, Baa) or by Standard & Poor's Ratings Group ("S&P") (i.e., AAA, AA, A,
BBB) in the case of bonds, rated SP-2 or higher by S&P or MIG-2 or higher by
Moody's in the case of notes, rated A-2 or higher by S&P or Prime-2 or higher
by Moody's in the case of tax-exempt commercial paper or VMIG-2 or higher by
Moody's in the case of variable rate demand notes or are unrated securities
determined at the time of purchase to be of comparable quality by BlackRock.
Securities rated "Baa" by Moody's or "BBB" by S&P, respectively, are generally
considered to be investment grade although they have speculative
characteristics and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than is the case for higher grade bonds. If a portfolio security is
reduced below Baa by Moody's or BBB by S&P, BlackRock will dispose of the
security in an orderly fashion as soon as practicable.
RISK FACTORS AND SPECIAL CONSIDERATIONS
The value of fixed income securities in the Portfolio can be expected
to vary inversely with changes in prevailing interest rates. Fixed income
securities with longer maturities, which tend to produce higher yields, are
subject to potentially greater capital appreciation and depreciation than
securities with shorter maturities.
Under normal market conditions, the Portfolio is predominantly
invested in New Jersey Municipal Obligations, and therefore the value of shares
in the Portfolio may be especially affected by factors pertaining to the state
economy and other factors specifically affecting the ability of issuers of New
Jersey Municipal Obligations to meet their obligations. As a result, the
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<PAGE> 12
value of the Portfolio's shares may fluctuate more widely than the value of the
shares of a portfolio investing in securities relating to a number of different
states. The ability of state, county, and local governments to meet their
obligations will depend primarily on the availability of tax and other revenues
to those governments and on their fiscal conditions generally. The amount of
tax and other revenues available to governmental issuers of New Jersey
Municipal Obligations may be affected from time to time by economic, political,
and demographic conditions within the state. In addition, constitutional or
statutory restrictions may limit a government's power to raise revenues or
increase taxes. Payments of principal and interest on limited obligation
securities will depend on the economic condition of the facility or specific
revenue source from whose revenues the payments will be made, which in turn
could be affected by economic, political, and demographic conditions in the
state. Moreover, the Portfolio is classified as "non-diversified" because it
may invest in obligations of a relatively limited number of issuers. See the
Statement of Additional Information for further discussion of investment
considerations associated with New Jersey Municipal Obligations and see
"Investment Policies--Description of Permitted Investments" for a description
of other investment policies.
DESCRIPTION OF PERMITTED INVESTMENTS
The Portfolio's investment objective and policies (except for the 80%
concentration in Municipal Obligations may be changed by the Board of Trustees
without shareholder approval. Depending upon prevailing market conditions, the
Portfolio may purchase debt securities at a discount from face value, which
produces a yield greater than the coupon rate. Conversely, if debt securities
are purchased at a premium over face value, the yield will be lower than the
coupon rate. An increase in interest rates will generally reduce the value of
the investments in the Portfolio and a decline in interest rates will generally
increase the value of those investments.
MUNICIPAL OBLIGATIONS. The two principal classifications of Municipal
Obligations are "general obligation" securities and "revenue" securities.
General obligation securities are secured by the issuer's pledge of its full
faith, credit and taxing power for the payment of principal and interest.
Revenue securities are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as the user of the
facility being financed. Revenue securities include private activity bonds
which are not payable from the unrestricted revenues of the issuer.
Consequently, the credit quality of private activity bonds is usually directly
related to the credit standing of the corporate user of the facility involved.
Municipal Obligations may also include "moral obligation" bonds, which are
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<PAGE> 13
normally issued by special purpose public authorities. If the issuer of moral
obligation bonds is unable to meet its debt service obligations from current
revenues, it may draw on a reserve fund, the restoration of which is a moral
commitment but not a legal obligation of the state or municipality which
created the issuer.
Purchasable Municipal Obligations include debt obligations issued by
governmental entities to obtain funds for various public purposes, including
the construction of a wide range of public facilities, the refunding of
outstanding obligations, the payment of general operating expenses and the
extension of loans to public institutions and facilities. Private activity
bonds issued by or on behalf of public authorities to finance various privately
operated facilities are considered Municipal Obligations. Dividends paid by
the Portfolio that are derived from interest on such Municipal Obligations
would be taxable to the Portfolio's shareholders for Federal income tax
purposes.
Also included within the general category of Municipal Obligations are
participation certificates in a lease, an installment purchase contract, or a
conditional sales contract ("lease obligations") entered into by a state or
political subdivision to finance the acquisition or construction of equipment,
land, or facilities. Although lease obligations do not constitute general
obligations of the issuer for which the lessee's unlimited taxing power is
pledged, certain lease obligations are backed by the lessee's covenant to
appropriate money to make the lease obligation payments. However, under
certain lease obligations, the lessee has no obligation to make these payments
in future years unless money is appropriated on a yearly basis. Although
"non-appropriation" lease obligations are secured by the leased property,
disposition of the property in the event of foreclosure might prove difficult.
These securities represent a relatively new type of financing that is not yet
as marketable as more conventional securities. Moreover, certain investments
in lease obligations may be illiquid and subject to the investment limitations
described below.
OPTIONS AND FUTURES CONTRACTS. The Portfolio may write covered call
options, buy put options, buy call options and write put options, without
limitation except as noted in this paragraph. Such options may relate to
particular securities or to various indexes and may or may not be listed on a
national securities exchange and issued by the Options Clearing Corporation.
The Portfolio may also invest in futures contracts and options
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<PAGE> 14
on futures contracts (index futures contracts or interest rate futures
contracts, as applicable) for hedging purposes or for other purposes so long as
aggregate initial margins and premiums required for non-hedging positions do
not exceed 5% of its net assets, after taking into account any unrealized
profits and losses on any such contracts it has entered into. However, the
Portfolio may not write put options or purchase or sell futures contracts or
options on futures contracts to hedge more than its total assets unless
immediately after any such transaction the aggregate amount of premiums paid
for put options and the amount of margin deposits on its existing futures
positions do not exceed 5% of its total assets.
Options trading is a highly specialized activity which entails greater
than ordinary investment risks. A call option for a particular security gives
the purchaser of the option the right to buy, and a writer the obligation to
sell, the underlying security at the stated exercise price at any time prior to
the expiration of the option, regardless of the market price of the security.
The premium paid to the writer is in consideration for undertaking the
obligations under the option contract. A put option for a particular security
gives the purchaser the right to sell the underlying security at the stated
exercise price at any time prior to the expiration date of the option,
regardless of the market price of the security. In contrast to an option on a
particular security, an option on an index provides the holder with the right
to make or receive a cash settlement upon exercise of the option. The amount
of this settlement will be equal to the difference between the closing price of
the index at the time of exercise and the exercise price of the option
expressed in dollars, times a specified multiple.
The Portfolio will engage in unlisted over-the-counter options only
with broker/dealers deemed creditworthy by BlackRock. Closing transactions in
certain options are usually effected directly with the same broker/dealer that
effected the original option transaction. The Portfolio bears the risk that
the broker/dealer will fail to meet its obligations. There is no assurance
that the Portfolio will be able to close an unlisted option position.
Furthermore, unlisted options are not subject to the protections afforded
purchasers of listed options by the Options Clearing Corporation, which
performs the obligations of its members who fail to do so in connection with
the purchase or sale of options.
To enter into a futures contract, the Portfolio must make a deposit of
initial margin with its custodian in a segregated account in the name of its
futures broker. Subsequent payments to or from the broker, called variation
margin, will be made on a daily basis as the price of the underlying security
or index fluctuates, making the long and short positions in the futures
contracts more or less valuable.
When investing in futures contracts, the Portfolio must satisfy
certain asset segregation requirements to ensure that the use of futures is
unleveraged. When the Portfolio takes a long position in a futures contract,
it must maintain a segregated account containing cash and/or certain liquid
assets equal to the purchase price of the contract, less any margin or deposit.
When the Portfolio takes a short position in a futures contract, the
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<PAGE> 15
Portfolio must maintain a segregated account containing cash and/or certain
liquid assets in an amount equal to the market value of the securities
underlying such contract (less any margin or deposit), which amount must be at
least equal to the market price at which the short position was established.
Asset segregation requirements are not applicable when the Portfolio "covers" a
futures position generally by entering into an offsetting position.
The risks related to the use of options and futures contracts include:
(i) the correlation between movements in the market price of the portfolio
investments (held or intended for purchase) being hedged and in the price of
the futures contract or option may be imperfect; (ii) possible lack of a liquid
secondary market for closing out options or futures positions; (iii) the need
for additional portfolio management skills and techniques; and (iv) losses due
to unanticipated market movements. Successful use of options and futures by
the Portfolio is subject to BlackRock's ability to correctly predict movements
in the direction of the market. For example, if the Portfolio uses futures
contracts as a hedge against the possibility of a decline in the market
adversely affecting securities held by it and securities prices increase
instead, the Portfolio will lose part or all of the benefit of the increased
value of its securities which it has hedged because it will have approximately
equal offsetting losses in its futures positions. The risk of loss in trading
futures contracts in some strategies can be substantial, due both to the low
margin deposits required and the extremely high degree of leverage involved in
futures pricing. As a result, a relatively small price movement in a futures
contract may result in immediate and substantial loss or gain to the investor.
Thus, a purchase or sale of a futures contract may result in losses or gains in
excess of the amount invested in the contract. For a further discussion see
"Investment Policies" in the Statement of Additional Information.
CASH EQUIVALENTS. The Portfolio may invest in taxable and tax-free
short-term, interest-bearing instruments or deposits of United States and
foreign issuers to maintain liquidity, pending investment and for temporary
defensive purposes. Such investments may include, but are not limited to,
commercial paper, certificates of deposit, variable or floating rate notes,
bankers' acceptances, time deposits, government securities, repurchase
agreements and money market deposit accounts.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. The Portfolio may
purchase securities on a "when-issued" basis and may purchase or sell
securities on a "forward commitment" basis. These transactions involve a
commitment by the Portfolio to purchase or sell particular securities with
payment and delivery taking place at the future date (perhaps one or two months
later), and permit a Portfolio to lock-in a price or yield on a security it
owns or intends to purchase, regardless of future changes in interest rates.
When-issued and forward commitment transactions involve the
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<PAGE> 16
risk, however, that the price or yield obtained in a transaction may be less
favorable than the price or yield available in the market when the securities
delivery takes place. The Portfolio's when-issued purchases and forward
commitments are not expected to exceed 25% of the value of its total assets
absent unusual market conditions. The Portfolio does not intend to engage in
when-issued purchases and forward commitments for speculative purposes but only
in furtherance of its investment objectives.
REVERSE REPURCHASE AGREEMENTS. The Portfolio 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 BlackRock). A reverse repurchase agreement involves a sale by the Portfolio
of securities that it holds concurrently with an agreement by the Portfolio to
repurchase the same securities at an agreed-upon price and date. Reverse
repurchase agreements involve the risk that the market value of the securities
sold by the Portfolio may decline below the price of the securities the
Portfolio is obligated to repurchase. Reverse repurchase agreements are
considered to be borrowings by the Portfolio under the 1940 Act.
The Portfolio will establish a segregated account with its custodian
in which it will maintain cash, U.S. government securities or other liquid high
grade debt obligations equal in value to its obligations with respect to
reverse repurchase agreements.
INVESTMENT COMPANIES. The Portfolio may invest in securities issued
by other investment companies within the limits prescribed by the 1940 Act.
The Portfolio currently intends to limit its investments so that, as determined
immediately after a securities purchase is made: (i) not more than 5% of the
value of its total assets will be invested in the securities of any one
investment company; (ii) not more than 10% of the value of its total assets
will be invested in the aggregate in securities of investment companies as a
group; and (iii) not more than 3% of the outstanding voting stock of any one
investment company will be owned by the Portfolio or by the Fund as a whole.
As a shareholder of another investment company, the Portfolio 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 the Portfolio bears directly in connection
with its own operations.
TAX-EXEMPT DERIVATIVES AND OTHER MUNICIPAL OBLIGATIONS. The Portfolio
may invest in tax-exempt derivative securities relating to Municipal
Obligations, including tender option bonds, participations, beneficial
interests in trusts and partnership interests.
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<PAGE> 17
Opinions relating to the validity of Municipal Obligations and to the
exemption of interest thereon from Federal income tax are rendered by bond
counsel to the respective issuers at the time of issuance, and opinions
relating to the validity of and the tax-exempt status of payments received by
the Portfolio from tax-exempt derivative securities are rendered by counsel to
the respective sponsors of such securities. The Portfolio and BlackRock will
rely on such opinions and will not review independently the underlying
proceedings relating to the issuance of Municipal Obligations, the creation of
any tax-exempt derivative securities, or the bases for such opinions.
ILLIQUID SECURITIES. The Portfolio will not knowingly invest more
than 15% of the value of its net assets in securities that are illiquid.
Variable and floating rate instruments that cannot be disposed of within seven
days, and repurchase agreements and time deposits that do not provide for
payment within seven days after notice, without taking a reduced price, are
subject to this 15% limit. The Portfolio may purchase securities which are not
registered under the Securities Act of 1933 (the "1933 Act") but which can be
sold to "qualified institutional buyers" in accordance with Rule 144A under the
1933 Act. Any such security will not be considered illiquid so long as it is
determined by BlackRock, acting under guidelines approved and monitored by the
Board, that an adequate trading market exists for that security. This
investment practice could have the effect of increasing the level of
illiquidity in the Portfolio during any period that qualified institutional
buyers become uninterested in purchasing these restricted securities.
MISCELLANEOUS. During normal market conditions up to 20% of the
Portfolio's net assets may be invested in securities which are not Municipal
Obligations. The Portfolio may invest up to 20% of its net assets in Municipal
Obligations the interest on which is exempt from regular Federal income tax but
is an item of tax preference for purposes of the Federal alternative minimum
tax. During temporary defensive periods, the Portfolio may invest without
limitation in obligations which are not Municipal Obligations and may hold
without limitation uninvested cash reserves. Such securities may include,
without limitation, bonds, notes, variable rate demand notes and commercial
paper, provided such securities are rated within the relevant categories
applicable to Municipal Obligations set forth above, or if unrated, are of
comparable quality as determined by BlackRock, and may also include, without
limitation, other debt obligations, such as bank obligations. The Portfolio
may acquire "stand-by commitments" with respect to Municipal Obligations held
by it. Under a stand-by commitment, a dealer agrees to purchase at the
Portfolio's option specified Municipal Obligations at a specified price. The
acquisition of a stand-by commitment may increase the cost, and thereby reduce
the yield, of the Municipal Obligation to which such commitment relates. The
Portfolio will acquire stand-by
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<PAGE> 18
commitments solely to facilitate portfolio liquidity and does not intend to
exercise its rights thereunder for trading purposes.
Although the Portfolio may invest 25% or more of its net assets in
Municipal Obligations the interest on which is paid solely from revenues of
similar projects, and may invest up to 20% of its total assets in private
activity bonds when added together with any taxable investments held by the
Portfolio, it does not presently intend to do so unless in the opinion of
BlackRock the investment is warranted. To the extent the Portfolio's assets
are invested in Municipal Obligations payable from the revenues of similar
projects or are invested in private activity bonds, the Portfolio will be
subject to the peculiar risks presented by the laws and economic conditions
relating to such projects and bonds to a greater extent than it would be if its
assets were not so invested. The amount of information regarding the financial
condition of issuers of Municipal Obligations may not be as extensive as that
which is made available by public corporations and the secondary market for
Municipal Obligations may be less liquid than that for taxable fixed-income
securities. Accordingly, the ability of the Portfolio to buy and sell
tax-exempt securities may, at any particular time and with respect to any
particular securities, be limited.
The Portfolio is classified as non-diversified under the 1940 Act.
Investment returns on a non-diversified portfolio typically are dependent upon
the performance of a smaller number of securities relative to the number held
in a diversified portfolio. Consequently, the change in value of any one
security may affect the overall value of a non-diversified portfolio more than
it would a diversified portfolio. Additionally, a non-diversified portfolio
may be more susceptible to economic, political and regulatory developments than
a diversified portfolio with similar objectives.
PORTFOLIO TURNOVER. Although it may vary from year to year, it is
currently estimated that under normal market conditions the annual portfolio
turnover rate for the Portfolio will not exceed 100%. The Portfolio's annual
portfolio turnover rate will not, however, be a factor preventing a sale or
purchase when BlackRock believes investment considerations warrant such sale or
purchase. Portfolio turnover may vary greatly from year to year as well as
within a particular year. A high portfolio turnover rate will generally result
in higher transaction costs to the Portfolio.
INVESTMENT LIMITATIONS
The Portfolio is subject to the following fundamental investment
limitations, which may not be changed with respect to the Portfolio except upon
the affirmative vote of the holders of a majority of the Portfolio's
outstanding shares.
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<PAGE> 19
The Portfolio may not:
1. Purchase any securities which would cause 25% or more of
the value of the Portfolio'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.
2. Borrow money or issue senior securities, except that the
Portfolio may borrow from banks and enter into reverse repurchase
agreements for temporary purposes in amounts up to one-third of the
value of its total assets at the time of such borrowing; or 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 Portfolio's total assets at the time of such borrowing. The
Portfolio will not purchase securities while its aggregate borrowings
(including reverse repurchase agreements and borrowings from banks) in
excess of 5% of its total assets are outstanding. Securities held in
escrow or separate accounts in connection with the Portfolio's
investment practices are not deemed to be pledged for purposes of this
limitation.
If a percentage limitation is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in the
value of a Portfolio's securities will not constitute a violation of such
limitation, except that any borrowing by the Portfolio that exceeds the
fundamental investment restriction stated above must be reduced to meet such
restriction within the period required by the 1940 Act (currently three days).
In order to permit the sale of the Portfolio's shares in certain
states, the Fund may make commitments more restrictive than the investment
policies and limitations described in this Prospectus. Should the Fund
determine that any such commitment is no longer in the best interests of the
Portfolio, it will revoke the commitment by terminating sales of its shares in
the state involved.
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<PAGE> 20
For information on additional investment limitations relating to the
Portfolio, see the Statement of Additional Information.
MANAGEMENT
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BOARD OF TRUSTEES
The business and affairs of the Fund are managed under the direction
of the Fund's Board of Trustees. The Statement of Additional Information
contains the name of each trustee and certain background information.
ADVISER AND SUB-ADVISER
PAMG was organized in 1995 to perform advisory services for investment
companies. BlackRock (formerly BlackRock Financial Management L.P.) was
organized in 1988. On February 28, 1995 BlackRock Financial Management L.P.
sold its business to PNC Bank National Association ("PNC Bank"). The principal
business address of PAMG is 1835 Market Street, 15th Floor, Philadelphia,
Pennsylvania, 19103. The principal business address of BlackRock is 345 Park
Avenue, New York, New York 10154.
As adviser, PAMG is responsible for the overall investment management
of the Portfolio. The sub-adviser, BlackRock, is responsible for the
day-to-day management of the Portfolio, and generally makes all purchase and
sale decisions regarding the investments made by the Portfolio. BlackRock also
provides research and credit analysis as well as certain other services.
Kevin Klingert is the person primarily responsible for the day-to-day
management of the Portfolio's investments. Mr. Klingert is a Principal and
Portfolio Manager at BlackRock Financial Management, and a member of its
Investment Strategy Committee. Mr. Klingert has primary responsibility for
managing client portfolios with a special emphasis on municipal securities.
His areas of expertise include general obligation bonds, revenue bonds and
tax-exempt derivative securities. Mr. Klingert also serves as Vice President
for BlackRock's family of tax-exempt mutual funds.
Prior to joining BlackRock in 1991, Mr. Klingert was an Assistant Vice
President in the Unit Investment Trust Department at Merrill Lynch, Pierce,
Fenner & Smith. Mr. Klingert joined Merrill Lynch in 1985 and was responsible
for investing over $1 billion annually for municipal UITs and for supervising
over $21 billion of existing municipal UITs.
Mr. Klingert received a Bachelor of Science in Business Administration
from the State University of New York at Oswego in 1984, and an M.B.A. in
Finance from New York University in 1991.
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<PAGE> 21
For the services provided and expenses assumed by it, PAMG is entitled
to receive from the Portfolio a fee, computed daily and payable monthly, at an
annual rate of .50% of the first $1 billion of the average daily net assets of
the Portfolio, plus 0.45% of the next $1 billion of the Portfolio's average
daily net assets, plus 0.425% of the next $1 billion of the Portfolio's average
daily net assets, plus 0.40% of the Portfolio's average daily net assets in
excess of $3 billion. The Predecessor Portfolio bore advisory fees during its
most recent fiscal year pursuant to the investment advisory agreement then in
effect with Midlantic Bank, N.A., its former adviser, at the effective annual
rate of .60% of its average daily net assets. From time to time PAMG may waive
all or any portion of its advisory fee for and may reimburse expenses of the
Portfolio. See "Introduction--Expense Table."
For its sub-advisory services, BlackRock is entitled to receive from
PAMG a fee, computed daily and payable monthly, at an annual rate of .35% of
the Portfolio's first $1 billion of average daily net assets, .30% of its next
$1 billion of average daily net assets, .275% of its next $1 billion of average
daily net assets, and .25% of its average daily net assets in excess of $3
billion. Such sub-advisory fee has no effect on the advisory fee payable by
the Portfolio to PAMG. BlackRock may from time to time waive all or any
portion of its sub-advisory fee for the Portfolio.
----------------------
ADMINISTRATORS
PMFCO, whose principal address is 345 Park Avenue, New York, New York
10154, PFPC, whose principal business address is 400 Bellevue Parkway,
Wilmington, Delaware 19809 and PDI, whose principal business address is 259
Radnor-Chester Road, Suite 120, Radnor, Pennsylvania 19087, serve as the Fund's
co-administrators. PMFCO and PFPC are indirect wholly-owned subsidiaries of
PNC Bank Corp. A majority of the outstanding stock of PDI is owned by its
officers and the remaining outstanding stock is owned by Pennsylvania Merchant
Group Ltd.
The Administrators generally assist the Fund in all aspects of its
administration and operation, including matters relating to the maintenance of
financial records and fund accounting. As compensation for their services,
PMFCO is entitled to receive a fee, computed daily and payable monthly, at an
annual rate of .03% of the Portfolio's average daily net assets, and PFPC and
PDI are entitled to receive a combined fee, computed daily and payable monthly,
at an annual rate of .20% of the first $500 million of the Portfolio's average
daily net assets, .18% of the next $500 million of the Portfolio's average
daily net assets, .16% of the next $1 billion of the Portfolio's average daily
net assets and .15% of the Portfolio's average daily net assets in excess of $2
billion. From
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<PAGE> 22
time to time the Administrators may waive all or any portion of the
administration fees for the Portfolio.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND CUSTODIAN
PNC Bank serves as the Fund's custodian and PFPC serves as the Fund's
transfer agent and dividend disbursing agent.
----------------------
SHAREHOLDER SERVICING
The Fund intends to enter into service agreements with Institutions
(including PNC Bank, PNC Bank Ohio and their affiliates) pursuant to which
Institutions will render certain support services to Customers who are the
beneficial owners of Service Shares. Such services will be provided to
Customers who are the beneficial owners of Service Shares and are intended to
supplement the services provided by the Fund's Administrators and transfer
agent to the Fund's shareholders of record. In consideration for payment of up
to .15% (on an annualized basis) of the average daily net asset value of
Service Shares owned beneficially by their Customers, Institutions may provide
one or more of the following services to such Customers: processing purchase
and redemption requests from Customers and placing orders with the Fund's
transfer agent or the Distributor; processing dividend payments from the Fund
on behalf of Customers; providing sub-accounting with respect to Service Shares
beneficially owned by Customers or the information necessary for
sub-accounting; and other similar services. In consideration for payment of up
to a separate .15% (on an annualized basis) of the average daily net asset
value of Service Shares owned beneficially by their Customers, Institutions may
provide one or more of these additional services to such Customers: responding
to Customer inquiries relating to the services performed by the Institution and
to Customer inquiries concerning their investments in Service Shares; providing
information periodically to Customers showing their positions in Service
Shares; and other similar shareholder liaison services. Customers who are
beneficial owners of Service Shares should read this Prospectus in light of the
terms and fees governing their accounts with Institutions. These fees are not
paid to Institutions with respect to other classes of shares of the Portfolio
("Series A Investor Shares," "Series B Investor Shares" and "Institutional
Shares"). See "Description of Shares."
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<PAGE> 23
----------------------
EXPENSES
Expenses are deducted from the total income of the Portfolio before
dividends and distributions are paid. These expenses include, but are not
limited to, fees paid to PAMG and the Administrators, transfer agency fees,
fees and expenses of officers and trustees who are not affiliated with PAMG or
the Distributor or any of their affiliates, taxes, interest, legal fees,
custodian fees, auditing fees, 12b-1 fees, servicing fees, certain fees and
expenses in registering and qualifying the Portfolio and its Shares for
distribution under Federal and state securities laws, expenses of preparing
prospectuses and statements of additional information and of printing and
distributing prospectuses and statements of additional information to existing
shareholders, the expense of reports to shareholders, shareholders' meetings
and proxy solicitations, fidelity bond and trustees and officers liability
insurance premiums, the expense of using independent pricing services and other
expenses which are not expressly assumed by PIMC or the Administrators under
their respective agreements with the Fund. Any general expenses of the Fund
that are not readily identifiable as belonging to a particular investment
portfolio will be allocated among all investment portfolios by or under the
direction of the Board of Trustees in a manner the Board determines to be fair
and equitable. Any expenses relating only to a particular class of shares
within the Portfolio (such as fees relating to the Fund's Service Plan for
Service Shares) will be borne solely by such Shares.
If the total expenses borne by the Portfolio in any fiscal year exceed
the expense limitations imposed by applicable state securities regulations,
PAMG, BlackRock and the Administrators will bear the amount of such excess to
the extent required by such regulations in proportion to the fees otherwise
payable to them for such year. Such amount, if any, will be estimated and
accrued daily and paid on a monthly basis. See "Introduction--Example,"
"Management--Adviser and Sub-Adviser" and "Management--Administrators" for
discussions of expense reimbursements and fee waivers.
----------------------
BANKING LAWS
Banking laws and regulations currently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks
generally from underwriting
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<PAGE> 24
securities, but such banking laws and regulations do not prohibit such a
holding company or affiliate or banks generally from acting as investment
adviser, administrator, transfer agent or custodian to such an investment
company, or from purchasing shares of such a company as agent for and upon the
order of customers. PNC Bank, PIMC, PFPC and Institutions that are banks or
bank affiliates, are subject to such banking laws and regulations. In
addition, state securities laws on this issue may differ from the
interpretations of Federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
Should future legislative, judicial or administrative action prohibit
or restrict the activities of such companies in connection with the provision
of services on behalf of the Fund and the holders of Service Shares, the Fund
might be required to alter materially or discontinue its arrangements with such
companies and change its method of operations with respect to the Service
Shares. It is not anticipated, however, that any change in the Fund's method
of operations would affect its net asset value per share or result in a
financial loss to any Customer.
----------------------
PORTFOLIO TRANSACTIONS
The Portfolio's sub-adviser will seek the best price and execution in
placing brokerage transactions. In this regard, the sub-adviser may consider a
number of factors in determining which brokers to use in purchasing or selling
portfolio securities. These factors, which are more fully discussed in the
Statement of Additional Information, include, but are not limited to, research
services, sales of shares of the Fund, the reasonableness of commissions and
quality of services and execution. Brokerage transactions for the Portfolio
may be directed through registered broker/dealers ("Authorized Dealers") who
have entered into dealer agreements with the Distributor, subject to the
requirements of best execution.
PURCHASE AND REDEMPTION OF SHARES
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DISTRIBUTOR
Shares of the Portfolio are offered on a continuous basis for the Fund
by the distributor, Provident Distributors, Inc. (the "Distributor"). The
Distributor is a registered broker/dealer with principal offices at 259
Radnor-Chester Road, Suite 120, Radnor, Pennsylvania 19087.
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<PAGE> 25
The Fund has adopted a distribution plan pursuant to Rule 12b-1 under
the 1940 Act. This plan permits the Adviser to pay a fee to the Distributor,
which in turn is authorized to make payments to securities dealer with which
the Distributor may enter into solicitation fee agreements. The Distributor
may also use a portion of the fee it receives under the plan to compensate
institutions who perform support services that would otherwise be performed by
an Administrator or its agents. The purpose of the plan is to promote
distribution of the Fund's shares and to enhance the provision of shareholder
services. The Fund is not required or permitted under the plan to make
distribution payments with respect to Service Shares over and above its
investment advisory fee; the Plan merely permits the reallocation of a portion
of the advisory fee the Adviser receives to pay for distribution related and
shareholder servicing activities. See "Investment Advisory, Administration,
Distribution and Servicing Arrangements" in the SAI.
PURCHASE OF SHARES
Shares are offered without a sales load on a continuous basis to
Institutions acting on behalf of their Customers. Service Shares will normally
be held of record by Institutions or in the names of nominees of Institutions.
All Share purchases are effected through a Customer's account at an Institution
through procedures established in connection with the requirements of the
account. Confirmations of Share purchases and redemptions will be sent to the
Institutions. Beneficial ownership of Shares will be recorded by the
Institutions and reflected in the account statements provided by such
Institutions to their Customers. Investors wishing to purchase Shares should
contact their Institutions.
Service Shares are sold at the net asset value for the Service Shares
of the Portfolios next computed after an order is received by PFPC. Shares may
be purchased by Institutions on any Business Day. A "Business Day" is any
weekday that the New York Stock Exchange (the "NYSE") and the Federal Reserve
Bank of Philadelphia (the "FRB") are open for business. Purchase orders may be
transmitted by telephoning PFPC at (800) 441-7379. Orders received by PFPC
after 4:00 p.m. (Eastern Time) are priced at the net asset value per share on
the following Business Day. The Fund may in its discretion reject any order
for Shares.
Payment for Service Shares may be made only in Federal funds or other
funds immediately available to the Fund's custodian. The minimum initial
investment by an Institution is $5,000; however, Institutions may set a higher
minimum for their Customers. There is no minimum subsequent investment
requirement.
Conflict of interest restrictions may apply to an Institution's
receipt of compensation paid by the Fund in
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<PAGE> 26
connection with the investment of fiduciary funds in Shares. Institutions,
including banks regulated by the Comptroller of the Currency and investment
advisers and other money managers subject to the jurisdiction of the SEC, the
Department of Labor or state securities commissions, are urged to consult their
legal advisers before investing fiduciary funds in Service Shares. See also
"Management--Shareholder Servicing."
REDEMPTION OF SHARES
A Customer may redeem all or part of his Service Shares in accordance
with the instructions and limitations pertaining to his account at an
Institution. These procedures will vary according to the type of account and
the Institution involved, and Customers should consult their account managers
in this regard. It is the responsibility of Institutions to transmit
redemption orders to PFPC and credit their Customers' accounts with the
redemption proceeds on a timely basis. In the case of shareholders holding
share certificates, the certificates must accompany the redemption request.
Institutions may transmit redemption orders to PFPC by telephone at
(800) 441-7379. Shares are redeemed at the net asset value per share of the
Service Shares of the Portfolio next determined after PFPC's receipt of the
redemption order. THE FUND, THE ADMINISTRATORS AND THE DISTRIBUTOR WILL NOT BE
LIABLE FOR ANY LOSS, LIABILITY, COST OR EXPENSE FOR ACTING UPON TELEPHONE
INSTRUCTIONS THAT ARE REASONABLY BELIEVED TO BE GENUINE. IN ATTEMPTING TO
CONFIRM THAT TELEPHONE INSTRUCTIONS ARE GENUINE, THE FUND WILL USE SUCH
PROCEDURES AS ARE CONSIDERED REASONABLE, INCLUDING RECORDING THOSE INSTRUCTIONS
AND REQUESTING INFORMATION AS TO ACCOUNT REGISTRATION (SUCH AS THE NAME IN
WHICH AN ACCOUNT IS REGISTERED, THE ACCOUNT NUMBER, RECENT TRANSACTIONS IN THE
ACCOUNT, AND THE ACCOUNT HOLDER'S SOCIAL SECURITY NUMBER, ADDRESS AND/OR BANK).
Payment for redeemed Shares for which a redemption order is received
by PFPC before 4:00 p.m. (Eastern Time) on a Business Day is normally made in
Federal funds wired to the redeeming Institution on the next Business Day,
provided that the Fund's custodian is also open for business. Payment for
redemption orders received after 4:00 p.m. (Eastern Time) or on a day when the
Fund's custodian is closed is normally wired in Federal funds on the next
Business Day following redemption on which the Fund's custodian is open for
business. The Fund reserves the right to wire redemption proceeds within seven
days after receiving a redemption order if, in the judgment of the investment
adviser, an earlier payment could adversely affect the Portfolio. No charge
for wiring redemption payments is imposed by the Fund, although Institutions
may charge Customer accounts for redemption services. Information relating to
such redemption services and charges, if any, should be obtained by Customers
from their Institution.
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<PAGE> 27
During periods of substantial economic or market change, telephone
redemptions may be difficult to complete. If an Institution is unable to
contact PFPC by telephone, the Institution may also deliver the redemption
request to PFPC by mail at 400 Bellevue Parkway, Wilmington, DE 19809.
A shareholder of record may be required to redeem Shares in the
Portfolio if the balance in such shareholder's account in the Portfolio drops
below $5,000 as the result of a redemption request and the shareholder does not
increase the balance to at least $5,000 upon thirty days' written notice. If a
Customer has agreed with an Institution to maintain a minimum balance in his
account with the Institution, and the balance in the account falls below that
minimum, the Customer may be obligated to redeem all or part of his Shares in
the Portfolio to the extent necessary to maintain the minimum balance required.
The Fund may suspend the right of redemption or postpone the date of
payment upon redemption (as well as suspend the recordation of the transfer of
Shares) for such periods as are permitted under the 1940 Act. The Fund may
also redeem Shares involuntarily or make payment for redemption in securities
or other property if it appears appropriate to do so in light of the Fund's
responsibilities under the 1940 Act. See "Purchase and Redemption Information"
in the Statement of Additional Information for examples of when such redemption
might be appropriate.
It is the responsibility of the Institutions to provide their
Customers with account statements with respect to Share transactions made for
accounts maintained at the Institutions.
NET ASSET VALUE
- -------------------------------------------------------------------------------
The net asset value for the Service Share for the Portfolio is
calculated as of the close of trading on the NYSE (currently 4:00 p.m. Eastern
Time) on each Business Day by adding the value of all its securities, cash and
other assets allocable to its Shares, subtracting the liabilities allocable to
its Service Shares and dividing by the total number of Service Shares
outstanding. The net asset value per Service Share of the Portfolio is
determined independently of the Portfolio's other classes and independently of
the Fund's other portfolios.
Valuation of securities held by the Portfolio is as follows:
securities traded on a national securities exchange or on the NASDAQ National
Market System are valued at the last reported sale price that day; securities
traded on a national securities exchange or on the NASDAQ National Market
System for which there were no sales on that day and securities traded on other
over-the-counter markets for which market quotations are readily available are
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<PAGE> 28
valued at the mean of the bid and asked prices; an option or futures contract
is valued at the last sales price prior to 4:00 p.m. (Eastern Time), as quoted
on the principal exchange or board of trade on which such option or contract is
traded, or in the absence of a sale, the mean between the last bid and asked
prices prior to 4:00 p.m. (Eastern Time); and securities for which market
quotations are not readily available are valued at fair market value as
determined in good faith by or under the direction of the Fund's Board of
Trustees. The amortized cost method of valuation will also be used with
respect to debt obligations with sixty days or less remaining to maturity
unless the investment adviser and/or sub-adviser under the supervision of the
Board of Trustees determines such method does not represent fair value.
The Portfolio may use a pricing service, bank or broker/dealer
experienced in such matters to value the Portfolio's securities. A more
detailed discussion of net asset value and security valuation is contained in
the Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
- -------------------------------------------------------------------------------
The Portfolio will distribute substantially all of its net investment
income and net realized capital gains, if any, to shareholders. For dividend
purposes, the Portfolio's investment income available for distribution to
holders of Service Shares is reduced by accrued expenses directly attributable
to the Portfolio and the general expenses of the Fund prorated to the Portfolio
on the basis of its relative net assets. The Portfolio's net investment income
available for distribution to the holders of Service Shares will be reduced by
the amount of other expenses allocated to the Portfolio's Service Shares,
including fees payable under the Fund's Service Plan. All distributions are
reinvested at net asset value in the form of additional full and fractional
Shares of the Portfolio unless a shareholder elects otherwise. Such election,
or any revocation thereof, must be made in writing to PFPC, and will become
effective with respect to dividends paid after its receipt by PFPC. The net
investment income of the Portfolio is declared daily as a dividend to investors
who are Shareholders of the Portfolio at, and whose payment for Share purchases
are available to the Portfolio in Federal funds by, the close of business on
the day of declaration. The Portfolio will pay all such dividends within seven
days after redemption of all of a shareholder's Shares in the Portfolio. Net
realized capital gains (including net short-term capital gains), if any, will
be distributed by the Portfolio at least annually.
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<PAGE> 29
TAXES
- -------------------------------------------------------------------------------
The following discussion is only a brief summary of some of the
important tax considerations generally affecting the Portfolio and their
shareholders and is not intended as a substitute for careful tax planning.
Accordingly, investors in the Portfolio should consult their tax advisers with
specific reference to their own tax situation.
The Portfolio will elect to be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. So long
as the Portfolio qualifies for this tax treatment, it generally will be
relieved of Federal income tax on amounts distributed to shareholders, but
shareholders, unless otherwise exempt, will pay income or capital gains taxes
on amounts so distributed (except distributions that constitute "exempt
interest dividends" or that are treated as a return of capital), regardless of
whether such distributions are paid in cash or reinvested in additional Shares.
Distributions paid out of the "net capital gain" (the excess of net
long-term capital gain over net short-term capital loss), if any, of the
Portfolio will be taxed to shareholders as long-term capital gain, regardless
of the length of time a shareholder has held his Shares and whether such gain
was reflected in the price paid for the Shares. All other distributions, to
the extent they are taxable, are taxed to shareholders as ordinary income.
The Portfolio intends to pay substantially all of its dividends as
"exempt interest dividends." Investors in the Portfolios should note, however,
that taxpayers are required to report the receipt of tax-exempt interest and
"exempt interest dividends" on their Federal income tax returns and that in two
circumstances such amounts, while exempt from regular Federal income tax, are
taxable to persons subject to alternative minimum and environmental taxes.
First, tax-exempt interest and "exempt interest dividends" derived from certain
private activity bonds issued after August 7, 1986, generally will constitute
an item of tax preference for corporate and noncorporate taxpayers in
determining alternative minimum and environmental tax liability. Second,
tax-exempt interest and "exempt interest dividends" derived from all other
Municipal Obligations must be taken into account by corporate taxpayers in
determining certain adjustments for alternative minimum and environmental tax
purposes. In addition, investors should be aware of the possibility of state
and local alternative minimum or minimum income tax liability from such private
activity bonds. Shareholders who are recipients of Social Security Act or
Railroad Retirement Act benefits should further note that tax-exempt interest
and "exempt interest dividends" derived from all types of Municipal Obligations
will be taken into account in determining the taxability of their benefit
payments.
-26-
<PAGE> 30
The Portfolio will determine annually the percentages of its net
investment income which are exempt from the regular Federal income tax, which
constitute an item of tax preference for purposes of the Federal alternative
minimum tax, and which are fully taxable. Such percentages will apply
uniformly to all distributions declared from net investment income during that
year. These percentages may differ significantly from the actual percentages
for any particular day.
The Fund will send written notices to shareholders annually regarding
the tax status of distributions made by the Portfolio. Dividends declared in
October, November or December of any year payable to shareholders of record on
a specified date in those months will be deemed to have been received by the
shareholders on December 31 of such year, if the dividends are paid during
January of the following year.
An investor considering buying shares of the Portfolio on or just
before the record date of a capital gain distribution should be aware that the
amount of the forthcoming distribution payment, although in effect a return of
capital, will be taxable to him.
A taxable gain or loss may be realized by a shareholder upon his
redemption, transfer or exchange of Portfolio Shares depending upon the tax
basis of such Shares and their price at the time of redemption, transfer or
exchange.
Any loss upon the sale or exchange of shares of the Portfolio held for
six months or less will be disallowed for Federal income tax purposes to the
extent of any exempt interest dividends received by the shareholder.
Future legislative or administrative changes or court decisions may
materially affect the tax consequences of investing in the Portfolio.
Shareholders are also urged to consult their tax advisers concerning the
application of state and local income taxes to investments in the Portfolio
which may differ from the federal income tax consequences described above.
Shareholders who are nonresident alien individuals, foreign trusts or estates,
foreign corporations or foreign partnerships may be subject to different U.S.
Federal income tax treatment and should consult their tax advisers.
NEW JERSEY TAX CONSIDERATIONS
It is anticipated that substantially all dividends paid by the
Portfolio will not be subject to New Jersey personal income tax. In accordance
with the provisions of New Jersey law as currently in effect, distributions
paid by a "qualified investment fund" will not be subject to the New Jersey
personal income tax to the extent that the distributions are attributable to
income received as interest or gain from New Jersey Municipal Obligations, or
as
-27-
<PAGE> 31
interest or gain from direct U.S. Government obligations. Distributions by a
qualified investment fund that are attributable to most other sources will be
subject to the New Jersey personal income tax. If the Portfolio qualifies as a
qualified investment fund under New Jersey law, any gain on the redemption or
sale of the Portfolio's shares will not be subject to the New Jersey personal
income tax. To be classified as a qualified investment fund, at least 80% of
the Portfolio's investments must consist of New Jersey Municipal Obligations or
direct U.S. Government obligations; it must have no investments other than
interest-bearing obligations, obligations issued at a discount, and cash and
cash items (including receivables); and it must satisfy certain reporting
obligations and provide certain information to its shareholders. Shares of the
Portfolio are not subject to property taxation by New Jersey or its political
subdivisions. To the extent that a shareholder is subject to state or local
taxes outside New Jersey, dividends earned by an investment in the Portfolio
may represent taxable income.
The New Jersey personal income tax is not applicable to corporations.
For all corporations subject to the New Jersey Corporation Business Tax,
dividends and distributions from a "qualified investment fund" are included in
the net income tax base for purposes of computing the Corporation Business Tax.
Furthermore, any gain upon the redemption or sale of shares by a corporate
shareholder is also included in the net income tax base for purposes of
computing the Corporation Business Tax.
The foregoing is only a summary of certain New Jersey tax
considerations generally affecting the Portfolio and its shareholders, and is
not intended as a substitute for careful tax planning. Shareholders are urged
to consult their tax advisers with specific reference to their own tax
situations.
DESCRIPTION OF SHARES
- -------------------------------------------------------------------------------
The Fund was organized as a Massachusetts business trust on December
22, 1988 and is registered under the 1940 Act as an open-end management
investment company. The Declaration of Trust authorizes the Board of Trustees
to classify and reclassify any unissued shares into one or more classes of
shares. Pursuant to such authority, the Board of Trustees has authorized the
issuance of an unlimited number of shares in each of 109 classes (22 classes of
"Series B Investor Shares" and 29 classes each of "Service Shares," "Series A
Investor Shares" and "Institutional Shares") representing interests in the
Fund's investment portfolios. This Prospectus describes the New Jersey
Tax-Free Income Portfolio which is classified as a non-diversified company
under the 1940 Act. For information regarding other portfolios of the Fund
contact the
-28-
<PAGE> 32
Distributor by phone at (800) 998-7633 or at the address listed in "Purchase
and Redemption of Shares--Distributor."
Each share of an investment portfolio has a par value of $.001,
represents an equal proportionate interest in the particular portfolio and is
entitled to such dividends and distributions earned on such portfolio's assets
as are declared in the discretion of the Board of Trustees. The Fund's
shareholders are entitled to one vote for each full share held and
proportionate fractional votes for fractional shares held, and will vote in the
aggregate and not by class, except where otherwise required by law or when the
Board of Trustees determines that the matter to be voted upon affects only the
interests of the shareholders of a particular class or investment portfolio.
Under Massachusetts law, the Fund's state of organization, and the Fund's
Declaration of Trust and Code of Regulations, the Fund is not required and does
not currently intend to hold annual meetings of shareholders for the election
of trustees (except as required under the 1940 Act). For a further discussion
of the voting rights of shareholders, see "Additional Information Concerning
Shares" in the Statement of Additional Information.
Holders of Service Shares bear the fees described under
"Management--Shareholder Servicing" that are paid to Institutions under the
Fund's Plan. Similarly, holders of a Portfolio's Series A Investor Shares and
Series B Investor Shares (collectively, "Investor Shares") will bear the
payments described in the prospectus for such shares that are paid under the
Fund's Plan. Under the Plan, the Distributor is entitled to payments by each
Portfolio for: (i) promotional activities in connection with advertising and
marketing Investor Shares; and (ii) payments to broker/dealers ("Service
Organizations") for distribution assistance such as advertising and marketing
of Investor Shares. In addition, payments under the Plan will be used to pay
for or finance sales commissions and other fees payable to Service
Organizations and other broker/dealers who sell Series B Investor Shares.
Service Organizations may also provide support services such as establishing
and maintaining accounts and records relating to shareholders of Investor
Shares for whom the Service Organizations are the dealer of record or holder of
record for shareholders with whom the Service Organizations have a servicing
relationship. The Plan provides for payments at an annual rate not to exceed
.50% of the average daily net asset value of each Portfolio's outstanding
Series A Investor Shares. The Plan provides for payments to the Distributor at
an annual rate not to exceed 1.15% of the average daily net asset value of each
Portfolio's outstanding Series B Investor Shares. As a result of these
different fees, the net asset value and the net yields on the Fund's
Institutional Shares will generally be higher than those on the Fund's Service
Shares, the net asset value and the net yields on the Fund's Service Shares
will generally be higher than those on the Fund's Series A Investor Shares, and
the net asset value and
-29-
<PAGE> 33
the net yields on the Fund's Series A Investor Shares will generally be higher
than those on the Fund's Series B Investor Shares if payments by the Portfolios
under the Plan are made at the maximum rates. Standardized total return and
yield quotations will be computed separately for each class of Shares. Series
A and Series B Investor Shares are exchangeable at the option of the holder for
Series A and Series B Investor Shares, respectively, in the Fund's other
investment portfolios. Series B Investor Shares are exchangeable for Series B
Investor Shares in the Fund's Money Market Portfolio, but are not exchangeable
for shares in the Fund's other money market investment portfolios. Series A
Investor Shares of the Portfolios are offered to the public at the net asset
value per share plus a maximum sales charge of 4.50% of the offering price on
single purchases of less than $50,000; the sales charge is reduced on a
graduated scale on single purchases of $50,000 or more and certain exemptions
from the sales charge may apply. The sales charge does not apply to exchanges
of Series A Investor Shares among the Portfolios. Series B Investor Shares are
subject to a maximum contingent deferred sales charge of 5.0%. The deferred
sales charge decreases over time. Series B Investor Shares may be exchanged
for Series B Investor Shares of another investment portfolio of the Fund
without the payment of any deferred sales charge at the time the exchange is
made. Because Service Shares and Institutional Shares are sold without a sales
charge, holders of Service Shares and Institutional Shares have no such
exchange privileges.
On September 29, 1995, PNC Bank held of record approximately 79% of
the Fund's outstanding shares, and may be deemed a controlling person of the
Fund under the 1940 Act. PNC Bank is a subsidiary of PNC Bank Corp., a
multi-bank holding company.
OTHER INFORMATION
- -------------------------------------------------------------------------------
REPORTS AND INQUIRIES
Shareholders will receive unaudited semi-annual financial statements
and annual financial statements audited by independent accountants.
Shareholder inquiries should be addressed to the Fund c/o PFPC, P.O. Box 8950,
Wilmington, Delaware 19885-9628, toll-free (800) 441-7762 (in Delaware call
collect (302) 791-1111).
PERFORMANCE INFORMATION
From time to time, total return and yield data for Shares of the
Portfolio may be quoted in advertisements or in communications to shareholders.
Total return will be calculated on an average annual total return basis for
various periods. Average annual total return reflects the average annual
percentage change in value of an investment in Shares of the Portfolio over the
measuring
-30-
<PAGE> 34
period. This method of calculating total return assumes that dividends and
capital gain distributions made by the Portfolio during the period relating to
Shares are reinvested in Shares.
The yield of Shares of the Portfolio is computed based on the net
income of the Portfolio allocated to such Shares during a 30-day (or one month)
period, which period will be identified in connection with the particular yield
quotation. More specifically, the yield of Shares of the Portfolio is computed
by dividing the Portfolio's net income per share allocated to such Shares
during a 30-day (or one month) period by the net asset value per share on the
last day of the period and annualizing the result on a semi-annual basis. The
Portfolio's "tax-equivalent yield" may also be quoted from time to time, which
shows the level of taxable yield needed to produce an after-tax equivalent to
the Portfolio's tax-free yield. This is done by increasing the Portfolio's
yield (calculated above) by the amount necessary to reflect the payment of
Federal and/or state income tax at a stated tax rate.
Performance data of Shares of the Portfolio may be compared to those
of other mutual funds with similar investment objectives and to other relevant
indexes or to ratings or rankings prepared by independent services or other
financial or industry publications that monitor the performance of mutual
funds. In addition, certain indexes may be used to illustrate historic
performance of select asset classes. For example, the total return and/or
yield of Shares of the Portfolio may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Weisenberger
Investment Company Service, and with the performance of the Shearson Lehman
GMNA Index, the Shearson Lehman Index of Baa-rated Corporate Bonds, the T-Bill
Index, the "stocks, bonds and inflation Index" published annually by Ibbotson
Associates and the Lehman Government Corporate Bond Index. Performance
information may also include evaluations of the Portfolio and its Shares
published by nationally recognized ranking services and information as reported
by financial publications such as Business Week, Fortune, Institutional
Investor, Money Magazine, Forbes, Barron's, The Wall Street Journal and The New
York Times, or in publications of a local or regional nature.
In addition to providing performance information that demonstrates the
actual yield or returns of Shares of the Portfolio over a particular period of
time, the Portfolio may provide certain other information demonstrating
hypothetical investment returns. Such information may include, but is not
limited to, illustrating the compounding effects of a dividend in a dividend
reinvestment plan or the impact of tax-deferred investing.
Performance quotations of Shares of the Portfolio represent past
performance and should not be considered as representative of future results.
The investment return and principal value of an investment in Shares of the
Portfolio will fluctuate so that an
-31-
<PAGE> 35
investor's Shares, when redeemed, may be worth more or less than their original
cost. Since performance will fluctuate, performance data for Shares of the
Portfolio cannot necessarily be used to compare an investment in such Shares
with bank deposits, savings accounts and similar investment alternatives which
often provide an agreed or guaranteed fixed yield for a stated period of time.
Shareholders should remember that performance is generally a function of the
kind and quality of the instruments held in a portfolio, portfolio maturity,
operating expenses and market conditions. Any fees charged by Institutions
directly to their customer accounts in connection with investments in Shares
will not be included in the Portfolio's calculations of yield and total return.
* * *
-32-
<PAGE> 36
<TABLE>
<S> <C> <C>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY The New Jersey
INFORMATION OR MAKE ANY REPRESENTATIONS NOT Tax-Free Income
CONTAINED IN THIS PROSPECTUS, OR IN THE STATEMENT OF Portfolio
ADDITIONAL INFORMATION INCORPORATED HEREIN BY
REFERENCE, IN CONNECTION WITH THE OFFERING MADE BY
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE FUND OR ITS DISTRIBUTOR. Service Class
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY
THE FUND OR BY THE DISTRIBUTOR IN ANY JURISDICTION
IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
------------------- Prospectus
TABLE OF CONTENTS
Page
-----
Introduction . . . . . . . . . . . . . . . . . . .
Financial Highlights . . . . . . . . . . . . . . .
Investment Policies . . . . . . . . . . . . . . . .
Investment Limitations . . . . . . . . . . . . . .
Management . . . . . . . . . . . . . . . . . . . .
Purchase and Redemption Shares . . . . . . . . . .
Net Asset Value . . . . . . . . . . . . . . . . . .
Dividends and Distributions . . . . . . . . . . . .
Taxes . . . . . . . . . . . . . . . . . . . . . . .
Description of Shares . . . . . . . . . . . . . . .
Other Information . . . . . . . . . . . . . . . . .
</TABLE>
INVESTMENT ADVISER
PNC Asset Management Group, Inc.
Philadelphia, Pennsylvania
SUB-ADVISER
BlackRock Financial Management Inc.
New York, New York
CO-ADMINISTRATOR
PNC Mutual Fund Company
New York, New York
CO-ADMINISTRATOR AND TRANSFER AGENT
PFPC Inc.
Wilmington, Delaware
CO-ADMINISTRATOR AND DISTRIBUTOR
Provident Distributors, Inc.
Radnor, Pennsylvania
COUNSEL
Drinker Biddle & Reath
Philadelphia, Pennsylvania
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand, L.L.P.
Philadelphia, Pennsylvania
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<PAGE> 37
[THIS PAGE INTENTIONALLY LEFT BLANK]
-34-
<PAGE> 38
THE PNC(R) FUND
(INSTITUTIONAL SHARES OF THE NEW JERSEY
TAX-FREE INCOME PORTFOLIO)
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A ITEM LOCATION
- -------------- --------
PART A PROSPECTUS
<S> <C> <C>
1. Cover page . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expense Table
3. Condensed Financial Information . . . . . . . . . . . . . . . . . Financial Highlights
4. General Description of Registrant . . . . . . . . . . . . . . . . Cover Page; Investment
Policies;
Description of
Shares
5. Management of the Fund . . . . . . . . . . . . . . . . . . . . . . Management
5A. Management's Discussion of Fund Performance . . . . . . . . . . . Inapplicable
6. Capital Stock and Other Securities . . . . . . . . . . . . . . . . Cover Page; Dividends
and Distributions;
Description of
Shares
7. Purchase of Securities Being Offered . . . . . . . . . . . . . . . Purchase and Redemption
of Shares;
Dividends and Distributions
Net Asset Value
8. Redemption or Repurchase . . . . . . . . . . . . . . . . . . . . . Purchase and Redemption
of Shares -
Redemption of
Shares
9. Pending Legal Proceedings . . . . . . . . . . . . . . . . . . . . Inapplicable
</TABLE>
<PAGE> 39
THE NEW JERSEY TAX-FREE INCOME PORTFOLIO
INSTITUTIONAL CLASS
The PNC(R) Fund (the "Fund") consists of 30 investment portfolios. This
Prospectus relates to shares ("Institutional Shares" or "Shares") representing
interests in the New Jersey Tax-Free Income Portfolio (the "Portfolio"). The
Portfolio's investment objective is to seek as high a level of current income
exempt from Federal and, to the extent possible, from New Jersey income tax as
is consistent with preservation of capital. It pursues this objective by
investing primarily in municipal obligations issued by the State of New Jersey
and its political subdivisions, agencies, instrumentalities and authorities and
tax-exempt derivative securities relating thereto ("New Jersey Municipal
Obligations").
Institutional Shares of the Portfolios ("Shares") are sold at net asset
value to institutional investors ("Institutions"). Shares of the New Jersey
Tax-Free Income Portfolio are intended for residents of New Jersey.
This Prospectus contains information that a prospective investor needs to
know before investing. Please keep it for future reference. A Statement of
Additional Information currently dated ____________, 1995 has been filed with
the Securities and Exchange Commission (the "SEC"). The current Statement of
Additional Information may be obtained free of charge from the Fund by calling
(800) 422-6538. The Statement of Additional Information, as it may be
supplemented from time to time, is incorporated by reference in this
Prospectus.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION OR ANY OTHER BANK AND SHARES ARE
NOT INSURED BY, GUARANTEED BY, OBLIGATIONS OF OR OTHERWISE SUPPORTED BY THE
U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD, OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENTS IN SHARES OF THE FUND
INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL AMOUNT
INVESTED.
- ------------------------------------------------------------------------------
PROSPECTUS , 1995
---------------
<PAGE> 40
INTRODUCTION
- ------------------------------------------------------------------------------
The Fund is an open-end management investment company which has registered
shares in 30 investment portfolios, of which only the New Jersey Tax-Free
Income is described in this Prospectus.
PORTFOLIO MANAGEMENT
PNC Asset Management Group, Inc. ("PAMG") serves as the Fund's investment
adviser. BlackRock Financial Management Inc. ("BlackRock") serves as
sub-adviser to the Portfolio. The investment adviser and sub-adviser are
indirect wholly-owned subsidiaries of PNC Bank Corp.
THE ADMINISTRATORS
PNC Mutual Fund Company ("PMFCO"), PFPC Inc. ("PFPC") and Provident
Distributors, Inc. ("PDI") serve as the Fund's co-administrators (collectively,
the "Administrators").
THE DISTRIBUTOR
Provident Distributors, Inc. (the "Distributor") serves as the Fund's
distributor.
-2-
<PAGE> 41
EXPENSE TABLE
ANNUAL OPERATING EXPENSES FOR INSTITUTIONAL SHARES AFTER FEE WAIVERS AND
EXPENSE
REIMBURSEMENTS AS A PERCENTAGE OF DAILY NET ASSETS
<TABLE>
<CAPTION>
NEW JERSEY
TAX-FREE
INCOME
PORTFOLIO
----------
<S> <C>
Advisory fees(1) . . . . . . . . . . . . . 0.30%
Other operating
expenses(1) . . . . . . . . . . . . . . . 0.25%
Total Fund operating expenses . . . . . . 0.55%
- --------------- =====
</TABLE>
(1) Advisory fees are net of waivers of .20% for the Portfolio. In addition,
the expense table reflects reimbursements made to the Portfolio by the
Adviser and fee waivers by the Administrators. PAMG and the Administrators
are under no obligation to waive or continue waiving such fees
or reimbursing such expenses, but have informed the Fund that they
expect to waive or continue waiving such fees and reimbursing such
expenses during the current fiscal year as necessary to maintain
the Portfolio's total operating expenses at the level set forth
in the table. The expenses noted above under "Other expenses" are
estimated based on the level of such expenses for the Portfolio's current
fiscal year.
EXAMPLE
An investor in Institutional Shares would pay the following expenses on a
$1,000 investment in Shares of the Portfolio, assuming (1) 5% annual return,
and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
FIVE TEN
ONE YEAR THREE YEARS YEARS YEARS
--------- ----------- ----- -----
<S> <C> <C> <C> <C>
New Jersey Tax-Free Income . . . . . . . . $6 $18 $31 $69
</TABLE>
The foregoing Expense Table and Example are intended to assist investors
in understanding the Portfolio's estimated annual operating expenses.
Investors bear these expenses either directly or indirectly. The information
in the table for the Portfolio has been restated based on the advisory and
administration fees and other expenses payable after fee waivers for the
current fiscal year ending September 30, 1996. Total operating expenses would
have been 0.85% for the Portfolio's Institutional Shares without such fee
waivers and reimbursements. See Footnote 1 to the Expense Table, "Financial
Highlights--Background," "Management," "Purchase and Redemption of Shares" and
"Description of Shares" for a further description of shareholder transaction
expenses and operating expenses.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
INVESTMENT RETURN OR OPERATING EXPENSES. ACTUAL
-3-
<PAGE> 42
INVESTMENT RETURN AND OPERATING EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
-4-
<PAGE> 43
CERTAIN RISK FACTORS TO CONSIDER
An investment in the Portfolio is subject to certain investment
considerations, as set forth in detail under "Investment Policies." As with
other mutual funds, there can be no assurance that the Portfolio will achieve
its investment objective. The Portfolio invests primarily in municipal
obligations of one state, New Jersey, and is thus subject to the peculiar risks
presented by the laws or economy of New Jersey. The Portfolio is classified
as non-diversified under the Investment Company Act of 1940 (the "1940 Act").
These and the other investment practices set forth below and their associated
risks deserve careful consideration by investors. See "Investment Policies."
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
BACKGROUND
The Fund currently offers four classes of shares in the Portfolio --
Service, Series A Investor, Series B Investor and Institutional Shares.
Service, Series A Investor, Series B Investor and Institutional Shares in the
Portfolio represent equal pro-rata interests in the Portfolio, except that they
bear different expenses which reflect the difference in the range of services
provided to them. Under the Fund's Amended and Restated Distribution and
Service Plan (the "Plan"), Service Shares bear the expense of fees at an annual
rate not to exceed .15% of the average daily net asset value of the Portfolio's
outstanding Service Shares. Service Shares also bear the expense of a service
fee at an annual rate not to exceed .15% of the average daily net asset value
of the Portfolio's outstanding Shares for other shareholder support activities
provided by service organizations. See "Description of Shares" for a
description of the Plan and shareholder support activities. Series A Investor
Shares bear expenses under the Plan at an annual rate not to exceed .50% of the
average daily net asset value of the Portfolio's outstanding Series A Investor
Shares. Series B Investor Shares bear expenses under the Plan at annual rates
not to exceed 1.15% of the average daily net asset value of the Portfolio's
outstanding Series B Investor Shares. See "Description of Shares" for a
description of the Plan. Institutional Shares do not bear the fees stated
above applicable to the other share classes under the Plan.
The financial highlights set forth certain information concerning the
investment results of the Portfolio for the for the period ended August 31,
1995 and the years or period ended February 28, 1995, 1994, 1993 and 1992. The
financial statements and notes thereto for the Portfolio were audited by
Coopers & Lybrand L.L.P., independent accountants for the Portfolio, whose
report thereon is incorporated by reference into the Statement of Additional
-5-
<PAGE> 44
Information. Additional information about the performance of the Portfolio is
contained in the Portfolio's annual report. Both the Statement of Additional
Information and the Portfolio's annual report may be obtained from the Fund
free of charge by calling the number on the front cover of this Prospectus.
During the years or period shown, the Portfolio offered one class of shares to
both institutional and retail investors.
-6-
<PAGE> 45
<TABLE>
<CAPTION>
THE NEW JERSEY TAX-FREE INCOME PORTFOLIO+
-----------------------------------------
Period Year Year Year Period
Ended Ended Ended Ended Ended
8/31/95 2/28/95 2/28/94 2/28/93 2/28/92**
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning
of period $10.94 $11.31 $11.30 $10.46 $10.00
------ ------ ------ ------ ------
Income from investment
operations
Net investment income 0.25 0.51 0.54 0.52 0.34
Net (loss) gain on
investments (both
realized and unrealized) 0.28 (0.36) 0.04 0.85 0.45
---- ------ ----- ------ ------
Total from investment
operations 0.53 0.15 0.58 1.37 0.79
---- ------ ------ ------ ------
Less distributions
Distributions from net
investment income (0.25) (0.51) (0.54) (0.53) (0.33)
Distributions from net
realized capital gains ---- (0.01) (0.03) -- --
---- ------ ------ ------ -----
Total distributions (0.25) (0.52) (0.57) (0.53) (0.33)
------ ------ ------ ------ -----
Net asset value at end of
period $11.22 $10.94 $11.31 $11.30 $10.46
====== ====== ====== ====== ======
Total return 4.90% 1.49% 5.18% 13.48% 12.33%*
Ratios/Supplemental data
Net assets at end of period
(in thousands) $97,752 $96,857 $111,354 $47,169 $10,673
Ratios of expenses to
average net assets 0.88%* 0.79% 0.38% 0.48% 0.52%*
Excluding waivers 0.88%* 0.87% 0.86% 1.04% 1.29%*
Ratios of net investment
income to average net
assets 4.51%* 4.71% 4.75% 5.04% 5.35%*
Excluding waivers 4.51%* 4.63% 4.27% 4.48% 4.58%*
Portfolio turnover rate 18.47% 28.43% 12.05% 16.09% 0.00%
</TABLE>
- --------------------------------------
+The Portfolio commenced operations on July 1, 1991 as the New Jersey Municipal
Bond Fund, a separate investment portfolio (the "Predecessor Portfolio") of The
Compass Capital Group of Funds, which was organized as a Massachusetts business
trust. On January __, 1996, the assets and liabilities of the Predecessor
Portfolio were transferred to the Portfolio, which had no prior operating
history.
** Commenced operations on July 1, 1991.
* Annualized.
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INVESTMENT POLICIES
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NEW JERSEY TAX-FREE INCOME PORTFOLIO
The Portfolio invests primarily in investment grade bonds, debentures, and
notes (including variable and floating rate notes) issued by or on behalf of
states (including the District of Columbia), territories, and possessions of
the United States, and their respective authorities, agencies,
instrumentalities, and political subdivisions, the interest on which is exempt
from federal income tax ("Municipal Obligations"). Under normal market
conditions, at least 80% of the Portfolio's total assets will be invested in
Municipal Obligations and at least 65% of the Portfolio's total assets will be
invested in New Jersey Municipal Obligations. It is anticipated that the
Portfolio's dollar weighted average portfolio maturity will range between five
and eighteen years.
Purchasable Municipal Obligations are rated within the four highest
ratings assigned by Moody's Investor Services, Inc. ("Moody's") (i.e., Aaa, Aa,
A, Baa) or by Standard & Poor's Ratings Group ("S&P") (i.e., AAA, AA, A, BBB)
in the case of bonds, rated SP-2 or higher by S&P or MIG-2 or higher by Moody's
in the case of notes, rated A-2 or higher by S&P or Prime-2 or higher by
Moody's in the case of tax-exempt commercial paper or VMIG-2 or higher by
Moody's in the case of variable rate demand notes or are unrated securities
determined at the time of purchase to be of comparable quality by BlackRock.
Securities rated "Baa" by Moody's or "BBB" by S&P, respectively, are generally
considered to be investment grade although they have speculative
characteristics and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than is the case for higher grade bonds. If a portfolio security is
reduced below Baa by Moody's or BBB by S&P, BlackRock will dispose of the
security in an orderly fashion as soon as practicable.
RISK FACTORS AND SPECIAL CONSIDERATIONS
The value of fixed income securities in the Portfolio can be expected to
vary inversely with changes in prevailing interest rates. Fixed income
securities with longer maturities, which tend to produce higher yields, are
subject to potentially greater capital appreciation and depreciation than
securities with shorter maturities.
Under normal market conditions, the Portfolio is predominantly invested in
New Jersey Municipal Obligations, and therefore the value of shares in the
Portfolio may be especially affected by factors pertaining to the state economy
and other factors specifically affecting the ability of issuers of New Jersey
Municipal Obligations to meet their obligations. As a result, the
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value of the Portfolio's shares may fluctuate more widely than the value of the
shares of a portfolio investing in securities relating to a number of different
states. The ability of state, county, and local governments to meet their
obligations will depend primarily on the availability of tax and other revenues
to those governments and on their fiscal conditions generally. The amount of
tax and other revenues available to governmental issuers of New Jersey
Municipal Obligations may be affected from time to time by economic, political,
and demographic conditions within the state. In addition, constitutional or
statutory restrictions may limit a government's power to raise revenues or
increase taxes. Payments of principal and interest on limited obligation
securities will depend on the economic condition of the facility or specific
revenue source from whose revenues the payments will be made, which in turn
could be affected by economic, political, and demographic conditions in the
state. Moreover, the Portfolio is classified as "non-diversified" because it
may invest in obligations of a relatively limited number of issuers. See the
Statement of Additional Information for further discussion of investment
considerations associated with New Jersey Municipal Obligations and see
"Investment Policies--Description of Permitted Investments" for a description
of other investment policies.
DESCRIPTION OF PERMITTED INVESTMENTS
The Portfolio's investment objective and policies (except for the 80%
concentration in Municipal Obligations may be changed by the Board of Trustees
without shareholder approval. Depending upon prevailing market conditions, the
Portfolio may purchase debt securities at a discount from face value, which
produces a yield greater than the coupon rate. Conversely, if debt securities
are purchased at a premium over face value, the yield will be lower than the
coupon rate. An increase in interest rates will generally reduce the value of
the investments in the Portfolio and a decline in interest rates will generally
increase the value of those investments.
MUNICIPAL OBLIGATIONS. The two principal classifications of Municipal
Obligations are "general obligation" securities and "revenue" securities.
General obligation securities are secured by the issuer's pledge of its full
faith, credit and taxing power for the payment of principal and interest.
Revenue securities are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as the user of the
facility being financed. Revenue securities include private activity bonds
which are not payable from the unrestricted revenues of the issuer.
Consequently, the credit quality of private activity bonds is usually directly
related to the credit standing of the corporate user of the facility involved.
Municipal Obligations may also include "moral obligation" bonds, which are
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normally issued by special purpose public authorities. If the issuer of moral
obligation bonds is unable to meet its debt service obligations from current
revenues, it may draw on a reserve fund, the restoration of which is a moral
commitment but not a legal obligation of the state or municipality which
created the issuer.
Purchasable Municipal Obligations include debt obligations issued by
governmental entities to obtain funds for various public purposes, including
the construction of a wide range of public facilities, the refunding of
outstanding obligations, the payment of general operating expenses and the
extension of loans to public institutions and facilities. Private activity
bonds issued by or on behalf of public authorities to finance various privately
operated facilities are considered Municipal Obligations. Dividends paid by
the Portfolio that are derived from interest on such Municipal Obligations
would be taxable to the Portfolio's shareholders for Federal income tax
purposes.
Also included within the general category of Municipal Obligations are
participation certificates in a lease, an installment purchase contract, or a
conditional sales contract ("lease obligations") entered into by a state or
political subdivision to finance the acquisition or construction of equipment,
land, or facilities. Although lease obligations do not constitute general
obligations of the issuer for which the lessee's unlimited taxing power is
pledged, certain lease obligations are backed by the lessee's covenant to
appropriate money to make the lease obligation payments. However, under
certain lease obligations, the lessee has no obligation to make these payments
in future years unless money is appropriated on a yearly basis. Although
"non-appropriation" lease obligations are secured by the leased property,
disposition of the property in the event of foreclosure might prove difficult.
These securities represent a relatively new type of financing that is not yet
as marketable as more conventional securities. Moreover, certain investments
in lease obligations may be illiquid and subject to the investment limitations
described below.
OPTIONS AND FUTURES CONTRACTS. The Portfolio may write covered call
options, buy put options, buy call options and write put options, without
limitation except as noted in this paragraph. Such options may relate to
particular securities or to various indexes and may or may not be listed on a
national securities exchange and issued by the Options Clearing Corporation.
The Portfolio may also invest in futures contracts and options on futures
contracts (index futures contracts or interest rate futures contracts, as
applicable) for hedging purposes or for other purposes so long as aggregate
initial margins and premiums required for non-hedging positions do not exceed
5% of its net assets, after taking into account any unrealized profits and
losses on any such contracts it has entered into. However, the Portfolio may
not write put options or purchase or sell futures contracts or options
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on futures contracts to hedge more than its total assets unless immediately
after any such transaction the aggregate amount of premiums paid for put
options and the amount of margin deposits on its existing futures positions do
not exceed 5% of its total assets.
Options trading is a highly specialized activity which entails greater
than ordinary investment risks. A call option for a particular security gives
the purchaser of the option the right to buy, and a writer the obligation to
sell, the underlying security at the stated exercise price at any time prior to
the expiration of the option, regardless of the market price of the security.
The premium paid to the writer is in consideration for undertaking the
obligations under the option contract. A put option for a particular security
gives the purchaser the right to sell the underlying security at the stated
exercise price at any time prior to the expiration date of the option,
regardless of the market price of the security. In contrast to an option on a
particular security, an option on an index provides the holder with the right
to make or receive a cash settlement upon exercise of the option. The amount
of this settlement will be equal to the difference between the closing price of
the index at the time of exercise and the exercise price of the option
expressed in dollars, times a specified multiple.
The Portfolio will engage in unlisted over-the-counter options only with
broker/dealers deemed creditworthy by BlackRock. Closing transactions in
certain options are usually effected directly with the same broker/dealer that
effected the original option transaction. The Portfolio bears the risk that
the broker/dealer will fail to meet its obligations. There is no assurance
that the Portfolio will be able to close an unlisted option position.
Furthermore, unlisted options are not subject to the protections afforded
purchasers of listed options by the Options Clearing Corporation, which
performs the obligations of its members who fail to do so in connection with
the purchase or sale of options.
To enter into a futures contract, the Portfolio must make a deposit of
initial margin with its custodian in a segregated account in the name of its
futures broker. Subsequent payments to or from the broker, called variation
margin, will be made on a daily basis as the price of the underlying security
or index fluctuates, making the long and short positions in the futures
contracts more or less valuable.
When investing in futures contracts, the Portfolio must satisfy certain
asset segregation requirements to ensure that the use of futures is
unleveraged. When the Portfolio takes a long position in a futures contract,
it must maintain a segregated account containing cash and/or certain liquid
assets equal to the purchase price of the contract, less any margin or deposit.
When the Portfolio takes a short position in a futures contract, the
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Portfolio must maintain a segregated account containing cash and/or certain
liquid assets in an amount equal to the market value of the securities
underlying such contract (less any margin or deposit), which amount must be at
least equal to the market price at which the short position was established.
Asset segregation requirements are not applicable when the Portfolio "covers" a
futures position generally by entering into an offsetting position.
The risks related to the use of options and futures contracts include: (i)
the correlation between movements in the market price of the portfolio
investments (held or intended for purchase) being hedged and in the price of
the futures contract or option may be imperfect; (ii) possible lack of a liquid
secondary market for closing out options or futures positions; (iii) the need
for additional portfolio management skills and techniques; and (iv) losses due
to unanticipated market movements. Successful use of options and futures by
the Portfolio is subject to BlackRock's ability to correctly predict movements
in the direction of the market. For example, if the Portfolio uses futures
contracts as a hedge against the possibility of a decline in the market
adversely affecting securities held by it and securities prices increase
instead, the Portfolio will lose part or all of the benefit of the increased
value of its securities which it has hedged because it will have approximately
equal offsetting losses in its futures positions. The risk of loss in trading
futures contracts in some strategies can be substantial, due both to the low
margin deposits required and the extremely high degree of leverage involved in
futures pricing. As a result, a relatively small price movement in a futures
contract may result in immediate and substantial loss or gain to the investor.
Thus, a purchase or sale of a futures contract may result in losses or gains in
excess of the amount invested in the contract. For a further discussion see
"Investment Policies" in the Statement of Additional Information.
CASH EQUIVALENTS. The Portfolio may invest in taxable and tax-free
short-term, interest-bearing instruments or deposits of United States and
foreign issuers to maintain liquidity, pending investment and for temporary
defensive purposes. Such investments may include, but are not limited to,
commercial paper, certificates of deposit, variable or floating rate notes,
bankers' acceptances, time deposits, government securities, repurchase
agreements and money market deposit accounts.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. The Portfolio may purchase
securities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions involve a commitment by the
Portfolio to purchase or sell particular securities with payment and delivery
taking place at the future date (perhaps one or two months later), and permit a
Portfolio to lock-in a price or yield on a security it owns or intends to
purchase, regardless of future changes in interest rates. When-issued and
forward commitment transactions involve the
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risk, however, that the price or yield obtained in a transaction may be less
favorable than the price or yield available in the market when the securities
delivery takes place. The Portfolio's when-issued purchases and forward
commitments are not expected to exceed 25% of the value of its total assets
absent unusual market conditions. The Portfolio does not intend to engage in
when-issued purchases and forward commitments for speculative purposes but only
in furtherance of its investment objectives.
REVERSE REPURCHASE AGREEMENTS. The Portfolio 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 BlackRock). A reverse repurchase agreement involves a sale by the Portfolio
of securities that it holds concurrently with an agreement by the Portfolio to
repurchase the same securities at an agreed-upon price and date. Reverse
repurchase agreements involve the risk that the market value of the securities
sold by the Portfolio may decline below the price of the securities the
Portfolio is obligated to repurchase. Reverse repurchase agreements are
considered to be borrowings by the Portfolio under the 1940 Act.
The Portfolio will establish a segregated account with its custodian in
which it will maintain cash, U.S. government securities or other liquid high
grade debt obligations equal in value to its obligations with respect to
reverse repurchase agreements.
INVESTMENT COMPANIES. The Portfolio may invest in securities issued by
other investment companies within the limits prescribed by the 1940 Act. The
Portfolio currently intends to limit its investments so that, as determined
immediately after a securities purchase is made: (i) not more than 5% of the
value of its total assets will be invested in the securities of any one
investment company; (ii) not more than 10% of the value of its total assets
will be invested in the aggregate in securities of investment companies as a
group; and (iii) not more than 3% of the outstanding voting stock of any one
investment company will be owned by the Portfolio or by the Fund as a whole.
As a shareholder of another investment company, the Portfolio 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 the Portfolio bears directly in connection
with its own operations.
TAX-EXEMPT DERIVATIVES AND OTHER MUNICIPAL OBLIGATIONS. The Portfolio may
invest in tax-exempt derivative securities relating to Municipal Obligations,
including tender option bonds, participations, beneficial interests in trusts
and partnership interests.
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Opinions relating to the validity of Municipal Obligations and to the
exemption of interest thereon from Federal income tax are rendered by bond
counsel to the respective issuers at the time of issuance, and opinions
relating to the validity of and the tax-exempt status of payments received by
the Portfolio from tax-exempt derivative securities are rendered by counsel to
the respective sponsors of such securities. The Portfolio and BlackRock will
rely on such opinions and will not review independently the underlying
proceedings relating to the issuance of Municipal Obligations, the creation of
any tax-exempt derivative securities, or the bases for such opinions.
ILLIQUID SECURITIES. The Portfolio will not knowingly invest more than
15% of the value of its net assets in securities that are illiquid. Variable
and floating rate instruments that cannot be disposed of within seven days, and
repurchase agreements and time deposits that do not provide for payment within
seven days after notice, without taking a reduced price, are subject to this
15% limit. The Portfolio may purchase securities which are not registered
under the Securities Act of 1933 (the "1933 Act") but which can be sold to
"qualified institutional buyers" in accordance with Rule 144A under the 1933
Act. Any such security will not be considered illiquid so long as it is
determined by BlackRock, acting under guidelines approved and monitored by the
Board, that an adequate trading market exists for that security. This
investment practice could have the effect of increasing the level of
illiquidity in the Portfolio during any period that qualified institutional
buyers become uninterested in purchasing these restricted securities.
MISCELLANEOUS. During normal market conditions up to 20% of the
Portfolio's net assets may be invested in securities which are not Municipal
Obligations. The Portfolio may invest up to 20% of its net assets in Municipal
Obligations the interest on which is exempt from regular Federal income tax but
is an item of tax preference for purposes of the Federal alternative minimum
tax. During temporary defensive periods, the Portfolio may invest without
limitation in obligations which are not Municipal Obligations and may hold
without limitation uninvested cash reserves. Such securities may include,
without limitation, bonds, notes, variable rate demand notes and commercial
paper, provided such securities are rated within the relevant categories
applicable to Municipal Obligations set forth above, or if unrated, are of
comparable quality as determined by BlackRock, and may also include, without
limitation, other debt obligations, such as bank obligations. The Portfolio
may acquire "stand-by commitments" with respect to Municipal Obligations held
by it. Under a stand-by commitment, a dealer agrees to purchase at the
Portfolio's option specified Municipal Obligations at a specified price. The
acquisition of a stand-by commitment may increase the cost, and thereby reduce
the yield, of the Municipal Obligation to which such commitment relates. The
Portfolio will acquire stand-by
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commitments solely to facilitate portfolio liquidity and does not intend to
exercise its rights thereunder for trading purposes.
Although the Portfolio may invest 25% or more of its net assets in
Municipal Obligations the interest on which is paid solely from revenues of
similar projects, and may invest up to 20% of its total assets in private
activity bonds when added together with any taxable investments held by the
Portfolio, it does not presently intend to do so unless in the opinion of
BlackRock the investment is warranted. To the extent the Portfolio's assets
are invested in Municipal Obligations payable from the revenues of similar
projects or are invested in private activity bonds, the Portfolio will be
subject to the peculiar risks presented by the laws and economic conditions
relating to such projects and bonds to a greater extent than it would be if its
assets were not so invested. The amount of information regarding the financial
condition of issuers of Municipal Obligations may not be as extensive as that
which is made available by public corporations and the secondary market for
Municipal Obligations may be less liquid than that for taxable fixed-income
securities. Accordingly, the ability of the Portfolio to buy and sell
tax-exempt securities may, at any particular time and with respect to any
particular securities, be limited.
The Portfolio is classified as non-diversified under the 1940 Act.
Investment returns on a non-diversified portfolio typically are dependent upon
the performance of a smaller number of securities relative to the number held
in a diversified portfolio. Consequently, the change in value of any one
security may affect the overall value of a non-diversified portfolio more than
it would a diversified portfolio. Additionally, a non-diversified portfolio
may be more susceptible to economic, political and regulatory developments than
a diversified portfolio with similar objectives.
PORTFOLIO TURNOVER. Although it may vary from year to year, it is
currently estimated that under normal market conditions the annual portfolio
turnover rate for the Portfolio will not exceed 100%. The Portfolio's annual
portfolio turnover rate will not, however, be a factor preventing a sale or
purchase when BlackRock believes investment considerations warrant such sale or
purchase. Portfolio turnover may vary greatly from year to year as well as
within a particular year. A high portfolio turnover rate will generally result
in higher transaction costs to the Portfolio.
INVESTMENT LIMITATIONS
The Portfolio is subject to the following fundamental investment
limitations, which may not be changed with respect to the Portfolio except upon
the affirmative vote of the holders of a majority of the Portfolio's
outstanding shares.
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The Portfolio may not:
1. Purchase any securities which would cause 25% or more of the
value of the Portfolio'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.
2. Borrow money or issue senior securities, except that the
Portfolio may borrow from banks and enter into reverse repurchase
agreements for temporary purposes in amounts up to one-third of the value
of its total assets at the time of such borrowing; or 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 Portfolio's
total assets at the time of such borrowing. The Portfolio will not
purchase securities while its aggregate borrowings (including reverse
repurchase agreements and borrowings from banks) in excess of 5% of its
total assets are outstanding. Securities held in escrow or separate
accounts in connection with the Portfolio's investment practices are not
deemed to be pledged for purposes of this limitation.
If a percentage limitation is satisfied at the time of investment, a later
increase or decrease in such percentage resulting from a change in the value of
a Portfolio's securities will not constitute a violation of such limitation,
except that any borrowing by the Portfolio that exceeds the fundamental
investment restriction stated above must be reduced to meet such restriction
within the period required by the 1940 Act (currently three days).
In order to permit the sale of the Portfolio's shares in certain states,
the Fund may make commitments more restrictive than the investment policies and
limitations described in this Prospectus. Should the Fund determine that any
such commitment is no longer in the best interests of the Portfolio, it will
revoke the commitment by terminating sales of its shares in the state involved.
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For information on additional investment limitations relating to the
Portfolio, see the Statement of Additional Information.
MANAGEMENT
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BOARD OF TRUSTEES
The business and affairs of the Fund are managed under the direction of
the Fund's Board of Trustees. The Statement of Additional Information contains
the name of each trustee and certain background information.
ADVISER AND SUB-ADVISER
PAMG was organized in 1995 to perform advisory services for investment
companies. BlackRock (formerly BlackRock Financial Management L.P.) was
organized in 1988. On February 28, 1995 BlackRock Financial Management L.P.
sold its business to PNC Bank National Association ("PNC Bank"). The principal
business address of PAMG is 1835 Market Street, 15th Floor, Philadelphia,
Pennsylvania, 19103. The principal business address of BlackRock is 345 Park
Avenue, New York, New York 10154.
As adviser, PAMG is responsible for the overall investment management of
the Portfolio. The sub-adviser, BlackRock, is responsible for the day-to-day
management of the Portfolio, and generally makes all purchase and sale
decisions regarding the investments made by the Portfolio. BlackRock also
provides research and credit analysis as well as certain other services.
Kevin Klingert is the person primarily responsible for the day-to-day
management of the Portfolio's investments. Mr. Klingert is a Principal and
Portfolio Manager at BlackRock Financial Management, and a member of its
Investment Strategy Committee. Mr. Klingert has primary responsibility for
managing client portfolios with a special emphasis on municipal securities.
His areas of expertise include general obligation bonds, revenue bonds and
tax-exempt derivative securities. Mr. Klingert also serves as Vice President
for BlackRock's family of tax-exempt mutual funds.
Prior to joining BlackRock in 1991, Mr. Klingert was an Assistant Vice
President in the Unit Investment Trust Department at Merrill Lynch, Pierce,
Fenner & Smith. Mr. Klingert joined Merrill Lynch in 1985 and was responsible
for investing over $1 billion annually for municipal UITs and for supervising
over $21 billion of existing municipal UITs.
Mr. Klingert received a Bachelor of Science in Business Administration
from the State University of New York at Oswego in 1984, and an M.B.A. in
Finance from New York University in 1991.
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For the services provided and expenses assumed by it, PAMG is entitled to
receive from the Portfolio a fee, computed daily and payable monthly, at an
annual rate of .50% of the first $1 billion of the average daily net assets of
the Portfolio, plus 0.45% of the next $1 billion of the Portfolio's average
daily net assets, plus 0.425% of the next $1 billion of the Portfolio's average
daily net assets, plus 0.40% of the Portfolio's average daily net assets in
excess of $3 billion. The Predecessor Portfolio bore advisory fees during its
most recent fiscal year pursuant to the investment advisory agreement then in
effect with Midlantic Bank, N.A., its former adviser, at the effective annual
rate of .60% of its average daily net assets. From time to time PAMG may waive
all or any portion of its advisory fee for and may reimburse expenses of the
Portfolio. See "Introduction-- Expense Table."
For its sub-advisory services, BlackRock is entitled to receive from PAMG
a fee, computed daily and payable monthly, at an annual rate of .35% of the
Portfolio's first $1 billion of average daily net assets, .30% of its next $1
billion of average daily net assets, .275% of its next $1 billion of average
daily net assets, and .25% of its average daily net assets in excess of $3
billion. Such sub-advisory fee has no effect on the advisory fee payable by
the Portfolio to PAMG. BlackRock may from time to time waive all or any
portion of its sub-advisory fee for the Portfolio.
ADMINISTRATORS
PMFCO, whose principal business address is 345 Park Avenue, New York, New
York, 10154, PFPC, whose principal business address is 400 Bellevue Parkway,
Wilmington, Delaware 19809 and PDI, whose principal business address is 259
Radnor-Chester Road, Suite 120, Radnor, Pennsylvania 19087, serve as the Fund's
co-administrators. PMFCO and PFPC are indirect wholly-owned subsidiaries of
PNC Bank Corp. A majority of the outstanding stock of PDI is owned by its
officers and the remaining outstanding stock is owned by Pennsylvania Merchant
Group Ltd.
The Administrators generally assist the Fund in all aspects of its
administration and operation, including matters relating to the maintenance of
financial records and fund accounting. As compensation for their services,
PMFCO is entitled to receive a fee, computed daily and payable monthly, at an
annual rate of .03% of the Portfolio's average daily net assets, and PFPC and
PDI are entitled to receive a combined fee, computed daily and payable monthly,
at an annual rate of .20% of the first $500 million of the Portfolio's average
daily net assets, .18% of the next $500 million of the Portfolio's average
daily net assets, .16% of the next $1 billion of the Portfolio's average daily
net assets and .15% of the Portfolio's average daily net assets in excess of $2
billion. From time to time the Administrators may waive all or any portion of
the administration fees for the Portfolio.
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TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND CUSTODIAN
PNC Bank serves as the Fund's custodian and PFPC serves as the Fund's
transfer agent and dividend disbursing agent.
EXPENSES
Expenses are deducted from the total income of the Portfolio before
dividends and distributions are paid. These expenses include, but are not
limited to, fees paid to PAMG and the Administrators, transfer agency fees,
fees and expenses of officers and trustees who are not affiliated with PAMG or
the Distributor or any of their affiliates, taxes, interest, legal fees,
custodian fees, auditing fees, servicing fees, certain fees and expenses in
registering and qualifying the Portfolio and its Shares for distribution under
Federal and state securities laws, expenses of preparing prospectuses and
statements of additional information and of printing and distributing
prospectuses and statements of additional information to existing shareholders,
the expense of reports to shareholders, shareholders' meetings and proxy
solicitations, fidelity bond and trustees and officers liability insurance
premiums, the expense of using independent pricing services and other expenses
which are not expressly assumed by PAMG or the Administrators under their
respective agreements with the Fund. Any general expenses of the Fund that are
not readily identifiable as belonging to a particular investment portfolio will
be allocated among all investment portfolios by or under the direction of the
Board of Trustees in a manner the Board determines to be fair and equitable.
Any expenses relating only to a particular class of shares within the Portfolio
will be borne solely by such Shares.
If the total expenses borne by the Portfolio in any fiscal year exceed the
expense limitations imposed by applicable state securities regulations, PAMG,
BlackRock and the Administrators will bear the amount of such excess to the
extent required by such regulations in proportion to the fees otherwise payable
to them for such year. Such amount, if any, will be estimated and accrued
daily and paid on a monthly basis. See "Introduction--Example,"
"Management--Adviser and Sub-Adviser" and "Management--Administrators" for
discussions of expense reimbursements and fee waivers.
PORTFOLIO TRANSACTIONS
The Portfolio's sub-adviser will seek the best price and execution in
placing brokerage transactions. In this regard, the sub-adviser may consider a
number of factors in determining which brokers to use in purchasing or selling
portfolio securities. These factors, which are more fully discussed in the
Statement of Additional Information, include, but are not limited to, research
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services, sales of shares of the Fund, the reasonableness of commissions and
quality of services and execution. Brokerage transactions for the Portfolio
may be directed through registered broker/dealers ("Authorized Dealers") who
have entered into dealer agreements with the Distributor, subject to the
requirements of best execution.
BANKING LAWS
Banking laws and regulations currently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks
generally from underwriting securities, but such banking laws and regulations
do not prohibit such a holding company or affiliate or banks generally from
acting as investment adviser, administrator, transfer agent or custodian to
such an investment company, or from purchasing shares of such company as agent
for and upon the order of customers. PNC Bank, PAMG, BlackRock, PMFCO, PFPC
and Institutions that are banks or bank affiliates, are subject to such banking
laws and regulations. In addition, state securities laws on this issue may
differ from the interpretations of Federal law expressed herein and banks and
financial institutions may be required to register as dealers pursuant to state
law.
Should future legislative, judicial or administrative action prohibit or
restrict the activities of such companies in connection with the provision of
services on behalf of the Fund and the holders of Institutional Shares, the
Fund might be required to alter materially or discontinue its arrangements with
such companies and change its method of operations with respect to the
Institutional Shares. It is not anticipated, however, that any change in the
Fund's method of operations would affect its net asset value per share or
result in a financial loss to any investor.
PURCHASE AND REDEMPTION OF SHARES
- --------------------------------------------------------------------------------
DISTRIBUTOR
Shares of the Portfolio are offered on a continuous basis for the Fund by
the distributor, Provident Distributors, Inc. (the "Distributor"). The
Distributor is a registered broker/dealer with principal offices at 259
Radnor-Chester Road, Suite 120, Radnor, Pennsylvania 19087.
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<PAGE> 59
The Fund has adopted a distribution plan pursuant to Rule 12b-1 under the
1940 Act. This plan permits the Adviser to pay a fee to the Distributor, which
in turn is authorized to make payments to securities dealer with which the
Distributor may enter into solicitation fee agreements. The Distributor may
also use a portion of the fee it receives under the plan to compensate
institutions who perform support services that would otherwise be performed by
an Administrator or its agents. The purpose of the distribution plan is to
promote distribution of the Fund's shares and to enhance the provision of
shareholder services. The Fund is not required or permitted under the plan to
make distribution payments over and above its investment advisory fee; the plan
merely permits the reallocation of a portion of the advisory fee the Adviser
receives to pay for distribution related and shareholder servicing activities.
See "Investment Advisory, Administration, Distribution and Servicing
Arrangements" in the SAI.
PURCHASE OF SHARES
Institutional Shares are offered without a sales load on a continuous
basis to Institutions at the net asset value per share for the Institutional
Shares of the Portfolio next computed after an order is received by PFPC.
Shares may be purchased on any Business Day. A "Business Day" is any weekday
that the New York Stock Exchange (the "NYSE") and the Federal Reserve Bank of
Philadelphia (the "FRB") are open for business. Purchase orders may be
transmitted by telephoning PFPC at (800) 441-7379. Orders received by PFPC
after 4:00 p.m. (Eastern Time) are priced at the net asset value per share on
the following Business Day. The Fund may in its discretion reject any order
for Shares.
Payment for Shares may be made only in Federal funds or other funds
immediately available to the Fund's custodian. The minimum initial investment
by an Institution is $5,000. There is no minimum subsequent investment.
REDEMPTION OF SHARES
Redemption orders may be transmitted to PFPC by telephone at (800)
441-7379. Shares are redeemed at the net asset value per share of the
Institutional Shares of the Portfolio next determined after PFPC's receipt of
the redemption order. THE FUND, THE ADMINISTRATORS AND THE DISTRIBUTOR WILL
NOT BE LIABLE FOR ANY LOSS, LIABILITY, COST OR EXPENSE FOR ACTING UPON
TELEPHONE INSTRUCTIONS THAT ARE REASONABLY BELIEVED TO BE GENUINE. IN
ATTEMPTING TO CONFIRM THAT TELEPHONE INSTRUCTIONS ARE GENUINE, THE FUND WILL
USE SUCH PROCEDURES AS ARE CONSIDERED REASONABLE, INCLUDING RECORDING THOSE
INSTRUCTIONS AND REQUESTING INFORMATION AS TO ACCOUNT REGISTRATION (SUCH AS THE
NAME IN WHICH AN ACCOUNT IS REGISTERED, THE ACCOUNT NUMBER, RECENT TRANSACTIONS
IN THE ACCOUNT, AND THE ACCOUNT HOLDER'S SOCIAL SECURITY NUMBER, ADDRESS AND/OR
BANK).
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<PAGE> 60
Payment for redeemed Shares for which a redemption order is received by
PFPC before 4:00 p.m. (Eastern Time) on a Business Day is normally made in
Federal funds wired to the redeeming Institution on the next Business Day,
provided that the Fund's custodian is also open for business. Payment for
redemption orders received after 4:00 p.m. (Eastern Time) or on a day when the
Fund's custodian is closed is normally wired in Federal funds on the next
Business Day following redemption on which the Fund's custodian is open for
business. The Fund reserves the right to wire redemption proceeds within seven
days after receiving a redemption order if, in the judgment of the investment
adviser, an earlier payment could adversely affect the Portfolio. No charge
for wiring redemption payments is imposed by the Fund.
During periods of substantial economic or market change, telephone
redemptions may be difficult to complete. If an Institution is unable to
contact PFPC by telephone, the Institution may also deliver the redemption
request to PFPC by mail at 400 Bellevue Parkway, Wilmington, DE 19809.
An Institution may be required to redeem Shares in the Portfolio if the
balance in its account in the Portfolio drops below $5,000 as the result of a
redemption request and the shareholder does not increase the balance to at
least $5,000 upon thirty days' written notice.
The Fund may suspend the right of redemption or postpone the date of
payment upon redemption (as well as suspend the recordation of the transfer of
Shares) for such periods as are permitted under the 1940 Act. The Fund may
also redeem Shares involuntarily or make payment for redemption in securities
or other property if it appears appropriate to do so in light of the Fund's
responsibilities under the 1940 Act. See "Purchase and Redemption Information"
in the Statement of Additional Information for examples of when such redemption
might be appropriate.
NET ASSET VALUE
- -------------------------------------------------------------------------------
The net asset value for the Institutional Shares of the Portfolio is
calculated as of the close of trading on the NYSE (currently 4:00 p.m. Eastern
Time) on each Business Day by adding the value of all its securities, cash and
other assets allocable to its Shares, subtracting the liabilities allocable to
its Shares and dividing by the total number of Shares outstanding. The net
asset value per Share of the Portfolio is determined independently of the
Portfolio's other classes and independently of the Fund's other portfolios.
Valuation of securities held by the Portfolio is as follows: securities
traded on a national securities exchange or on the
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<PAGE> 61
NASDAQ National Market System are valued at the last reported sale price that
day; securities traded on a national securities exchange or on the NASDAQ
National Market System for which there were no sales on that day and securities
traded on other over-the-counter markets for which market quotations are
readily available are valued at the mean of the bid and asked prices; an option
or futures contract is valued at the last sales price prior to 4:00 p.m.
(Eastern Time), as quoted on the principal exchange or board of trade on which
such option or contract is traded, or in the absence of a sale, the mean
between the last bid and asked prices prior to 4:00 p.m. (Eastern Time); and
securities for which market quotations are not readily available are valued at
fair market value as determined in good faith by or under the direction of the
Fund's Board of Trustees. The amortized cost method of valuation will also be
used with respect to debt obligations with sixty days or less remaining to
maturity unless the investment adviser and/or sub-adviser under the supervision
of the Board of Trustees determines such method does not represent fair value.
The Portfolio may use a pricing service, bank or broker/dealer experienced
in such matters to value the Portfolio's securities. A more detailed
discussion of net asset value and security valuation is contained in the
Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
- --------------------------------------------------------------------------------
The Portfolio will distribute substantially all of its net investment
income and net realized capital gains, if any, to shareholders. For dividend
purposes, the Portfolio's investment income available for distribution to
holders of Institutional Shares is reduced by accrued expenses directly
attributable to the Portfolio and the general expenses of the Fund prorated to
the Portfolio on the basis of its relative net assets. All distributions are
reinvested at net asset value in the form of additional full and fractional
Shares of the Portfolio unless an Institution elects otherwise. Such election,
or any revocation thereof, must be made in writing to PFPC, and will become
effective with respect to dividends paid after its receipt by PFPC. The net
investment income of the Portfolio is declared daily as a dividend to investors
who are Shareholders of the Portfolio at, and whose payment for Share purchases
are available to the Portfolio in Federal funds by, the close of business on
the day of declaration. All dividends are paid within ten days after the end
of each month and within seven days after redemption of all of a shareholder's
Shares in the Portfolio. Net realized capital gains (including net short-term
capital gains), if any, will be distributed by the Portfolio at least annually.
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<PAGE> 62
TAXES
- ------------------------------------------------------------------------------
The following discussion is only a brief summary of some of the important
tax considerations generally affecting the Portfolio and its shareholders and
is not intended as a substitute for careful tax planning. Accordingly,
investors in the Portfolio should consult their tax advisers with specific
reference to their own tax situation.
The Portfolio will elect to be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. So long
as the Portfolio qualifies for this tax treatment, it generally will be
relieved of Federal income tax on amounts distributed to shareholders, but
shareholders, unless otherwise exempt, will pay income or capital gains taxes
on amounts so distributed (except distributions that constitute "exempt
interest dividends" or that are treated as a return of capital), regardless of
whether such distributions are paid in cash or reinvested in additional Shares.
Distributions paid out of the "net capital gain" (the excess of net
long-term capital gain over net short-term capital loss), if any, of the
Portfolio will be taxed to shareholders as long-term capital gain, regardless
of the length of time a shareholder has held his Shares and whether such gain
was reflected in the price paid for the Shares. All other distributions, to
the extent they are taxable, are taxed to shareholders as ordinary income.
The Portfolio intends to pay substantially all of its dividends as "exempt
interest dividends." Investors in the Portfolio should note, however, that
taxpayers are required to report the receipt of tax-exempt interest and "exempt
interest dividends" on their federal income tax returns and that in two
circumstances such amounts, while exempt from regular federal income tax, are
taxable to persons subject to alternative minimum and environmental taxes.
First, tax-exempt interest and "exempt interest dividends" derived from certain
private activity bonds issued after August 7, 1986, generally will constitute
an item of tax preference for corporate and noncorporate taxpayers in
determining alternative minimum and environmental tax liability. Second,
tax-exempt interest and "exempt interest dividends" derived from all other
Municipal Obligations must be taken into account by corporate taxpayers in
determining certain adjustments for alternative minimum and environmental tax
purposes. In addition, investors should be aware of the possibility of state
and local alternative minimum or minimum income tax liability from such private
activity bonds. Shareholders who are recipients of Social Security Act or
Railroad Retirement Act benefits should further note that tax-exempt interest
and "exempt interest dividends" derived from all types of Municipal Obligations
will be taken into account in determining the taxability of their benefit
payments.
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<PAGE> 63
The Portfolio will determine annually the percentages of its net
investment income which are exempt from the regular federal income tax, which
constitute an item of tax preference for purposes of the federal alternative
minimum tax, and which are fully taxable. Such percentages will apply
uniformly to all distributions declared from net investment income during that
year. These percentages may differ significantly from the actual percentages
for any particular day.
The Fund will send written notices to shareholders annually regarding the
tax status of distributions made by the Portfolio. Dividends declared in
October, November or December of any year payable to shareholders of record on
a specified date in those months will be deemed to have been received by the
shareholders on December 31 of such year, if the dividends are paid during
January of the following year.
An investor considering buying shares of the Portfolio on or just before
the record date of a capital gains distribution, should be aware that the
amount of the forthcoming distribution, although in effect a return of capital,
will be taxable to him.
A taxable gain or loss may be realized by a shareholder upon his
redemption, transfer or exchange of Portfolio Shares depending upon the tax
basis of such Shares and their price at the time of redemption, transfer or
exchange.
Any loss upon the sale or exchange of shares of the Portfolio held for six
months or less will be disallowed for federal income tax purposes to the extent
of any exempt interest dividends received by the shareholder.
Future legislative or administrative changes or court decisions may
materially affect the tax consequences of investing in the Portfolio.
Shareholders are also urged to consult their tax advisers concerning the
application of state and local income taxes to investments in the Portfolio
which may differ from the federal income tax consequences described above.
Shareholders who are nonresident alien individuals, foreign trusts or estates,
foreign corporations or foreign partnerships may be subject to different U.S.
federal income tax treatment and should consult their tax advisers.
NEW JERSEY TAX CONSIDERATIONS. It is anticipated that substantially all
dividends paid by the Portfolio will not be subject to New Jersey personal
income tax. In accordance with the provisions of New Jersey law as currently
in effect, distributions paid by a "qualified investment fund" will not be
subject to the New Jersey personal income tax to the extent that the
distributions are attributable to income received as interest or gain from New
Jersey Municipal Obligations, or as interest or gain from direct
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<PAGE> 64
U.S. Government obligations. Distributions by a qualified investment fund that
are attributable to most other sources will be subject to the New Jersey
personal income tax. If the Portfolio qualifies as a qualified investment fund
under New Jersey law, any gain on the redemption or sale of the Portfolio's
shares will not be subject to the New Jersey personal income tax. To be
classified as a qualified investment fund, at least 80% of the Portfolio's
investments must consist of New Jersey Municipal Obligations or direct U.S.
Government obligations; it must have no investments other than interest-bearing
obligations, obligations issued at a discount, and cash and cash items
(including receivables); and it must satisfy certain reporting obligations and
provide certain information to its shareholders. Shares of the Portfolio are
not subject to property taxation by New Jersey or its political subdivisions.
To the extent that a shareholder is subject to state or local taxes outside New
Jersey, dividends earned by an investment in the Portfolio may represent
taxable income.
The New Jersey personal income tax is not applicable to corporations. For
all corporations subject to the New Jersey Corporation Business Tax, dividends
and distributions from a "qualified investment fund" are included in the net
income tax base for purposes of computing the Corporation Business Tax.
Furthermore, any gain upon the redemption or sale of shares by a corporate
shareholder is also included in the net income tax base for purposes of
computing the Corporation Business Tax.
The foregoing is only a summary of certain New Jersey tax considerations
generally affecting the Portfolio and its shareholders, and is not intended as
a substitute for careful tax planning. Shareholders are urged to consult their
tax advisers with specific reference to their own tax situations.
DESCRIPTION OF SHARES
- --------------------------------------------------------------------------------
The Fund was organized as a Massachusetts business trust on December 22,
1988 and is registered under the 1940 Act as an open-end management investment
company. The Declaration of Trust authorizes the Board of Trustees to classify
and reclassify any unissued shares into one or more classes of shares.
Pursuant to such authority, the Board of Trustees has authorized the issuance
of an unlimited number of shares in each of 109 classes (22 classes of "Series
B Investor Shares" and 29 classes each of "Institutional Shares," "Service
Shares" and "Series A Investor Shares") representing interests in the Fund's
investment portfolios. This Prospectus describes the New Jersey Tax-Free
Income Portfolio, which is classified as a non-diversified company under the
1940 Act. For information regarding other portfolios of the Fund, contact the
Distributor by phone at (800) 998-7633 or at the address listed in "Purchase
and Redemption of Shares--Distributor."
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<PAGE> 65
Each share of an investment portfolio has a par value of $.001, represents
an equal proportionate interest in the portfolio and is entitled to such
dividends and distributions earned on the portfolio's assets as are declared in
the discretion of the Board of Trustees. The Fund's shareholders are entitled
to one vote for each full share held and proportionate fractional votes for
fractional shares held, and will vote in the aggregate and not by class, except
where otherwise required by law or when the Board of Trustees determines that
the matter to be voted upon affects only the interests of theshareholders of a
particular class or investment portfolio. Under Massachusetts law, the Fund's
state of organization, and the Fund's Declaration of Trust and Code of
Regulations, the Fund is not required and does not currently intend to hold
annual meetings of shareholders for the election of trustees (except as
required under the 1940 Act). For a further discussion of the voting rights of
shareholders, see "Additional Information Concerning Shares" in the Statement
of Additional Information.
Holders of the Portfolio's Service Shares bear the fees described in the
prospectus for such shares that will be paid under the Fund's Amended and
Restated Distribution and Service Plan (the "Plan"). Payments under the Plan
will cover support services provided to beneficial owners of Service Shares by
certain institutions. Such services are intended to supplement the services
provided by the Fund's Administrators and transfer agent to the Fund's
shareholders of record. In consideration for payment of up to .15% (on an
annualized basis) of the average daily net asset value of Service Shares owned
beneficially by their customers, Institutions may provide one or more of the
following services to such customers: processing purchase and redemption
requests from customers and placing orders with the Fund's transfer agent or
the Distributor; processing dividend payments from the Fund on behalf of
customers; providing sub-accounting with respect to Service Shares beneficially
owned by customers or the information necessary for sub-accounting; and other
similar services. In consideration for payment of a service fee of up to a
separate .15% (on an annualized basis) of the average daily net asset value of
Service Shares owned beneficially by their customers, Institutions may provide
one or more of these additional services to such customers: responding to
customer inquiries relating to the services performed by the institution and to
customer inquiries concerning their investments in Service Shares; providing
information periodically to customers showing their positions in Service
Shares; and other similar shareholder liaison services. Similarly, holders of
the Portfolio's Series A Investor Shares and Series B Investor Shares
(collectively, "Investor Shares") bear the payments described in the prospectus
for such shares that are paid under the Plan. Under the Plan, the Distributor
is entitled to payments by the Portfolio for: (i) payments in connection with
advertising and marketing Investor Shares; and (ii) payments to broker/dealers
that are not affiliated
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<PAGE> 66
with the Distributor ("Service Organizations") for distribution assistance such
as advertising and marketing of Investor Shares. In addition, payments under
the Plan will be used to pay for or finance sales commissions and other fees
payable to Service Organizations and other broker/dealers who sell Series B
Investor Shares. Service Organizations may also provide support services such
as establishing and maintaining accounts and records relating to shareholders
of Investor Shares for whom the Service Organizations are the dealer of record
or holder of record for shareholders with whom the Service Organizations have a
servicing relationship. The Plan provides for payments at an annual rate not
to exceed .50% of the average daily net asset value of the Portfolio's
outstanding Series A Investor Shares. The Plan provides for payments at an
annual rate not to exceed 1.15% of the average daily net asset value of the
Portfolio's outstanding Series B Investor Shares. As a result of these
different fees, the net asset value and the net yields on the Fund's
Institutional Shares will generally be higher than those on the Fund's Service
Shares, the net asset value and the net yields on the Fund's Service Shares
will generally be higher than those on the Fund's Series A Investor Shares, and
the net asset value and the net yields on the Fund's Series A Investor Shares
will generally be higher than those on the Fund's Series B Investor Shares if
payments by the Portfolio under the Plan are made at the maximum rates.
Standardized total return and yield quotations will be computed separately for
each class of Shares. Series A and Series B Investor Shares are exchangeable
at the option of the holder for Series A and Series B Investor Shares,
respectively, in the Fund's other investment portfolios. Series B Investor
Shares are exchangeable for Series B Investor Shares in the Fund's Money Market
Portfolio, but are not exchangeable for shares in the Fund's other money market
investment portfolios. Series A Investor Shares of the Portfolio are offered
to the public at the net asset value per share plus a maximum sales charge of
4.50% of the offering price on single purchases of less than $50,000; the sales
charge is reduced on a graduated scale on single purchases of $50,000 or more
and certain exemptions from the sales charge may apply. The sales charge does
not apply to exchanges of Series A Investor Shares of the Portfolio. Series B
Investor Shares are subject to a maximum contingent deferred sales charge of
5.0%. The deferred sales charge decreases over time. Series B Investor Shares
may be exchanged for Series B Investor Shares of another investment portfolio
of the Fund without the payment of any deferred sales charge at the time the
exchange is made. Because Service Shares and Institutional Shares are sold
without a sales charge, holders of Service Shares and Institutional Shares have
no such exchange privileges.
On September 29, 1995, PNC Bank held of record approximately 79% of the
Fund's outstanding shares, and may be deemed a controlling person of the Fund
under the 1940 Act. PNC Bank is a subsidiary of PNC Bank Corp., a multi-bank
holding company.
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<PAGE> 67
OTHER INFORMATION
- -------------------------------------------------------------------------------
REPORTS AND INQUIRIES
Shareholders will receive unaudited semi-annual financial statements and
annual financial statements audited by independent accountants. Shareholder
inquiries should be addressed to the Fund c/o PFPC, P.O. Box 8950, Wilmington,
Delaware 19885-9628, toll-free (800) 441-7764 (in Delaware call collect (302)
791-1104).
PERFORMANCE INFORMATION
From time to time, total return and yield data for Shares of the Portfolio
may be quoted in advertisements or in communications to Institutions. Total
return will be calculated on an average annual total return basis for various
periods. Average annual total return reflects the average annual percentage
change in value of an investment in Shares of the Portfolio over the measuring
period. This method of calculating total return assumes that dividends and
capital gain distributions made by the Portfolio during the period relating to
Shares are reinvested in Shares.
The yield of Shares of the Portfolio are computed based on the net income
of the Portfolio allocated to such Shares during a 30-day (or one month)
period, which period will be identified in connection with the particular yield
quotation. More specifically, the yield of Shares of the Portfolio is computed
by dividing the Portfolio's net income per share allocated to such Shares
during a 30-day (or one month) period by the net asset value per share on the
last day of the period and annualizing the result on a semi-annual basis. The
Portfolio's "tax-equivalent yield" may also be quoted from time to time, which
shows the level of taxable yield needed to produce an after-tax equivalent to
the Portfolio's tax-free yield. This is done by increasing the Portfolio's
yield (calculated above) by the amount necessary to reflect the payment of
Federal and/or state income tax at a stated tax rate.
Performance data of Shares of the Portfolio may be compared to those of
other mutual funds with similar investment objectives and to other relevant
indexes or to ratings or rankings prepared by independent services or other
financial or industry publications that monitor the performance of mutual
funds. In addition, certain indexes may be used to illustrate historic
performance of select asset classes. For example, the total return and/or
yield of Shares of the Portfolio may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Weisenberger
Investment Company Service, and with the performance of the Shearson Lehman
GMNA Index, the Shearson Lehman Index of Baa-rated Corporate Bonds, the T-Bill
Index, the "stocks, bonds and inflation Index" published annually by Ibbotson
Associates and the Lehman Government Corporate Bond Index. Performance
information
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<PAGE> 68
may also include evaluations of the Portfolio and their Shares published by
nationally recognized ranking services and information as reported by financial
publications such as Business Week, Fortune, Institutional Investor, Money
Magazine, Forbes, Barron's, The Wall Street Journal and The New York Times, or
in publications of a local or regional nature.
In addition to providing performance information that demonstrates the
actual yield or returns of Shares of the Portfolio over a particular period of
time, the Portfolio may provide certain other information demonstrating
hypothetical investment returns. Such information may include, but is not
limited to, illustrating the compounding effects of a dividend in a dividend
reinvestment plan or the impact of tax-deferred investing.
Performance quotations of Shares of the Portfolio represent past
performance and should not be considered as representative of future results.
The investment return and principal value of an investment in Shares of the
Portfolio will fluctuate so that a shareholder's Shares, when redeemed, may be
worth more or less than their original cost. Since performance will fluctuate,
performance data for Shares of the Portfolio cannot necessarily be used to
compare an investment in such Shares with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that
performance is generally a function of the kind and quality of the instruments
held in the portfolio, portfolio maturity, operating expenses and market
conditions. Any fees charged by Service Organizations directly to their
customer accounts in connection with investments in Shares will not be included
in the Portfolio's calculations of yield and total return.
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<PAGE> 69
<TABLE>
<S> <C>
The New Jersey
NO PERSON HAS BEEN AUTHORIZED TO Tax-Free Income
GIVE ANY INFORMATION OR MAKE ANY Portfolio
REPRESENTATIONS NOT CONTAINED IN THIS
PROSPECTUS, OR IN THE STATEMENT OF
ADDITIONAL INFORMATION INCORPORATED
HEREIN BY REFERENCE, IN CONNECTION WITH
THE OFFERING MADE BY THIS PROSPECTUS Institutional
AND, IF GIVEN OR MADE, SUCH Class
REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR
ITS DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFERING BY THE FUND
OR BY THE DISTRIBUTOR IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY
NOT LAWFULLY BE MADE.
</TABLE>
-------------------- Prospectus
TABLE OF CONTENTS
Page
----
Introduction . . . . . . . . . . . . . ______________, 1995
Financial Highlights . . . . . . . . .
Investment Policies . . . . . . . . . .
Fundamental Investment Restrictions . .
Management . . . . . . . . . . . . . .
Purchase and Redemption of Shares . . .
Net Asset Value . . . . . . . . . . . .
Dividends and Distributions . . . . . .
Taxes . . . . . . . . . . . . . . . . .
Description of Shares . . . . . . . . .
Other Information . . . . . . . . . . .
INVESTMENT ADVISER
PNC Asset Management Group, Inc.
Philadelphia, Pennsylvania
SUB-ADVISER
BlackRock Financial Management Inc.
New York, New York
CO-ADMINISTRATOR
PNC Mutual Fund Company
New York, New York
CO-ADMINISTRATOR AND TRANSFER AGENT
PFPC Inc.
Wilmington, Delaware
CO-ADMINISTRATOR AND DISTRIBUTOR
Provident Distributors, Inc.
Radnor, Pennsylvania
COUNSEL
Drinker Biddle & Reath
Philadelphia, Pennsylvania
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand, L.L.P.
Philadelphia, Pennsylvania
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<PAGE> 70
THE PNC(R) FUND
(SERIES A AND SERIES B INVESTOR SHARES
OF THE NEW JERSEY TAX-FREE INCOME PORTFOLIO)
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A ITEM LOCATION
- -------------- --------
PART A PROSPECTUS
<S> <C> <C>
1. Cover page . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expense Table
3. Condensed Financial Information . . . . . . . . . . . . . . . . . Financial Highlights
4. General Description of Registrant . . . . . . . . . . . . . . . . Cover Page; Investment
Policies;
Description of
Shares
5. Management of the Fund . . . . . . . . . . . . . . . . . . . . . . Management
5A. Management's Discussion of Fund Performance . . . . . . . . . . . Inapplicable
6. Capital Stock and Other Securities . . . . . . . . . . . . . . . . Cover Page; Dividends
and Distributions;
Description of
Shares
7. Purchase of Securities Being Offered . . . . . . . . . . . . . . . Purchase and Redemption
of Shares;
Dividends and Distributions
Net Asset Value
8. Redemption or Repurchase . . . . . . . . . . . . . . . . . . . . . Purchase and Redemption
of Shares -
Redemption of
Shares
9. Pending Legal Proceedings . . . . . . . . . . . . . . . . . . . . Inapplicable
</TABLE>
<PAGE> 71
THE NEW JERSEY TAX-FREE INCOME PORTFOLIO
INVESTOR CLASS
The PNC(R) Fund (the "Fund") consists of 30 investment portfolios.
This Prospectus relates to shares ("Investor Shares" or "Shares") representing
interests in the New Jersey Tax-Free Income Portfolio (the "Portfolio"). The
Portfolio's investment objective is to seek as high a level of current income
exempt from Federal and, to the extent possible, from New Jersey income tax as
is consistent with preservation of capital. It pursues this objective by
investing primarily in municipal obligations issued by the State of New Jersey
and its political subdivisions, agencies, instrumentalities and authorities and
tax-exempt derivative securities relating thereto ("New Jersey Municipal
Obligations").
This Prospectus relates to two classes of shares from which investors
may choose representing interests in the Portfolio: Series A Investor Shares
("Series A Shares") and Series B Investor Shares ("Series B Shares" and,
collectively with Series A Shares, "Investor Shares" or "Shares"). Series A
Shares are sold with a front-end sales charge. Series B Shares are sold with a
contingent deferred sales charge. Shares of the Portfolio are intended for
residents of New Jersey. This Prospectus contains information that a
prospective investor needs to know before investing. Please keep it for future
reference. A Statement of Additional Information currently dated __________,
____ has been filed with the Securities and Exchange Commission (the "SEC").
The current Statement of Additional Information may be obtained free of charge
from the Fund by calling (800) 422-6538. The Statement of Additional
Information, as it may be supplemented from time to time, is incorporated by
reference in this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION OR ANY OTHER BANK AND SHARES ARE
NOT INSURED BY, GUARANTEED BY, OBLIGATIONS OF OR OTHERWISE SUPPORTED BY THE
U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD, OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENTS IN SHARES OF THE FUND
INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL AMOUNT
INVESTED.
- --------------------------------------------------------------------------------
PROSPECTUS ,
------------ ----
<PAGE> 72
INTRODUCTION
- --------------------------------------------------------------------------------
The Fund is an open-end management investment company which has
registered shares in 30 investment portfolios, of which only the New Jersey
Tax-Free Income is described in this Prospectus.
PORTFOLIO MANAGEMENT
PNC Asset Management Group, Inc. ("PAMG") serves as the Fund's
investment adviser. BlackRock Financial Management Inc. ("BlackRock") serves
as sub-adviser to the Portfolio. The investment adviser and sub-adviser are
indirect wholly-owned subsidiaries of PNC Bank Corp.
THE ADMINISTRATORS
PNC Mutual Fund Company ("PMFCO"), PFPC Inc. ("PFPC") and Provident
Distributors, Inc. ("PDI") serve as the Fund's co-administrators (collectively,
the "Administrators").
THE DISTRIBUTOR
Provident Distributors, Inc. (the "Distributor") serves as the Fund's
distributor.
<PAGE> 73
EXPENSE TABLE
<TABLE>
<CAPTION>
New Jersey
Tax-Free Income
Portfolio
------------------------
Series A Series B
-------- --------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Front-End Sales Charge (1) (as a percentage of offering price) . .
4.00% None
Sales Charge on Reinvested Dividends . . . . . . . . . . . . . . . None None
Deferred Sales Charge (2) (as a
percentage of original purchase
price or redemption proceeds,
whichever is lower) . . . . . . . . . . . . . . . . . . . . . . . None 4.00%
ANNUAL FUND OPERATING EXPENSES FOR
INVESTOR SHARES AFTER FEE WAIVERS
AS A PERCENTAGE OF DAILY NET
ASSETS
Advisory Fees (3) . . . . . . . . . . . . . . . . . . . . . . . . . 0.30% 0.30%
12b-1 fees(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.40% 0.75%
----- -----
Other operating expenses . . . . . . . . . . . . . . . . . . . . . 0.32% 0.72%
Administration fees (3) . . . . . . . . . . . . . . . . . . . . . 0.13% 0.13%
Service fees . . . . . . . . . . . . . . . . . . . . . . . . . . None 0.25%
Other expenses (3) . . . . . . . . . . . . . . . . . . . . . . . 0.19% 0.34%
----- -----
Total fund operating expenses . . . . . . . . . . . . . . . . . . . 1.02% 1.77%
===== =====
</TABLE>
(1) Reduced front-end sales charges may be available. See "How to
Purchase Shares--Purchases of Series A Shares."
(2) This amount applies to redemptions during the first year. The
deferred sales charge decreases 1.00% annually to 3.00% for
redemptions made during the third and fourth years and then decreases
to 2.00% and 1.00% for redemptions made during the fifth and sixth
years, respectively. See "How to Purchase Shares - Purchase of Series
B Shares."
(3) Advisory fees are net of waivers of .20% for the Portfolio. In
addition, the expense table reflects reimbursements made to the
Portfolio by the Adviser and fee waivers by the Administrators.
PAMG and the Administrators are under no obligation to waive or
continue waiving such fees or reimbursing such expenses, but have
informed the Fund that
<PAGE> 74
they expect to waive or continue waving such fees and reimbursing such
expenses during the current fiscal year as necessary to maintain the
Portfolio's total operating expenses at the levels set forth in the
table. The expenses noted above under "Other expenses" are estimated
based on the level of such expenses for the Portfolio's current fiscal
year. Securities dealers, financial institutions and other industry
professionals may charge their clients additional fees for account
services.
(4) Long-term shareholders may pay more than the economic equivalent of
the maximum front-end sales charges permitted by the rules of the
National Association of Securities Dealers, Inc. ("NASD").
EXAMPLE
An investor in Investor Shares would pay the following expenses on a
$1,000 investment in Shares of the Portfolio, assuming (1) imposition of the
maximum sales load, (2) 5% annual return, and (3) redemption at the end of each
time period:
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
New Jersey Tax-Free
Income Portfolio
Series A Shares* . . . $50 $71 $ 94 $160
Series B Shares** . . . $58 $88 $119 $170*
</TABLE>
* Reflects the imposition of the maximum front-end sales charge at the
beginning of the period.
** Reflects the deduction of the deferred sales charge.
*** Based on the conversion of Series B Shares to Series A Shares after
six years.
The foregoing Expense Table and Example are intended to assist
investors in understanding the Portfolio's shareholder transaction and
estimated operating expenses. Investors bear these expenses either directly or
indirectly. The information in the table for the Portfolio has been restated
based on the advisory and administration fees and other expenses payable after
fee waivers for the current fiscal year ending September 30, 1996. Total
operating expenses would have been 1.32% and 2.07%, respectively,
without fee waivers and reimbursements. See Footnote 3 to the Expense Table,
"Financial Highlights -Background," "Management," "Distribution of Shares,"
"How to Purchase Shares"and "Description of Shares" for a further description
of shareholder transaction expenses and operating expenses.
<PAGE> 75
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
INVESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND
OPERATING EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
OFFERING PRICES
Series A Shares in the Portfolio are offered to the public at the next
determined net asset value after receipt by PFPC of a purchase order plus a
maximum sales charge of 4.50% of the offering price on single purchases of less
than $50,000. The sales charge is reduced on a graduated scale on single
purchases of $50,000 or more and certain exemptions from the sales charge may
apply. See "How to Purchase Shares-- Purchases of Series A Shares."
Series B Shares in the Portfolio are offered to the public at the next
determined net asset value after receipt by PFPC of a purchase order. Series B
Shares are subject to a maximum deferred sales charge of 5.0%. See "How to
Purchase Shares--Purchases of Series B Shares."
MINIMUM INITIAL AND SUBSEQUENT INVESTMENTS
The minimum initial investment for the Portfolio is $500, except that
such minimum investment requirement is $100 for employees of the Fund, the
Fund's adviser, sub-adviser, distributor or transfer agent or employees of any
such service providers' affiliate. Subsequent investments must be $100 or
more. See "How to Purchase Shares."
EXCHANGES
Series A Shares of the Portfolio may be exchanged for Series A Shares
of any other investment portfolio offered by the Fund at their respective net
asset value next determined after receipt by PFPC of an exchange request.
Series B Shares of the Portfolio may be exchanged for Series B Shares of any
other investment portfolio offered by the Fund with a deferred sales charge at
their respective net asset value next determined after receipt by PFPC of an
exchange request. Series B Shares are exchangeable for Series B Investor
Shares in the Fund's Money Market Portfolio, but are not exchangeable for
shares in the Fund's other money market investment portfolios. Series B Shares
may be exchanged without the payment of any deferred sales charge at the time
the exchange is made. No exchange fee is charged by the Fund. See "Investor
Programs--Exchange Privilege."
REDEMPTION PRICE
Series A Shares may be redeemed at any time at their net asset value
next determined after receipt by PFPC of a redemption request
<PAGE> 76
in proper form. Series B Shares may be redeemed at any time at their net asset
value next determined after receipt by PFPC of a redemption request, minus any
applicable deferred sales charge. The Fund reserves the right, upon 30 days'
written notice, to redeem an account in the Portfolio if the net asset value of
the Shares held by a shareholder of record in that account falls below the
minimum initial investment requirement amount as a result of a redemption or an
exchange and is not increased to at least that amount within the 30 day period.
See "How to Redeem Shares."
CERTAIN RISK FACTORS TO CONSIDER
An investment in the Portfolio is subject to certain investment
considerations, as set forth in detail under "Investment Policies." As with
other mutual funds, there can be no assurance that the Portfolio will achieve
its investment objective. The Portfolio invests primarily in municipal
obligations of one state, New Jersey, and is thus subject to the peculiar risks
presented by the laws or economy of New Jersey. The Portfolio is classified
as non-diversified under the Investment Company Act of 1940 (the "1940 Act").
These and the other investment practices set forth below and their associated
risks deserve careful consideration by investors. See "Investment Policies."
SHAREHOLDER INQUIRIES
Any questions or communications regarding a shareholder account may be
directed to The PNC Fund c/o PFPC, P.O. Box 8907, Wilmington, Delaware
19899-8907, toll-free (800) 422-6538.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
BACKGROUND
The Fund currently offers four classes of shares in the Portfolio --
Service, Series A Investor, Series B Investor and Institutional Shares.
Service, Series A Investor, Series B Investor and Institutional Shares in the
Portfolio represent equal pro-rata interests in the Portfolio, except that they
bear different expenses which reflect the difference in the range of services
provided to them. Under the Fund's Amended and Restated Distribution and
Service Plan (the "Plan"), Service Shares bear the expense of fees at an annual
rate not to exceed .15% of the average daily net asset value of the Portfolio's
outstanding Service Shares. Service Shares also bear the expense of a service
fee at an annual rate not to exceed .15% of the average daily net asset value
of the Portfolio's outstanding Shares for other shareholder support activities
provided by service organizations. See "Description of Shares" for a
description of the Plan and shareholder support activities. Series A Investor
Shares bear expenses under the Plan at an annual rate not to exceed .50% of the
<PAGE> 77
average daily net asset value of the Portfolio's outstanding Series A Investor
Shares. Series B Investor Shares bear expenses under the Plan at annual rates
not to exceed 1.15% of the average daily net asset value of the Portfolio's
outstanding Series B Investor Shares. See "Description of Shares" for a
description of the Plan. Institutional Shares do not bear the fees stated
above applicable to the other share classes under the Plan.
The financial highlights set forth certain information concerning the
investment results of the Portfolio for the for the period ended August 31,
1995 and the years or period ended February 28, 1995, 1994, 1993 and 1992. The
financial statements and notes thereto for the Portfolio were audited by
Coopers & Lybrand L.L.P., independent accountants for the Portfolio, whose
report thereon is incorporated by reference into the Statement of Additional
Information. Additional information about the performance of the Portfolio is
contained in the Portfolio's annual report. Both the Statement of Additional
Information and the Portfolio's annual report may be obtained from the Fund
free of charge by calling the number on the front cover of this Prospectus.
During the years or period shown, the Portfolio offered one class of shares to
both institutional and retail investors.
<PAGE> 78
<TABLE>
<CAPTION>
THE NEW JERSEY TAX-FREE INCOME PORTFOLIO+
-----------------------------------------
Period Year Year Year Period
Ended Ended Ended Ended Ended
8/31/95 2/28/95 2/28/94 2/28/93 2/28/92**
------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning
of period $10.94 $11.31 $11.30 $10.46 $10.00
------ ------ ------ ------ ------
Income from investment
operations
Net investment income 0.25 0.51 0.54 0.52 0.34
Net (loss) gain on
investments (both
realized and unrealized) 0.28 (0.36) 0.04 0.85 0.45
---- ------ ----- ------ ------
Total from investment
operations 0.53 0.15 0.58 1.37 0.79
---- ------ ------ ------ ------
Less distributions
Distributions from net
investment income (0.25) (0.51) (0.54) (0.53) (0.33)
Distributions from net
realized capital gains -- (0.01) (0.03) -- --
----- ------ ------ ------ ------
Total distributions (0.25) (0.52) (0.57) (0.53) (0.33)
------ ------ ------ ------ ------
Net asset value at end of
period $11.22 $10.94 $11.31 $11.30 $10.46
====== ====== ====== ====== ======
Total return 4.90% 1.49% 5.18% 13.48% 12.33%*
Ratios/Supplemental data
Net assets at end of period
(in thousands) $97,752 $96,857 $111,354 $47,169 $10,673
Ratios of expenses to
average net assets 0.88%* 0.79% 0.38% 0.48% 0.52%*
Excluding waivers 0.88%* 0.87% 0.86% 1.04% 1.29%*
Ratios of net investment
income to average net
assets 4.51%* 4.71% 4.75% 5.04% 5.35%*
Excluding waivers 4.51%* 4.63% 4.27% 4.48% 4.58%*
Portfolio turnover rate 18.47% 28.43% 12.05% 16.09% 0.00%
</TABLE>
- ------------------------------------------
+The Portfolio commenced operations on July 1, 1991 as the New Jersey Municipal
Bond Fund, a separate investment portfolio (the "Predecessor Portfolio") of The
Compass Capital Group of Funds, which was organized as a Massachusetts business
trust. On January __, 1996, the assets and liabilities of the Predecessor
Portfolio were transferred to the Portfolio, which had no prior operating
history.
** Commenced operations on July 1, 1991.
* Annualized.
<PAGE> 79
INVESTMENT POLICIES
- --------------------------------------------------------------------------------
NEW JERSEY TAX-FREE INCOME PORTFOLIO
The Portfolio invests primarily in investment grade bonds, debentures,
and notes (including variable and floating rate notes) issued by or on behalf
of states (including the District of Columbia), territories, and possessions of
the United States, and their respective authorities, agencies,
instrumentalities, and political subdivisions, the interest on which is exempt
from federal income tax ("Municipal Obligations"). Under normal market
conditions, at least 80% of the Portfolio's total assets will be invested in
Municipal Obligations and at least 65% of the Portfolio's total assets will be
invested in New Jersey Municipal Obligations. It is anticipated that the
Portfolio's dollar weighted average portfolio maturity will range between five
and eighteen years.
Purchasable Municipal Obligations are rated within the four highest
ratings assigned by Moody's Investor Services, Inc. ("Moody's") (i.e., Aaa, Aa,
A, Baa) or by Standard & Poor's Ratings Group ("S&P") (i.e., AAA, AA, A, BBB)
in the case of bonds, rated SP-2 or higher by S&P or MIG-2 or higher by Moody's
in the case of notes, rated A-2 or higher by S&P or Prime-2 or higher by
Moody's in the case of tax-exempt commercial paper or VMIG-2 or higher by
Moody's in the case of variable rate demand notes or are unrated securities
determined at the time of purchase to be of comparable quality by BlackRock.
Securities rated "Baa" by Moody's or "BBB" by S&P, respectively, are generally
considered to be investment grade although they have speculative
characteristics and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than is the case for higher grade bonds. If a portfolio security is
reduced below Baa by Moody's or BBB by S&P, BlackRock will dispose of the
security in an orderly fashion as soon as practicable.
RISK FACTORS AND SPECIAL CONSIDERATIONS
The value of fixed income securities in the Portfolio can be expected
to vary inversely with changes in prevailing interest rates. Fixed income
securities with longer maturities, which tend to produce higher yields, are
subject to potentially greater capital appreciation and depreciation than
securities with shorter maturities.
Under normal market conditions, the Portfolio is predominantly
invested in New Jersey Municipal Obligations, and therefore the value of shares
in the Portfolio may be especially affected by factors pertaining to the state
economy and other factors specifically affecting the ability of issuers of New
Jersey Municipal Obligations to meet their obligations. As a result, the
<PAGE> 80
value of the Portfolio's shares may fluctuate more widely than the value of the
shares of a portfolio investing in securities relating to a number of different
states. The ability of state, county, and local governments to meet their
obligations will depend primarily on the availability of tax and other revenues
to those governments and on their fiscal conditions generally. The amount of
tax and other revenues available to governmental issuers of New Jersey
Municipal Obligations may be affected from time to time by economic, political,
and demographic conditions within the state. In addition, constitutional or
statutory restrictions may limit a government's power to raise revenues or
increase taxes. Payments of principal and interest on limited obligation
securities will depend on the economic condition of the facility or specific
revenue source from whose revenues the payments will be made, which in turn
could be affected by economic, political, and demographic conditions in the
state. Moreover, the Portfolio is classified as "non-diversified" because it
may invest in obligations of a relatively limited number of issuers. See the
Statement of Additional Information for further discussion of investment
considerations associated with New Jersey Municipal Obligations and see
"Investment Policies--Description of Permitted Investments" for a description
of other investment policies.
DESCRIPTION OF PERMITTED INVESTMENTS
The Portfolio's investment objective and policies (except for the 80%
concentration in Municipal Obligations may be changed by the Board of Trustees
without shareholder approval. Depending upon prevailing market conditions, the
Portfolio may purchase debt securities at a discount from face value, which
produces a yield greater than the coupon rate. Conversely, if debt securities
are purchased at a premium over face value, the yield will be lower than the
coupon rate. An increase in interest rates will generally reduce the value of
the investments in the Portfolio and a decline in interest rates will generally
increase the value of those investments.
MUNICIPAL OBLIGATIONS. The two principal classifications of Municipal
Obligations are "general obligation" securities and "revenue" securities.
General obligation securities are secured by the issuer's pledge of its full
faith, credit and taxing power for the payment of principal and interest.
Revenue securities are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as the user of the
facility being financed. Revenue securities include private activity bonds
which are not payable from the unrestricted revenues of the issuer.
Consequently, the credit quality of private activity bonds is usually directly
related to the credit standing of the corporate user of the facility involved.
Municipal Obligations may also include "moral obligation" bonds, which are
<PAGE> 81
normally issued by special purpose public authorities. If the issuer of moral
obligation bonds is unable to meet its debt service obligations from current
revenues, it may draw on a reserve fund, the restoration of which is a moral
commitment but not a legal obligation of the state or municipality which
created the issuer.
Purchasable Municipal Obligations include debt obligations issued by
governmental entities to obtain funds for various public purposes, including
the construction of a wide range of public facilities, the refunding of
outstanding obligations, the payment of general operating expenses and the
extension of loans to public institutions and facilities. Private activity
bonds issued by or on behalf of public authorities to finance various privately
operated facilities are considered Municipal Obligations. Dividends paid by
the Portfolio that are derived from interest on such Municipal Obligations
would be taxable to the Portfolio's shareholders for Federal income tax
purposes.
Also included within the general category of Municipal Obligations are
participation certificates in a lease, an installment purchase contract, or a
conditional sales contract ("lease obligations") entered into by a state or
political subdivision to finance the acquisition or construction of equipment,
land, or facilities. Although lease obligations do not constitute general
obligations of the issuer for which the lessee's unlimited taxing power is
pledged, certain lease obligations are backed by the lessee's covenant to
appropriate money to make the lease obligation payments. However, under
certain lease obligations, the lessee has no obligation to make these payments
in future years unless money is appropriated on a yearly basis. Although
"non-appropriation" lease obligations are secured by the leased property,
disposition of the property in the event of foreclosure might prove difficult.
These securities represent a relatively new type of financing that is not yet
as marketable as more conventional securities. Moreover, certain investments
in lease obligations may be illiquid and subject to the investment limitations
described below.
OPTIONS AND FUTURES CONTRACTS. The Portfolio may write covered call
options, buy put options, buy call options and write put options, without
limitation except as noted in this paragraph. Such options may relate to
particular securities or to various indexes and may or may not be listed on a
national securities exchange and issued by the Options Clearing Corporation.
The Portfolio may also invest in futures contracts and options on futures
contracts (index futures contracts or interest rate futures contracts, as
applicable) for hedging purposes or for other purposes so long as aggregate
initial margins and premiums required for non-hedging positions do not exceed
5% of its net assets, after taking into account any unrealized profits and
losses on any such contracts it has entered into. However, the Portfolio may
not write put options or purchase or sell futures contracts or options
<PAGE> 82
on futures contracts to hedge more than its total assets unless immediately
after any such transaction the aggregate amount of premiums paid for put
options and the amount of margin deposits on its existing futures positions do
not exceed 5% of its total assets.
Options trading is a highly specialized activity which entails greater
than ordinary investment risks. A call option for a particular security gives
the purchaser of the option the right to buy, and a writer the obligation to
sell, the underlying security at the stated exercise price at any time prior to
the expiration of the option, regardless of the market price of the security.
The premium paid to the writer is in consideration for undertaking the
obligations under the option contract. A put option for a particular security
gives the purchaser the right to sell the underlying security at the stated
exercise price at any time prior to the expiration date of the option,
regardless of the market price of the security. In contrast to an option on a
particular security, an option on an index provides the holder with the right
to make or receive a cash settlement upon exercise of the option. The amount
of this settlement will be equal to the difference between the closing price of
the index at the time of exercise and the exercise price of the option
expressed in dollars, times a specified multiple.
The Portfolio will engage in unlisted over-the-counter options only
with broker/dealers deemed creditworthy by BlackRock. Closing transactions in
certain options are usually effected directly with the same broker/dealer that
effected the original option transaction. The Portfolio bears the risk that
the broker/dealer will fail to meet its obligations. There is no assurance
that the Portfolio will be able to close an unlisted option position.
Furthermore, unlisted options are not subject to the protections afforded
purchasers of listed options by the Options Clearing Corporation, which
performs the obligations of its members who fail to do so in connection with
the purchase or sale of options.
To enter into a futures contract, the Portfolio must make a deposit of
initial margin with its custodian in a segregated account in the name of its
futures broker. Subsequent payments to or from the broker, called variation
margin, will be made on a daily basis as the price of the underlying security
or index fluctuates, making the long and short positions in the futures
contracts more or less valuable.
When investing in futures contracts, the Portfolio must satisfy
certain asset segregation requirements to ensure that the use of futures is
unleveraged. When the Portfolio takes a long position in a futures contract,
it must maintain a segregated account containing cash and/or certain liquid
assets equal to the purchase price of the contract, less any margin or deposit.
When the Portfolio takes a short position in a futures contract, the
<PAGE> 83
Portfolio must maintain a segregated account containing cash and/or certain
liquid assets in an amount equal to the market value of the securities
underlying such contract (less any margin or deposit), which amount must be at
least equal to the market price at which the short position was established.
Asset segregation requirements are not applicable when the Portfolio "covers" a
futures position generally by entering into an offsetting position.
The risks related to the use of options and futures contracts include:
(i) the correlation between movements in the market price of the portfolio
investments (held or intended for purchase) being hedged and in the price of
the futures contract or option may be imperfect; (ii) possible lack of a liquid
secondary market for closing out options or futures positions; (iii) the need
for additional portfolio management skills and techniques; and (iv) losses due
to unanticipated market movements. Successful use of options and futures by
the Portfolio is subject to BlackRock's ability to correctly predict movements
in the direction of the market. For example, if the Portfolio uses futures
contracts as a hedge against the possibility of a decline in the market
adversely affecting securities held by it and securities prices increase
instead, the Portfolio will lose part or all of the benefit of the increased
value of its securities which it has hedged because it will have approximately
equal offsetting losses in its futures positions. The risk of loss in trading
futures contracts in some strategies can be substantial, due both to the low
margin deposits required and the extremely high degree of leverage involved in
futures pricing. As a result, a relatively small price movement in a futures
contract may result in immediate and substantial loss or gain to the investor.
Thus, a purchase or sale of a futures contract may result in losses or gains in
excess of the amount invested in the contract. For a further discussion see
"Investment Policies" in the Statement of Additional Information.
CASH EQUIVALENTS. The Portfolio may invest in taxable and tax-free
short-term, interest-bearing instruments or deposits of United States and
foreign issuers to maintain liquidity, pending investment and for temporary
defensive purposes. Such investments may include, but are not limited to,
commercial paper, certificates of deposit, variable or floating rate notes,
bankers' acceptances, time deposits, government securities, repurchase
agreements and money market deposit accounts.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. The Portfolio may
purchase securities on a "when-issued" basis and may purchase or sell
securities on a "forward commitment" basis. These transactions involve a
commitment by the Portfolio to purchase or sell particular securities with
payment and delivery taking place at the future date (perhaps one or two months
later), and permit a Portfolio to lock-in a price or yield on a security it
owns or intends to purchase, regardless of future changes in interest rates.
When-issued and forward commitment transactions involve the
<PAGE> 84
risk, however, that the price or yield obtained in a transaction may be less
favorable than the price or yield available in the market when the securities
delivery takes place. The Portfolio's when-issued purchases and forward
commitments are not expected to exceed 25% of the value of its total assets
absent unusual market conditions. The Portfolio does not intend to engage in
when-issued purchases and forward commitments for speculative purposes but only
in furtherance of its investment objectives.
REVERSE REPURCHASE AGREEMENTS. The Portfolio 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 BlackRock). A reverse repurchase agreement involves a sale by the Portfolio
of securities that it holds concurrently with an agreement by the Portfolio to
repurchase the same securities at an agreed-upon price and date. Reverse
repurchase agreements involve the risk that the market value of the securities
sold by the Portfolio may decline below the price of the securities the
Portfolio is obligated to repurchase. Reverse repurchase agreements are
considered to be borrowings by the Portfolio under the 1940 Act.
The Portfolio will establish a segregated account with its custodian
in which it will maintain cash, U.S. government securities or other liquid high
grade debt obligations equal in value to its obligations with respect to
reverse repurchase agreements.
INVESTMENT COMPANIES. The Portfolio may invest in securities issued
by other investment companies within the limits prescribed by the 1940 Act.
The Portfolio currently intends to limit its investments so that, as determined
immediately after a securities purchase is made: (i) not more than 5% of the
value of its total assets will be invested in the securities of any one
investment company; (ii) not more than 10% of the value of its total assets
will be invested in the aggregate in securities of investment companies as a
group; and (iii) not more than 3% of the outstanding voting stock of any one
investment company will be owned by the Portfolio or by the Fund as a whole.
As a shareholder of another investment company, the Portfolio 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 the Portfolio bears directly in connection
with its own operations.
TAX-EXEMPT DERIVATIVES AND OTHER MUNICIPAL OBLIGATIONS. The Portfolio
may invest in tax-exempt derivative securities relating to Municipal
Obligations, including tender option bonds, participations, beneficial
interests in trusts and partnership interests.
<PAGE> 85
Opinions relating to the validity of Municipal Obligations and to the
exemption of interest thereon from Federal income tax are rendered by bond
counsel to the respective issuers at the time of issuance, and opinions
relating to the validity of and the tax-exempt status of payments received by
the Portfolio from tax-exempt derivative securities are rendered by counsel to
the respective sponsors of such securities. The Portfolio and BlackRock will
rely on such opinions and will not review independently the underlying
proceedings relating to the issuance of Municipal Obligations, the creation of
any tax-exempt derivative securities, or the bases for such opinions.
ILLIQUID SECURITIES. The Portfolio will not knowingly invest more
than 15% of the value of its net assets in securities that are illiquid.
Variable and floating rate instruments that cannot be disposed of within seven
days, and repurchase agreements and time deposits that do not provide for
payment within seven days after notice, without taking a reduced price, are
subject to this 15% limit. The Portfolio may purchase securities which are not
registered under the Securities Act of 1933 (the "1933 Act") but which can be
sold to "qualified institutional buyers" in accordance with Rule 144A under the
1933 Act. Any such security will not be considered illiquid so long as it is
determined by BlackRock, acting under guidelines approved and monitored by the
Board, that an adequate trading market exists for that security. This
investment practice could have the effect of increasing the level of
illiquidity in the Portfolio during any period that qualified institutional
buyers become uninterested in purchasing these restricted securities.
MISCELLANEOUS. During normal market conditions up to 20% of the
Portfolio's net assets may be invested in securities which are not Municipal
Obligations. The Portfolio may invest up to 20% of its net assets in Municipal
Obligations the interest on which is exempt from regular Federal income tax but
is an item of tax preference for purposes of the Federal alternative minimum
tax. During temporary defensive periods, the Portfolio may invest without
limitation in obligations which are not Municipal Obligations and may hold
without limitation uninvested cash reserves. Such securities may include,
without limitation, bonds, notes, variable rate demand notes and commercial
paper, provided such securities are rated within the relevant categories
applicable to Municipal Obligations set forth above, or if unrated, are of
comparable quality as determined by BlackRock, and may also include, without
limitation, other debt obligations, such as bank obligations. The Portfolio
may acquire "stand-by commitments" with respect to Municipal Obligations held
by it. Under a stand-by commitment, a dealer agrees to purchase at the
Portfolio's option specified Municipal Obligations at a specified price. The
acquisition of a stand-by commitment may increase the cost, and thereby reduce
the yield, of the Municipal Obligation to which such commitment relates. The
Portfolio will acquire stand-by
<PAGE> 86
commitments solely to facilitate portfolio liquidity and does not intend to
exercise its rights thereunder for trading purposes.
Although the Portfolio may invest 25% or more of its net assets in
Municipal Obligations the interest on which is paid solely from revenues of
similar projects, and may invest up to 20% of its total assets in private
activity bonds when added together with any taxable investments held by the
Portfolio, it does not presently intend to do so unless in the opinion of
BlackRock the investment is warranted. To the extent the Portfolio's assets
are invested in Municipal Obligations payable from the revenues of similar
projects or are invested in private activity bonds, the Portfolio will be
subject to the peculiar risks presented by the laws and economic conditions
relating to such projects and bonds to a greater extent than it would be if its
assets were not so invested. The amount of information regarding the financial
condition of issuers of Municipal Obligations may not be as extensive as that
which is made available by public corporations and the secondary market for
Municipal Obligations may be less liquid than that for taxable fixed-income
securities. Accordingly, the ability of the Portfolio to buy and sell
tax-exempt securities may, at any particular time and with respect to any
particular securities, be limited.
The Portfolio is classified as non-diversified under the 1940 Act.
Investment returns on a non-diversified portfolio typically are dependent upon
the performance of a smaller number of securities relative to the number held
in a diversified portfolio. Consequently, the change in value of any one
security may affect the overall value of a non-diversified portfolio more than
it would a diversified portfolio. Additionally, a non-diversified portfolio
may be more susceptible to economic, political and regulatory developments than
a diversified portfolio with similar objectives.
PORTFOLIO TURNOVER. Although it may vary from year to year, it is
currently estimated that under normal market conditions the annual portfolio
turnover rate for the Portfolio will not exceed 100%. The Portfolio's annual
portfolio turnover rate will not, however, be a factor preventing a sale or
purchase when BlackRock believes investment considerations warrant such sale or
purchase. Portfolio turnover may vary greatly from year to year as well as
within a particular year. A high portfolio turnover rate will generally result
in higher transaction costs to the Portfolio.
INVESTMENT LIMITATIONS
The Portfolio is subject to the following fundamental investment
limitations, which may not be changed with respect to the Portfolio except upon
the affirmative vote of the holders of a majority of the Portfolio's
outstanding shares.
<PAGE> 87
The Portfolio may not:
1. Purchase any securities which would cause 25% or more of
the value of the Portfolio'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.
2. Borrow money or issue senior securities, except that the
Portfolio may borrow from banks and enter into reverse repurchase
agreements for temporary purposes in amounts up to one-third of the
value of its total assets at the time of such borrowing; or 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 Portfolio's total assets at the time of such borrowing. The
Portfolio will not purchase securities while its aggregate borrowings
(including reverse repurchase agreements and borrowings from banks) in
excess of 5% of its total assets are outstanding. Securities held in
escrow or separate accounts in connection with the Portfolio's
investment practices are not deemed to be pledged for purposes of this
limitation.
If a percentage limitation is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in the
value of a Portfolio's securities will not constitute a violation of such
limitation, except that any borrowing by the Portfolio that exceeds the
fundamental investment restriction stated above must be reduced to meet such
restriction within the period required by the 1940 Act (currently three days).
In order to permit the sale of the Portfolio's shares in certain
states, the Fund may make commitments more restrictive than the investment
policies and limitations described in this Prospectus. Should the Fund
determine that any such commitment is no longer in the best interests of the
Portfolio, it will revoke the commitment by terminating sales of its shares in
the state involved. For information on additional investment limitations
relating to the Portfolio, see the Statement of Additional Information.
<PAGE> 88
MANAGEMENT
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BOARD OF TRUSTEES
The business and affairs of the Fund are managed under the direction
of the Fund's Board of Trustees. The Statement of Additional Information
contains the name of each trustee and certain background information.
ADVISER AND SUB-ADVISER
PAMG was organized in 1995 to perform advisory services for investment
companies. BlackRock (formerly BlackRock Financial Management L.P.) was
organized in 1988. On February 28, 1995 BlackRock Financial Management L.P.
sold its business to PNC Bank National Association ("PNC Bank"). The principal
business address of PAMG is 1835 Market Street, 15th Floor, Philadelphia,
Pennsylvania, 19103. The principal business address of BlackRock is 345 Park
Avenue, New York, New York 10154.
As adviser, PAMG is responsible for the overall investment management
of the Portfolio. The sub-adviser, BlackRock, is responsible for the
day-to-day management of the Portfolio, and generally makes all purchase and
sale decisions regarding the investments made by the Portfolio. BlackRock also
provides research and credit analysis as well as certain other services.
Kevin Klingert is the person primarily responsible for the day-to-day
management of the Portfolio's investments. Mr. Klingert is a Principal and
Portfolio Manager at BlackRock Financial Management, and a member of its
Investment Strategy Committee. Mr. Klingert has primary responsibility for
managing client portfolios with a special emphasis on municipal securities.
His areas of expertise include general obligation bonds, revenue bonds and
tax-exempt derivative securities. Mr. Klingert also serves as Vice President
for BlackRock's family of tax-exempt mutual funds.
Prior to joining BlackRock in 1991, Mr. Klingert was an Assistant Vice
President in the Unit Investment Trust Department at Merrill Lynch, Pierce,
Fenner & Smith. Mr. Klingert joined Merrill Lynch in 1985 and was responsible
for investing over $1 billion annually for municipal UITs and for supervising
over $21 billion of existing municipal UITs.
Mr. Klingert received a Bachelor of Science in Business Administration
from the State University of New York at Oswego in 1984, and an M.B.A. in
Finance from New York University in 1991.
For the services provided and expenses assumed by it, PAMG is entitled
to receive from the Portfolio a fee, computed daily and payable monthly, at an
annual rate of .50% of the first $1 billion
<PAGE> 89
of the average daily net assets of the Portfolio, plus 0.45% of the next $1
billion of the Portfolio's average daily net assets, plus 0.425% of the next $1
billion of the Portfolio's average daily net assets, plus 0.40% of the
Portfolio's average daily net assets in excess of $3 billion. The Predecessor
Portfolio bore advisory fees during its most recent fiscal year pursuant to the
investment advisory agreement then in effect with Midlantic Bank, N.A., its
former adviser, at the effective annual rate of .60% of its average daily net
assets. From time to time PAMG may waive all or any portion of its advisory
fee for and may reimburse expenses of the Portfolio. See
"Introduction--Expense Table."
For its sub-advisory services, BlackRock is entitled to receive from
PAMG a fee, computed daily and payable monthly, at an annual rate of .35% of
the Portfolio's first $1 billion of average daily net assets, .30% of its next
$1 billion of average daily net assets, .275% of its next $1 billion of average
daily net assets, and .25% of its average daily net assets in excess of $3
billion. Such sub-advisory fee has no effect on the advisory fee payable by
the Portfolio to PAMG. BlackRock may from time to time waive all or any
portion of its sub-advisory fee for the Portfolio.
ADMINISTRATORS
PMFCO, whose principal business address is 345 Park Avenue, New York,
New York, 10154, PFPC, whose principal business address is 400 Bellevue
Parkway, Wilmington, Delaware 19809 and PDI, whose principal business address
is 259 Radnor-Chester Road, Suite 120, Radnor, Pennsylvania 19087, serve as the
Fund's co-administrators. PMFCO and PFPC are indirect wholly-owned
subsidiaries of PNC Bank Corp. A majority of the outstanding stock of PDI is
owned by its officers and the remaining outstanding stock is owned by
Pennsylvania Merchant Group Ltd.
The Administrators generally assist the Fund in all aspects of its
administration and operation, including matters relating to the maintenance of
financial records and fund accounting. As compensation for their services,
PMFCO is entitled to receive a fee, computed daily and payable monthly, at an
annual rate of .03% of the Portfolio's average daily net assets, and PFPC and
PDI are entitled to receive a combined fee, computed daily and payable monthly,
at an annual rate of .20% of the first $500 million of the Portfolio's average
daily net assets, .18% of the next $500 million of the Portfolio's average
daily net assets, .16% of the next $1 billion of the Portfolio's average daily
net assets and .15% of the Portfolio's average daily net assets in excess of $2
billion. From time to time the Administrators may waive all or any portion of
the administration fees for the Portfolio.
<PAGE> 90
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND CUSTODIAN
PNC Bank serves as the Fund's custodian and PFPC serves as the Fund's
transfer agent and dividend disbursing agent.
EXPENSES
Expenses are deducted from the total income of the Portfolio before
dividends and distributions are paid. These expenses include, but are not
limited to, fees paid to PAMG and the Administrators, transfer agency fees,
fees and expenses of officers and trustees who are not affiliated with PAMG or
the Distributor or any of their affiliates, taxes, interest, legal fees,
custodian fees, auditing fees, 12b-1 fees, servicing fees, certain fees and
expenses in registering and qualifying the Portfolio and its Shares for
distribution under Federal and state securities laws, expenses of preparing
prospectuses and statements of additional information and of printing and
distributing prospectuses and statements of additional information to existing
shareholders, the expense of reports to shareholders, shareholders' meetings
and proxy solicitations, fidelity bond and trustees and officers liability
insurance premiums, the expense of using independent pricing services and other
expenses which are not expressly assumed by PAMG or the Administrators under
their respective agreements with the Fund. Any general expenses of the Fund
that are not readily identifiable as belonging to a particular investment
portfolio will be allocated among all investment portfolios by or under the
direction of the Board of Trustees in a manner the Board determines to be fair
and equitable. Any expenses relating only to a particular class of shares
within the Portfolio (such as Series A 12b-1 fees for Series A Investor Shares
and Series B 12b-1 fees and service fees for Series B Investor Shares) will be
borne solely by such Shares.
If the total expenses borne by the Portfolio in any fiscal year exceed
the expense limitations imposed by applicable state securities regulations,
PAMG, the sub-adviser and the Administrators will bear the amount of such
excess to the extent required by such regulations in proportion to the fees
otherwise payable to them for such year. Such amount, if any, will be
estimated and accrued daily and paid on a monthly basis. See
"Introduction--Example," "Management--Adviser and Sub-Adviser" and
"Management--Administrators" for discussions of expense reimbursements and fee
waivers.
BANKING LAWS
Banking laws and regulations currently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring,
<PAGE> 91
organizing, controlling or distributing the shares of a registered open-end
investment company continuously engaged in the issuance of its shares, and
prohibit banks generally from underwriting securities, but such banking laws
and regulations do not prohibit such a holding company or affiliate or banks
generally from acting as investment adviser, administrator, transfer agent or
custodian to such an investment company, or from purchasing shares of such a
company as agent for and upon the order of customers. PNC Bank, PAMG,
BlackRock, PMFCO and PFPC are subject to such banking laws and regulations. In
addition, state securities laws on this issue may differ from the
interpretations of Federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
Should future legislative, judicial or administrative action prohibit
or restrict the activities of such companies in connection with the provision
of services on behalf of the Fund and the holders of Investor Shares, the Fund
might be required to alter materially or discontinue its arrangements with such
companies and change its method of operations with respect to the Investor
Shares. It is not anticipated, however, that any change in the Fund's method
of operations would affect its net asset value per share or result in a
financial loss to any investor.
PORTFOLIO TRANSACTIONS
The Portfolio's adviser or sub-adviser will seek the best price and
execution in placing brokerage transactions. In this regard, the adviser or
sub-adviser may consider a number of factors in determining which brokers to
use in purchasing or selling portfolio securities. These factors, which are
more fully discussed in the Statement of Additional Information, include, but
are not limited to, research services, sales of shares of the Fund, the
reasonableness of commissions and quality of services and execution. Brokerage
transactions for the Portfolio may be directed through registered
broker/dealers ("Authorized Dealers") who have entered into dealer agreements
with the Distributor, subject to the requirements of best execution.
<PAGE> 92
DISTRIBUTION OF SHARES
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Shares of the Portfolio are offered on a continuous basis by the
Distributor. The Distributor is a registered broker/dealer with principal
offices at 259 Radnor-Chester Road, Suite 120, Radnor, Pennsylvania 19087.
The Fund's Board of Trustees has adopted an Amended and Restated
Distribution and Service Plan for Series A Shares and Series B Shares (the
"Plan").
Under the Plan the Distributor is entitled to payments by the
Portfolio for: (i) promotional activities in connection with advertising and
marketing Shares; and (ii) payments to broker/dealers that are not affiliated
with the Distributor ("Service Organizations") for distribution assistance such
as advertising and marketing of Fund Shares. In addition, with respect to
Series B Shares, payments under the Plan will be used to pay for or finance
sales commissions and other fees payable to Service Organizations and other
broker/dealers who sell Series B Shares. Service Organizations may also
provide support services such as establishing and maintaining accounts and
records relating to shareholders for whom the Service Organizations are the
dealer of record or holder of record for shareholders with whom the Service
Organizations have a servicing relationship. Promotional activities include
advertising via radio, television, newspapers, magazines and otherwise;
preparing, printing and mailing sales materials, brochures and prospectuses
(except for prospectuses used for regulatory purposes or for distribution to
existing shareholders); and other activities in connection with the promotion
of Shares.
Payments under the Plan may also be used for telephone facilities and
in-house telemarketing or shareholder servicing.
Payments under the Plan with respect to Series A Shares will not
exceed .50% (annualized) of the average daily net asset value of the
Portfolio's outstanding Series A Shares. Service Organizations may charge
their clients additional fees for account services. Customers who are
beneficial owners of Series A Shares should read this Prospectus in light of
the terms and fees governing their accounts with Service Organizations. The
NASD has adopted rules which generally limit the aggregate sales charges and
payments under the Plan with respect to each Portfolio to 7.25% of total new
gross Series A Share sales, plus interest. The Fund would retain any deferred
front-end sales charges collected and stop accruing payments under the Plan
with respect to Series A Shares if, to the extent, and for as long as, such
limit would otherwise be exceeded. See "How to Purchase Shares--Purchases of
Series A Shares" for a description of the front-end sales charge.
<PAGE> 93
Payments under the Plan with respect to Series B Shares will not
exceed 1.15% (annualized) of the average daily net asset value of the
Portfolio's outstanding Series B Shares. Service Organizations may charge
their clients additional fees for account services. Customers who are
beneficial owners of Series B Shares should read this Prospectus in light of
the terms and fees governing their accounts with Service Organizations. Under
applicable NASD rules, the aggregate deferred sales charges and payments under
the Plan with respect to Series B Shares are generally limited with respect to
the Portfolio to 6.25% of total new gross Series B Share sales, plus interest.
The Fund would retain any deferred sales charges collected and stop accruing
payments under the Plan if, to the extent, and for as long as, such limit would
otherwise be exceeded. See "How to Purchase Shares--Purchases of Series B
Shares" for a description of the deferred sales charge.
Payments under the Plan which are expenses of the Portfolio's Investor
Shares are for distribution and/or other services rendered for or on behalf of
the Investor Shares of the Portfolio. However, joint distribution financing
with respect to Shares of the Portfolio (which financing may also involve other
investment portfolios or companies that are affiliated persons of such a
person, or affiliated persons of the Distributor) will be permitted in
accordance with applicable regulations of the SEC if and when such regulations
are adopted.
Payments under the Plan are not tied directly to out-of-pocket
expenses and therefore may be used as the Distributor or PMFCO elect (for
example, to defray their overhead expenses). See "Description of Shares."
SHAREHOLDER SERVICING
- --------------------------------------------------------------------------------
The Fund intends to enter into service agreements pursuant to which
Service Organizations and sometimes the Distributor will render certain support
services to their customers who are the beneficial owners of Investor Shares.
Such services will be provided to customers who are the beneficial owners of
Investor Shares and are intended to supplement the services provided by the
Fund's Administrators and transfer agent. Service Organizations and the
Distributor may provide one or more of the following services to such
customers: establishing and maintaining accounts and records relating to
customers that invest in Investor Shares; processing dividend and distribution
payments from the Fund on behalf of customers; arranging for bank wires;
providing sub-accounting with respect to Investor Shares beneficially owned by
customers or the information necessary for sub-accounting; forwarding
shareholder communications from the Fund (such as proxies, shareholder reports,
annual and semi-annual financial statements and dividend, distribution and tax
notices) to
<PAGE> 94
customers; assisting in processing purchase, exchange and redemption requests
from customers and in placing such orders with the Fund's service contractors;
assisting customers in changing dividend options, account designations and
addresses; providing customers with a service that invests the assets of their
accounts in Investor Shares pursuant to specific or pre-authorized
instructions; providing information periodically to customers showing their
positions in Investor Shares and integrating such statements with those of
other transactions and balances in customers' other accounts with the Service
Organization; responding to customer inquiries relating to the services
performed by the Service Organization or the Distributor; responding to
customer inquiries concerning their investments in Investor Shares; and
providing other similar shareholder liaison services. Customers who are
beneficial owners of Investor Shares should read this Prospectus in light of
the terms and fees governing their accounts with Service Organizations.
HOW TO PURCHASE SHARES
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GENERAL
Shares in the Portfolio may be purchased through PNC Bank, PNC Bank
Ohio, institutional investors and Authorized Dealers, or by completing and
forwarding the application included in this Prospectus, through any one of
them, to the Fund's transfer agent. Subsequent purchases of Shares may be
effected through PNC Bank, PNC Bank Ohio, institutional investors and
Authorized Dealers or by mailing a check or Federal Reserve Draft, payable to
the order of "The PNC Fund" c/o PFPC, P.O. Box 8907, Wilmington, Delaware
19899-8907. The name of the Portfolio for which Shares are being purchased
must also appear on the check or Federal Reserve Draft. Federal Reserve Drafts
are available at national banks or any state bank which is a member of the
Federal Reserve System. Initial investments in the Portfolio must be at least
$500, except that such minimum investment requirement is: (i) $100 for
employees of the Fund, the Fund's adviser, sub-advisers, Distributor or
transfer agent or employees of any such service providers' affiliate; and (ii)
$50 for investors purchasing shares under the automatic investing program
described in "Investor Programs--Automatic Investing. "Subsequent investments
must be at least $100. The Fund reserves the right to reject any purchase
order. Certificates for Series A Shares will be issued only upon request. No
certificates will be issued for Series B Shares.
Investor Shares may be purchased on any Business Day. A "Business
Day" is any weekday that the New York Stock Exchange (the "NYSE") and the
Federal Reserve Bank of Philadelphia (the "FRB") are open for business.
<PAGE> 95
Investor Shares are sold at the applicable offering price next
computed after an order is received by the Fund's transfer agent. It is the
responsibility of the Distributor, PNC Bank, PNC Bank Ohio, institutional
investors and the Authorized Dealers to transmit orders received by them from
investors to the Fund's transfer agent in a timely manner. Orders of less than
$500 may be mailed by PNC Bank, PNC Bank Ohio, institutional investors and
Authorized Dealers to the transfer agent. Orders received by the Fund's
transfer agent after 4:00 p.m. are priced at the applicable offering price on
the following Business Day.
ALTERNATIVE PURCHASE OPTIONS
Purchases of Investor Shares of the Portfolio are subject to a sales
charge. Purchases of Series A Shares are subject to a "front-end" sales charge
deducted at the time of purchase. Series B Shares are subject to a deferred or
"back-end" sales charge which is deducted upon their redemption. The deferred
sales charge applicable to purchases of Series B Shares declines over time and
is known as a "contingent deferred sales charge." Investors may elect to have
the sales charge applicable to their purchase of Shares deducted at the time of
purchase by purchasing Series A Shares. Alternatively, investors may elect to
have the sales charge applicable to their purchase of Shares deducted upon
their redemption by purchasing Series B Shares. INVESTORS WHO PURCHASE SHARES
OF THE PORTFOLIO MUST SPECIFY AT THE TIME OF PURCHASE WHETHER THEY ARE
PURCHASING SERIES A SHARES OR SERIES B SHARES.
EXEMPTIONS FROM THE FRONT-END SALES CHARGE. The following persons
associated with the Fund, the Distributor, the Fund's investment adviser,
sub-advisers or transfer agent and affiliates of any of the above may buy
Series A Shares without paying a sales charge to the extent permitted by such
firms: (a) officers, directors and partners (and their spouses and minor
children); (b) full-time employees and retirees (and their spouses and minor
children); (c) registered representatives of Authorized Dealers and of the
Distributor; (d) spouses or children of any such persons; (e) any trust,
pension, profit-sharing or other benefit plan for any of the persons set forth
in (a) through (d). The following persons may also buy Series A Shares without
paying a sales charge: (a) persons investing through an authorized payroll
deductions plan; (b) persons investing through an authorized investment plan
for organizations which operate under Section 501(c)(3) of the Internal Revenue
Code; and (c) registered investment advisers, trust companies and bank trust
departments exercising discretionary investment authority with respect to
amounts to be invested in the Portfolio, provided that the aggregate amount
invested pursuant to this exemption equals at least $250,000. INVESTORS WHO
QUALIFY FOR ANY EXEMPTION FROM THE SALES CHARGE ORDINARILY PAYABLE WITH RESPECT
TO PURCHASES OF INVESTOR SHARES MUST PURCHASE SERIES A SHARES.
<PAGE> 96
CHOOSING BETWEEN SERIES A SHARES AND SERIES B SHARES
Investors should understand the differences between Series A Shares
and Series B Shares before purchasing Shares of the Portfolio.
SERIES A SHARES. Series A Shares are sold at the net asset value for
Series A Shares of the Portfolio plus the applicable front-end sales charge.
This front-end sales charge may be reduced or waived in some cases. See "How
to Purchase Shares--Exemptions from the Sales Charge" and "How to Purchase
Shares--Purchases of Series A Shares." Series A Shares bear the expense of
payments under the Plan at an annual rate not to exceed .50% of the average
daily net asset value of the Portfolio's outstanding Series A Investor Shares.
See "Distribution of Shares."
SERIES B SHARES. Series B Shares are sold at the net asset value for
Series B Shares of the Portfolio. A deferred sales charge is deducted if
Series B Shares are redeemed within six years of purchase. The deferred sales
charge deducted upon the redemption of Series B Shares decreases over time.
See "How to Purchase Shares--Purchases of Series B Shares." Series B Shares
bear the expense of payments under the Plan at an annual rate not to exceed
1.15% of the average daily net asset value of the Portfolio's outstanding
Series B Investor Shares. See "Distribution of Shares." If payments under the
Plan are made at the maximum rates, then Series B Shares of the Portfolio will
have higher operating expenses and will pay lower dividends than Series A
Shares of the Portfolio.
Six years after the date of purchase, Series B Shares will
automatically convert to Series A Shares. The purpose of the conversion is to
relieve the holders of Series B Shares of the higher operating expenses charged
to Series B Shares. The conversion from Series B Shares to Series A Shares
will take place at the net asset value of each class of Shares at the time of
the conversion. Upon such conversion, an investor would hold Series A Shares
subject to the operating expenses for Series A Shares discussed above. Upon
each conversion of Series B Shares that were not acquired through reinvestment
of dividends or distributions, a proportionate amount of Series B Shares that
were acquired through reinvestment of dividends or distributions will likewise
automatically convert to Series A Shares.
FACTORS TO CONSIDER IN CHOOSING BETWEEN SERIES A SHARES AND SERIES B
SHARES. Before deciding between Series A Shares and Series B Shares of the
Portfolio, an investor should carefully consider the amount and intended length
of his investment in Investor Shares. Specifically, an investor should
consider whether the accumulated distribution and servicing fees and the
deferred sales charge applicable to Series B Shares would be less than the
front-end sales charge and accumulated distribution fees applicable
<PAGE> 97
to Series A Shares purchased at the same time and held for the same period, and
the extent to which the difference between those amounts would be offset by the
higher returns associated with Series A Shares. Because the operating expenses
of Series B Shares are greater than those of Series A Shares in the Portfolio,
the dividends on Series A Shares will be higher than the dividends on Series B
Shares. However, since a front-end sales charge is deducted at the time of
purchase of Series A Shares, not all of the purchase amount will purchase
Series A Shares. Consequently, the same initial investment will purchase more
Series B Shares than Series A Shares of the Portfolio.
Because of reductions in the front-end sales charge for purchases of
Series A Shares aggregating $50,000 or more, it may be advantageous for
investors purchasing large quantities of Investor Shares to purchase Series A
Shares. In any event, the Fund will not accept any purchase order for $1
million or more of Series B Shares. In addition, because the accumulated
higher operating expenses of Series B Shares may eventually exceed the amount
of the front-end sales charge and distribution fees associated with Series A
Shares, investors who intend to hold their Investor Shares for an extended
period of time should consider purchasing Series A Shares.
Investors who would not qualify for a reduction in the front-end sales
charge for purchases of Series A Shares may decide that it is more advantageous
to have the entire purchase amount invested immediately in Series B Shares
notwithstanding the higher operating expenses associated with Series B Shares.
These higher operating expenses may be offset by any return an investor
receives from the additional Investor Shares received as a result of not having
to pay a front-end sales charge. However, investors should understand that the
Portfolio's future return cannot be predicted, and that there is no assurance
that such return, if any, would compensate for the higher operating expenses
associated with Series B Shares.
PURCHASES OF SERIES A SHARES
Series A Investor Shares are sold at their public offering price
(i.e., net asset value of the Series A Shares plus the applicable front-end
sales charge) next computed after a purchase order is received by the Fund's
transfer agent. The following table shows sales charges at various investment
levels. Sales charges are reduced on a graduated scale on single purchases of
$50,000 or more. During special promotions, the entire sales charge may be
reallowed to dealers. In addition, certain dealers who enter into an agreement
to provide extra training and information on products, or marketing and related
services, and who increase sales of Shares may also receive additional payments
from the Distributor. Dealers who receive 90% or more of the sales charge may
be deemed to be "underwriters" under the 1933 Act.
<PAGE> 98
<TABLE>
<CAPTION>
Reallowance
for
Sales Sales Placement
Charge as Charge as fees
Percentage Percentage to dealers
of of (as % of
Amount of Transaction Offering Net Offering
at Offering Price Price Asset Value Price)
--------------------- ---------- ----------- -----------
<S> <C> <C> <C>
Less than $50,000 . . . . . . . . . . . . . . . 4.50% 4.71% 4.00%
$50,000 but less than $75,000 . . . . . . . . . 3.50 3.63 3.00
$75,000 but less than $100,000 . . . . . . . . 3.00 3.09 2.50
$100,000 but less than $250,000 . . . . . . . . 2.50 2.56 2.00
$250,000 but less than $500,000 . . . . . . . . 1.50 1.52 1.25
$500,000 but less than $1,000,000 . . . . . . . 1.00 1.01 0.75
$1,000,000 but less than $2,000,000 . . . . . . 0.00 0.00 0.50*
$2,000,000 and over . . . . . . . . . . . . . . 0.00 0.00 0.25*
</TABLE>
* Placement fees the Distributor may pay to dealers, provided the
aggregate of such fees (including placement fees described below
payable to dealers in connection with investments of redemption
proceeds from other investment companies) does not exceed the
aggregate amount of front-end sales charges, net of dealer
reallowances, on Fund shares subject to a front-end sales charge.
Dealers must refund a pro-rata portion of such fee if the Series A
Shares are redeemed within six months.
The foregoing schedule of sales charges applies to purchases made at
any one time by the following: (a) any individual; (b) any individual, his or
her spouse, and their children under the age of 21; (c) a trustee or fiduciary
of a single trust estate or single fiduciary account; or (d) any organized
group which has been in existence for more than six months, provided that it is
not organized for the purpose of buying redeemable securities of a registered
investment company, and provided that the purchase is made through a central
administrator, or through a single dealer, or by other means which result in
economy of sales effort or expense. An organized group does not include a
group of individuals whose sole organizational connection is participation as
credit card holders of a company, policyholders of an insurance company,
customers of either a bank or broker/dealer or clients of an investment
adviser. Purchases made by an organized group may include, for example, a
trustee or other fiduciary purchasing for a single fiduciary account or other
employee benefit plan purchases made through a payroll deduction plan.
The sales charge (as a percentage of the offering price) payable by
qualified employee benefit plans ("Qualified Plans") having at least 20
employees eligible to participate on purchases
<PAGE> 99
of Series A Investor Shares of the Portfolio aggregating less than $500,000
will be 1.00%. The above schedule will apply to purchases by those Qualified
Plans of Series A Investor Shares of the Portfolio aggregating $500,000 and
above. The effect of this policy is to make the sales load 1.00% for purchases
by such Qualified Plans of Series A Investor Shares of the Portfolio
aggregating less than $1,000,000, while no sales charge applies to purchases
aggregating $1,000,000 and above. The sales charge payable by Qualified Plans
having less than 20 employees eligible to participate on purchases of Series A
Investor Shares of the Portfolio aggregating less than $100,000 will be 2.50%.
The above schedule will apply to purchases by such Qualified Plans of Series A
Investor Shares aggregating $100,000 and above. The effect of this policy is
to make the maximum sales load 2.50% for purchases of Series A Investor Shares
of the Portfolio by Qualified Plans with less than 20 employees eligible to
participate. Such Qualified Plans may take advantage of the lower sales
charges set forth in the above schedule by purchasing Series A Investor Shares
of the Portfolio aggregating $250,000 and above.
HOW TO REDEEM SHARES
- --------------------------------------------------------------------------------
REDEMPTION
Shareholders may redeem for cash some or all of their Shares of the
Portfolio at any time. To do so, a written request in proper form must be sent
directly to The PNC Fund c/o PFPC, P.O. Box 8907, Wilmington, Delaware
19899-8907. Except for the contingent deferred sales charge that may be
charged with respect to Series B Shares, there is no charge for a redemption.
Shareholders may also place redemption requests through an Authorized Dealer,
but the Authorized Dealer might charge a fee for this service.
WHEN REDEEMING INVESTOR SHARES IN THE PORTFOLIO, SHAREHOLDERS SHOULD
INDICATE WHETHER THEY ARE REDEEMING SERIES A SHARES OR SERIES B SHARES. In the
event a redeeming shareholder owns both Series A Shares and Series B Shares in
the Portfolio, the Series A Shares will be redeemed first unless the
shareholder indicates otherwise.
Except as noted below, a request for redemption must be signed by all
persons in whose names the Shares are registered. Signatures must conform
exactly to the account registration. If the proceeds of the redemption would
exceed $25,000, or if the proceeds are not to be paid to the record owner at
the record address, or if the shareholder is a corporation, partnership, trust
or fiduciary, signature(s) must be guaranteed by any eligible guarantor
institution as defined in Rule 17Ad-15 under the Securities Exchange Act of
1934. Eligible guarantor institutions
<PAGE> 100
generally include banks, broker/dealers, credit unions, national securities
exchanges, registered securities associations, clearing agencies and savings
associations.
Generally, a properly signed written request with any required
signature guarantee is all that is required for a redemption. In some cases,
however, other documents may be necessary. In the case of shareholders holding
Series A Share certificates, the certificates for the Series A Shares being
redeemed must accompany the redemption request. Additional documentary
evidence of authority is required by PFPC in the event redemption is requested
by a corporation, partnership, trust, fiduciary, executor or administrator.
EXPEDITED REDEMPTIONS
If a shareholder has given authorization for expedited redemption,
Shares can be redeemed by telephone and the proceeds sent by check to the
shareholder or by Federal wire transfer to a single previously designated bank
account. Once authorization is on file, PFPC will honor requests by any person
by telephone at (800) 441-7762 (in Delaware call collect (302) 791-1194) or
other means. The minimum amount that may be sent by check is $500, while the
minimum amount that may be wired is $10,000. The Fund reserves the right to
change these minimums or to terminate these redemption privileges. If the
proceeds of a redemption would exceed $25,000, the redemption request must be
in writing and will be subject to the signature guarantee requirement described
above in "How to Redeem Shares--Redemption." This privilege may not be used to
redeem Series A Shares in certificated form.
During periods of substantial economic or market change, telephone
redemptions may be difficult to complete. If a shareholder is unable to
contact the transfer agent by telephone, the shareholder may also deliver the
redemption request to the transfer agent by mail at PFPC Inc., P.O. Box 8907,
Wilmington, DE 19899-8907.
The Fund is not responsible for the efficiency of the Federal wire
system or the shareholder's firm or bank. The Fund does not currently charge
for wire transfers. The shareholder is responsible for any charges imposed by
the shareholder's bank. To change the name of the single designated bank
account to receive wire redemption proceeds, it is necessary to send a written
request (with a guaranteed signature as described under "How to Redeem
Shares--Redemption") to The PNC Fund c/o PFPC, P.O. Box 8907, Wilmington,
Delaware 19899-8907.
The Fund reserves the right to refuse a telephone redemption if it
believes it advisable to do so. The Fund, the Administrators and the
Distributor will not be liable for any loss, liability, cost or expense for
acting upon telephone instructions reasonably
<PAGE> 101
believed to be genuine. See "Investor Programs--Exchange Privilege" for a
description of the Fund's policy on telephone instructions. For further
information, see "How to Redeem Shares--Payment of Redemption Proceeds."
ACCOUNTS WITH LOW BALANCES
The Fund reserves the right to redeem a shareholder's account in the
Portfolio at any time the net asset value of the account in the Portfolio falls
below the minimum initial investment requirement amount as the result of a
redemption or an exchange request. A shareholder will be notified in writing
that the value of the shareholder's account in the Portfolio is less than the
required amount and will be allowed 30 days to make additional investments
before the redemption is processed.
PAYMENT OF REDEMPTION PROCEEDS
The redemption price for Series A and Series B Shares of the Portfolio
is the net asset value per share of the Series A and Series B Shares,
respectively, of the Portfolio next determined after the request for redemption
is received in proper form by The PNC Fund c/o PFPC, P.O. Box 8907,
Wilmington, Delaware 19899-8907. Proceeds from the redemption of Series B
Shares will be reduced by the amount of any applicable contingent deferred
sales charge. Payment for Shares redeemed is made by check mailed within seven
days after acceptance by PFPC of the request and any other necessary documents
in proper order. Such payment may be postponed or the right of redemption
suspended as provided by the rules of the SEC. If the Shares to be redeemed
have been recently purchased by check, the Fund's transfer agent may delay the
payment of redemption proceeds, which may be a period of up to 15 days after
the purchase date, pending a determination that the check has cleared.
INVESTOR PROGRAMS
- --------------------------------------------------------------------------------
EXCHANGE PRIVILEGE
After appropriate authorization, a shareholder may exchange, without a
sales charge, Series A Investor Shares and Series B Investor Shares of the
Portfolio for Series A Investor Shares and Series B Investor Shares,
respectively, of any other investment portfolio of the Fund at the net asset
value of each class of shares next determined after the transfer agent's
receipt of a request for an exchange. Series B Shares are exchangeable without
the payment of any contingent deferred sales charge at the time the exchange is
made. In determining the holding period for calculating the contingent
deferred sales charge payable on redemptions of Series B Shares, the holding
period of the Series B Shares originally held will be added to the holding
period of the
<PAGE> 102
Series B Shares acquired through the exchange. Series B Shares are
exchangeable for Series B Investor Shares in the Fund's Money Market Portfolio,
but are not exchangeable for shares in the Fund's other money market investment
portfolios. No exchange fee is imposed by the Fund. The public offering of
Series B Investor Shares in certain investment portfolios of the Fund may not
commence on the date of this Prospectus. Prospectuses for the other portfolios
of the Fund and information on the availability of Series B Investor Shares of
such portfolios can be obtained by calling the Fund's Distributor at (800)
422-6538.
A shareholder wishing to make an exchange may do so by sending a
written request to PFPC at the address given above in "How to Purchase
Shares--General." Shareholders are automatically provided with telephone
exchange privileges when opening an account, unless they indicate on the
Application that they do not wish to use this privilege. Shareholders holding
share certificates are not eligible to exchange Series A Shares by phone
because share certificates must accompany all exchange requests. To add this
feature to an existing account that previously did not provide for this option,
a Telephone Exchange Authorization Form must be filed with PFPC. This form is
available from PFPC. Once this election has been made, the shareholder may
simply contact PFPC by telephone at (800) 441-7762 (in Delaware call collect
(302) 791-1194) to request the exchange. During periods of substantial
economic or market change, telephone exchanges may be difficult to complete and
shareholders may have to submit exchange requests to PFPC in writing.
If the exchanging shareholder does not currently own shares of the
investment portfolio whose shares are being acquired, a new account will be
established with the same registration, dividend and capital gain options and
Authorized Dealer of record as the account from which shares are exchanged,
unless otherwise specified in writing by the shareholder with all signatures
guaranteed by an eligible guarantor institution as defined above. In order to
participate in the automatic investment program or establish a systematic
withdrawal plan for the new account, however, an exchanging shareholder must
file a specific written request. The exchange privilege may be modified or
terminated at any time, or from time to time, by the Fund on 60 days' notice to
affected Portfolio shareholders. THE FUND, THE ADMINISTRATORS AND THE
DISTRIBUTOR WILL NOT BE LIABLE FOR ANY LOSS, LIABILITY, COST OR EXPENSE FOR
ACTING UPON TELEPHONE INSTRUCTIONS THAT ARE REASONABLY BELIEVED TO BE GENUINE.
IN ATTEMPTING TO CONFIRM THAT TELEPHONE INSTRUCTIONS ARE GENUINE, THE FUND WILL
USE SUCH PROCEDURES AS ARE CONSIDERED REASONABLE, INCLUDING RECORDING THOSE
INSTRUCTIONS AND REQUESTING INFORMATION AS TO ACCOUNT REGISTRATION (SUCH AS THE
NAME IN WHICH AN ACCOUNT IS REGISTERED, THE ACCOUNT NUMBER, RECENT TRANSACTIONS
IN THE ACCOUNT, AND THE ACCOUNT HOLDER'S SOCIAL SECURITY NUMBER, ADDRESS AND/OR
BANK).
<PAGE> 103
In establishing a new account by exchange, the dollar value of shares
acquired must equal or exceed the investment portfolio's minimum for a new
account; if making an exchange to an existing account, the dollar value must
equal or exceed the Fund's minimum for subsequent investments. If any amount
remains in the investment portfolio from which the exchange is being made, such
amount must not drop below the minimum account value required by the Fund.
AUTOMATIC INVESTING
Investments in Shares may be made automatically by authorizing the
Fund's transfer agent to withdraw funds from your bank account. An initial
minimum investment of $50 per Portfolio, and subsequent investments of at least
$50, are required. Investors desiring to participate in the automatic
investing program should call PFPC at (800) 441-7762 (in Delaware call collect
(302) 791-1194) to obtain the appropriate forms.
SYSTEMATIC WITHDRAWAL PLAN
If your account in the Portfolio has a value of at least $10,000, you
may establish a Systematic Withdrawal Plan with respect to the Portfolio and
receive regular periodic payments. A request to establish a Systematic
Withdrawal Plan must be submitted in writing to The PNC Fund c/o PFPC, P.O.
Box 8907, Wilmington, Delaware 19899-8907. Shareholders holding Series A Share
certificates are not eligible to establish a Systematic Withdrawal Plan because
Series A Share certificates must accompany all withdrawal requests. Each
withdrawal redemption may, at the shareholder's election, be processed either
monthly, every other month, quarterly, three times a year, semi-annually or
annually on or about the 25th of the month and mailed as soon as possible
thereafter. There are no service charges for maintenance; the minimum amount
that you may withdraw each period is $100. (This is merely the minimum amount
allowed and should not be mistaken for a recommended amount.) THE AMOUNT OF
REGULAR PERIODIC PAYMENTS SPECIFIED BY HOLDERS OF SERIES B SHARES PURSUANT TO A
SYSTEMATIC WITHDRAWAL PLAN WILL BE REDUCED BY ANY APPLICABLE DEFERRED SALES
CHARGE. The holder of a Systematic Withdrawal Plan will have any income
dividends and any capital gains distributions reinvested in full and fractional
Shares at net asset value. To provide funds for payment, Shares of the
Portfolio will be redeemed in such amount as is necessary to make the payment.
Redemption of Shares may reduce or possibly exhaust the Shares in your account,
particularly in the event of a market decline. As with other redemptions, a
redemption to make a withdrawal payment is a sale for Federal income tax
purposes. Payments made pursuant to a Systematic Withdrawal Plan cannot be
considered as actual yield or income since part of such payments may be a
return of capital.
<PAGE> 104
The maintenance of a Systematic Withdrawal Plan for the Portfolio
concurrently with purchases of additional Shares of the Portfolio may be
disadvantageous because of the sales commission involved in the additional
purchases. You will ordinarily not be allowed to make additional investments
of less than the aggregate annual withdrawals under the Systematic Withdrawal
Plan during the time you have the Systematic Withdrawal Plan in effect and,
while a Systematic Withdrawal Plan is in effect, you may not make periodic
investments under Automatic Investing. THE MAINTENANCE OF A SYSTEMATIC
WITHDRAWAL PLAN MAY ALSO BE DISADVANTAGEOUS FOR HOLDERS OF SERIES B SHARES DUE
TO THE EFFECT OF THE CONTINGENT DEFERRED SALES CHARGE. You will receive a
confirmation of each transaction showing the sources of the payment and the
Share and cash balance remaining in your Systematic Withdrawal Plan. The
Systematic Withdrawal Plan may be terminated on written notice by the
shareholder or by the Fund with respect to the Portfolio and it will terminate
automatically if all Shares are liquidated or withdrawn from the account or
upon the death or incapacity of the shareholder. You may change the amount and
schedule of withdrawal payments or suspend such payments by giving written
notice to PFPC at least seven business days prior to the end of the month
preceding a scheduled payment.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The net asset value for each Series A Share and the Series B Share for
the Portfolio is calculated as of the close of trading on the NYSE (currently
4:00 p.m. Eastern Time) on each Business Day by adding the value of all its
securities, cash and other assets allocable to its Series A and Series B
Shares, respectively, subtracting the liabilities allocable to its Series A and
Series B Shares, respectively, and dividing by the respective total number of
Series A and Series B Shares outstanding. The net asset values per Series A
Share and per Series B Share of the Portfolio are determined independently of
the Portfolio's other classes and independently of the Fund's other portfolios.
Because the operating expenses of Series B Shares are higher than those
associated with Series A Shares, the net asset value per Series A Share of the
Portfolio will generally be higher than the net asset value per Series B Share
of the Portfolio.
Valuation of securities held by the Portfolio is as follows:
securities traded on a national securities exchange or on the NASDAQ National
Market System are valued at the last reported sale price that day; securities
traded on a national securities exchange or on the NASDAQ National Market
System for which there were no sales on that day and securities traded on other
over-the-counter markets for which market quotations are readily available are
valued at the mean of the bid and asked prices; an option or futures contract
is valued at the last sales price prior to 4:00 p.m. (Eastern Time), as quoted
on the principal exchange or board
<PAGE> 105
of trade on which such option or contract is traded, or in the absence of a
sale, the mean between the last bid and asked prices prior to 4:00 p.m.
(Eastern Time); and securities for which market quotations are not readily
available are valued at fair market value as determined in good faith by or
under the direction of the Fund's Board of Trustees. The amortized cost method
of valuation will also be used with respect to debt obligations with sixty days
or less remaining to maturity unless the investment adviser and/or sub-adviser
under the supervision of the Board of Trustees determines such method does not
represent fair value.
The Portfolio may use a pricing service, bank or broker/dealer
experienced in such matters to value the Portfolio's securities. A more
detailed discussion of net asset value and security valuation is contained in
the Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
- --------------------------------------------------------------------------------
The Portfolio will distribute substantially all of its net investment
income and net realized capital gains, if any, to shareholders. For dividend
purposes, the Portfolio's investment income available for distribution to
holders of Investor Shares is reduced by accrued expenses directly attributable
to the Portfolio and the general expenses of the Fund prorated to the Portfolio
on the basis of its relative net assets. The Portfolio's net investment income
available for distribution to the holders of Series A Shares and Series B
Shares will be reduced by the amount of other expenses allocated to such
respective series of the Portfolio's Investor Shares, including fees payable
under the Fund's Plan. All distributions are reinvested at net asset value in
the form of additional full and fractional Shares of the Portfolio unless a
shareholder elects otherwise. Such election, or any revocation thereof, must
be made in writing to PFPC, and will become effective with respect to dividends
paid after its receipt by PFPC. The net investment income of the Portfolio is
declared daily as a dividend to investors who are Shareholders of the Portfolio
at, and whose payment for Share purchases are available to the Portfolio in
Federal funds by, the close of business on the day of declaration. The
Portfolio will pay all such dividends within seven days after redemption of all
of a shareholder's Shares in the Portfolio. Net realized capital gains
(including net short-term capital gains), if any, will be distributed by the
Portfolio at least annually.
TAXES
- --------------------------------------------------------------------------------
The following discussion is only a brief summary of some of the
important tax considerations generally affecting the Portfolio and their
shareholders and is not intended as a substitute for careful tax planning.
Accordingly, investors in the Portfolio
<PAGE> 106
should consult their tax advisers with specific reference to their own tax
situation.
The Portfolio will elect to be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. So long
as the Portfolio qualifies for this tax treatment, it generally will be
relieved of Federal income tax on amounts distributed to shareholders, but
shareholders, unless otherwise exempt, will pay income or capital gains taxes
on amounts so distributed (except distributions that constitute "exempt
interest dividends" or that are treated as a return of capital), regardless of
whether such distributions are paid in cash or reinvested in additional Shares.
Distributions paid out of the "net capital gain" (the excess of net
long-term capital gain over net short-term capital loss), if any, of the
Portfolio will be taxed to shareholders as long-term capital gain, regardless
of the length of time a shareholder has held his Shares and whether such gain
was reflected in the price paid for the Shares. All other distributions, to
the extent they are taxable, are taxed to shareholders as ordinary income.
The Portfolio intends to pay substantially all of its dividends as
"exempt interest dividends." Investors in the Portfolio should note, however,
that taxpayers are required to report the receipt of tax-exempt interest and
"exempt interest dividends" on their Federal income tax returns and that in two
circumstances such amounts, while exempt from regular Federal income tax, are
taxable to persons subject to alternative minimum and environmental taxes.
First, tax-exempt interest and "exempt interest dividends" derived from certain
private activity bonds issued after August 7, 1986 generally will constitute an
item of tax preference for corporate and noncorporate taxpayers in determining
alternative minimum and environmental tax liability. Although they do not
currently intend to do so, during normal market conditions the Portfolio may
invest up to 20% of their respective net assets in such private activity bonds.
Second, tax-exempt interest and "exempt interest dividends" derived from all
other Municipal Obligations must be taken into account by corporate taxpayers
in determining certain adjustments for alternative minimum and environmental
tax purposes. In addition, investors should be aware of the possibility of
state and local alternative minimum or minimum income tax liability from such
private activity bonds. Shareholders who are recipients of Social Security Act
or Railroad Retirement Act benefits should further note that tax-exempt
interest and "exempt interest dividends" derived from all types of Municipal
Obligations will be taken into account in determining the taxability of their
benefit payments.
The Portfolio will determine annually the percentages of its net
investment income which are exempt from the regular Federal income tax, which
constitute an item of tax preference for purposes
<PAGE> 107
of the Federal alternative minimum tax, and which are fully taxable. Such
percentages will apply uniformly to all distributions declared from net
investment income during that year. These percentages may differ significantly
from the actual percentages for any particular day.
The Fund will send written notices to shareholders annually regarding
the tax status of distributions made by the Portfolio. Dividends declared in
October, November or December of any year payable to shareholders of record on
a specified date in those months will be deemed to have been received by the
shareholders on December 31 of such year, if the dividends are paid during
January of the following year.
An investor considering buying shares of the Portfolio on or just
before the record date of a taxable dividend should be aware that the amount of
the forthcoming dividend payment, although in effect a return of capital, will
be taxable to him.
A taxable gain or loss may be realized by a shareholder upon his
redemption, transfer or exchange of Portfolio Shares depending upon the tax
basis of such Shares and their price at the time of redemption, transfer or
exchange. Generally, a shareholder may include sales charges incurred upon the
purchase of Portfolio Shares in his tax basis for such Shares for the purpose
of determining gain or loss on a redemption, transfer or exchange of such
Shares. However, if the shareholder effects an exchange of such Shares for
Shares of another Portfolio within 90 days of the purchase and is able to
reduce the sales charges applicable to the new Shares (by virtue of the Fund's
exchange privilege), the amount equal to such reduction may not be included in
the tax basis of the shareholder's exchanged Shares but may be included
(subject to the same limitation) in the tax basis of the new Shares.
Any loss upon the sale or exchange of shares of the Portfolio held for
six months or less will be disallowed for Federal income tax purposes to the
extent of any exempt interest dividends received by the shareholder.
Future legislative or administrative changes or court decisions may
materially affect the tax consequences of investing in the Portfolio.
Shareholders are also urged to consult their tax advisers concerning the
application of state and local income taxes to investments in the Fund which
may differ from the Federal income tax consequences described above.
Shareholders who are nonresident alien individuals, foreign trusts or estates,
foreign corporations or foreign partnerships may be subject to different U.S.
Federal income tax treatment and should consult their tax advisers.
NEW JERSEY TAX CONSIDERATIONS. It is anticipated that substantially
all dividends paid by the Portfolio will not be subject to New Jersey personal
income tax. In accordance with the
<PAGE> 108
provisions of New Jersey law as currently in effect, distributions paid by a
"qualified investment fund" will not be subject to the New Jersey personal
income tax to the extent that the distributions are attributable to income
received as interest or gain from New Jersey Municipal Obligations, or as
interest or gain from direct U.S. Government obligations. Distributions by a
qualified investment fund that are attributable to most other sources will be
subject to the New Jersey personal income tax. If the Portfolio qualifies as a
qualified investment fund under New Jersey law, any gain on the redemption or
sale of the Portfolio's shares will not be subject to the New Jersey personal
income tax. To be classified as a qualified investment fund, at least 80% of
the Portfolio's investments must consist of New Jersey Municipal Obligations or
direct U.S. Government obligations; it must have no investments other than
interest-bearing obligations, obligations issued at a discount, and cash and
cash items (including receivables); and it must satisfy certain reporting
obligations and provide certain information to its shareholders. Shares of the
Portfolio are not subject to property taxation by New Jersey or its political
subdivisions. To the extent that a shareholder is subject to state or local
taxes outside New Jersey, dividends earned by an investment in the Portfolio
may represent taxable income.
The New Jersey personal income tax is not applicable to corporations.
For all corporations subject to the New Jersey Corporation Business Tax,
dividends and distributions from a "qualified investment fund" are included in
the net income tax base for purposes of computing the Corporation Business Tax.
Furthermore, any gain upon the redemption or sale of shares by a corporate
shareholder is also included in the net income tax base for purposes of
computing the Corporation Business Tax.
The foregoing is only a summary of certain New Jersey tax
considerations generally affecting the Portfolio and its shareholders, and is
not intended as a substitute for careful tax planning. Shareholders are urged
to consult their tax advisers with specific reference to their own tax
situations.
DESCRIPTION OF SHARES
- --------------------------------------------------------------------------------
The Fund was organized as a Massachusetts business trust on December
22, 1988 and is registered under the 1940 Act as an open-end management
investment company. The Declaration of Trust authorizes the Board of Trustees
to classify and reclassify any unissued shares into one or more classes of
shares. Pursuant to such authority, the Board of Trustees has authorized the
issuance of an unlimited number of shares in each of 109 classes (22 classes of
"Series B Investor Shares" and 29 classes each of "Series A Investor Shares,"
"Service Shares" and "Institutional Shares") representing interests in the
Fund's investment portfolios. This
<PAGE> 109
Prospectus describes the New Jersey Tax-Free Income Portfolio, which is
classified as a non-diversified company under the 1940 Act. For information
regarding these other portfolios, contact the Distributor by phone at (800)
998-7633 or at the address listed in "Distribution of Shares."
Each share of an investment portfolio has a par value of $.001,
represents an equal proportionate interest in the particular portfolio and is
entitled to such dividends and distributions earned on such portfolio's assets
as are declared in the discretion of the Board of Trustees. The Fund's
shareholders are entitled to one vote for each full share held and
proportionate fractional votes for fractional shares held, and will vote in the
aggregate and not by class, except where otherwise required by law or when the
Board of Trustees determines that the matter to be voted upon affects only the
interests of the shareholders of a particular class or investment portfolio.
Under the law of Massachusetts, the Fund's state of organization, and the
Fund's Declaration of Trust and Code of Regulations, the Fund is not required
and does not currently intend to hold annual meetings of shareholders for the
election of trustees (except as required under the 1940 Act). For a further
discussion of the voting rights of shareholders, see "Additional Information
Concerning Shares" in the Statement of Additional Information.
Holders of Investor Shares bear the fees described under "Distribution
of Shares" that are paid under the Fund's Plan. Similarly, holders of a
Portfolio's Service Shares bear the expense of fees described in the prospectus
for such shares that are paid under the Fund's Plan. Payments under the Plan
with respect to Service Shares will cover expenses relating to the support
services provided to beneficial owners of Service Shares by certain
institutions. Such services are intended to supplement the services provided
by the Fund's Administrators and transfer agent to the Fund's shareholders of
record. In consideration for payment of up to .15% (on an annualized basis) of
the average daily net asset value of Service Shares owned beneficially by their
customers, institutions may provide one or more of the following services to
such customers: processing purchase and redemption requests from customers and
placing orders with the Fund's transfer agent or the Distributor; processing
dividend payments from the Fund on behalf of customers; providing
sub-accounting with respect to Service Shares beneficially owned by customers
or the information necessary for sub-accounting; and other similar services.
In consideration for payment of a service fee of up to a separate .15% (on an
annualized basis) of the average daily net asset value of Service Shares owned
beneficially by their customers, institutions may provide one or more of these
additional services to such customers: responding to customer inquiries
relating to the services performed by the institution and to customer inquiries
concerning their investments in Service Shares; providing information
periodically to customers showing their
<PAGE> 110
positions in Service Shares; and other similar shareholder liaison services.
Institutional Shares bear no shareholder servicing or distribution fees. As a
result of these different fees, the net asset value and the net yields on the
Fund's Institutional Shares will generally be higher than those on the Fund's
Service Shares, the net asset value and the net yields on the Fund's Service
Shares will generally be higher than those on the Fund's Series A Investor
Shares, and the net asset value and the net yields on the Fund's Series A
Investor Shares will generally be higher than those on the Fund's Series B
Investor Shares if payments by the Portfolios under the Plan are made at the
maximum rates. Standardized total return and yield quotations will be computed
separately for each class of Shares. Series A and Series B Investor Shares are
exchangeable at the option of the holder for Series A and Series B Investor
Shares, respectively, in the Fund's other investment portfolios. Series B
Investor Shares are exchangeable for Series B Investor Shares in the Fund's
Money Market Portfolio, but are not exchangeable for shares in the Fund's other
money market investment portfolios. Series A Investor Shares of the Portfolio
are offered to the public at the net asset value per share plus a maximum sales
charge of 4.50% of the offering price on single purchases of less than $50,000;
the sales charge is reduced on a graduated scale on single purchases of $50,000
or more and certain exemptions from the sales charge may apply. The sales
charge does not apply to exchanges of Series A Investor Shares among the
Portfolios. Series B Investor Shares are subject to a maximum contingent
deferred sales charge of 5.0%. The deferred sales charge decreases over time.
Series B Investor Shares may be exchanged for Series B Investor Shares of
another investment portfolio of the Fund without the payment of any deferred
sales charge at the time the exchange is made. Because Service Shares and
Institutional Shares are sold without a sales charge, holders of Service Shares
and Institutional Shares have no such exchange privileges.
On January 4, 1995, PNC Bank held of record approximately 80% of the
Fund's outstanding shares, and may be deemed a controlling person of the Fund
under the 1940 Act. PNC Bank is a subsidiary of PNC Bank Corp., a multi-bank
holding company.
THIS PROSPECTUS AND THE STATEMENT OF ADDITIONAL INFORMATION
INCORPORATED HEREIN BY REFERENCE RELATE PRIMARILY TO THE FUND'S INVESTOR SHARES
AND DESCRIBE ONLY THE INVESTMENT OBJECTIVES, POLICIES, OPERATIONS, CONTRACTS
AND OTHER MATTERS PERTAINING TO THE INVESTOR SHARES.
OTHER INFORMATION
- --------------------------------------------------------------------------------
REPORTS AND INQUIRIES
Shareholders will receive unaudited semi-annual reports and annual
financial statements audited by independent accountants.
<PAGE> 111
Shareholder inquiries should be addressed to the Fund c/o PFPC, P.O. Box 8907,
Wilmington, Delaware 19899-8907, toll-free (800) 422-6538.
PERFORMANCE INFORMATION
From time to time, total return and yield data for Series A Shares and
Series B Shares of the Portfolio may be quoted in advertisements or in
communications to shareholders. Total return will be calculated on an average
annual total return basis for various periods. Average annual total return
reflects the average annual percentage change in value of an investment in
Shares of the Portfolio over the measuring period. This method of calculating
total return assumes that dividends and capital gain distributions made by the
Portfolio during the period relating to Shares are reinvested in Shares of the
same series, and also reflects the maximum sales load charged by the Portfolio.
When, however, the Portfolio compares the total return of Shares to that of
other funds or relevant indexes, such total return may also be computed without
reflecting the sales load so long as the sales load is stated separately in
connection with the comparison.
The yield of Shares of the Portfolio is computed based on the net
income of the Portfolio allocated to such Shares during a 30-day (or one month)
period, which period will be identified in connection with the particular yield
quotation. More specifically, the yield of Shares of the Portfolio is computed
by dividing the Portfolio's net income per share allocated to such Shares
during a 30-day (or one month) period by the maximum offering price per share
on the last day of the period and annualizing the result on a semi-annual
basis. The Portfolio's "tax-equivalent yield" may also be quoted from time to
time, which shows the level of taxable yield needed to produce an after-tax
equivalent to the Portfolio's tax-free yield. This is done by increasing the
Portfolio's yield (calculated above) by the amount necessary to reflect the
payment of Federal and/or state income tax at a stated tax rate.
Performance data of Shares of the Portfolio may be compared to those
of other mutual funds with similar investment objectives and to other relevant
indexes or to ratings or rankings prepared by independent services or other
financial or industry publications that monitor the performance of mutual
funds. In addition, certain indexes may be used to illustrate historic
performance of select asset classes. For example, the total return and/or
yield of Shares of a Portfolio may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Weisenberger
Investment Company Service, and with the performance of the Shearson Lehman
GMNA Index, the Shearson Lehman Index of Baa-rated Corporate Bonds, the T-Bill
Index, the "stocks, bonds and inflation Index" published annually by Ibbotson
Associates and the Shearson Lehman Hutton Government Corporate Bond Index.
Performance information may also include evaluations of the
<PAGE> 112
Portfolio and its Shares published by nationally recognized ranking services
and information as reported by financial publications such as Business Week,
Fortune, Institutional Investor, Money Magazine, Forbes, Barron's, The Wall
Street Journal and The New York Times, or in publications of a local or
regional nature.
In addition to providing performance information that demonstrates the
actual yield or returns of Series A Shares and Series B Shares of the Portfolio
over a particular period of time, the Portfolio may provide certain other
information demonstrating hypothetical investment returns. Such information
may include, but is not limited to, illustrating the compounding effects of a
dividend in a dividend reinvestment plan or the impact of tax-deferred
investing.
Performance quotations of Shares of the Portfolio represent past
performance and should not be considered as representative of future results.
The investment return and principal value of an investment in Shares of the
Portfolio will fluctuate so that an investor's Shares, when redeemed, may be
worth more or less than their original cost. Since performance will fluctuate,
performance data for Shares of the Portfolio cannot necessarily be used to
compare an investment in such Shares with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that
performance is generally a function of the kind and quality of the instruments
held in a portfolio, portfolio maturity, operating expenses and market
conditions. Any fees charged by Service Organizations directly to their
customer accounts in connection with investments in Shares will not be included
in the Portfolio's calculations of yield and total return.
<PAGE> 113
<TABLE>
<S> <C>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT The PNC Fund
CONTAINED IN THIS PROSPECTUS, OR IN THE STATEMENT OF
ADDITIONAL INFORMATION INCORPORATED HEREIN BY The New Jersey
REFERENCE, IN CONNECTION WITH THE OFFERING MADE BY Tax-Free Income Fund
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE FUND OR ITS DISTRIBUTOR.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY Investor
THE FUND OR BY THE DISTRIBUTOR IN ANY JURISDICTION Class
IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
</TABLE>
<TABLE>
<CAPTION>
------------------- Prospectus
TABLE OF CONTENTS
Page
----
<S> <C>
Introduction . . . . . . . . . . . . . . . . . . .
Financial Highlights . . . . . . . . . . . . . . . ___________ , ___
Investment Policies . . . . . . . . . . . . . . . .
Investment Limitations . . . . . . . . . . . . . .
Management . . . . . . . . . . . . . . . . . . . .
Distribution of Shares . . . . . . . . . . . . . .
Shareholder Servicing . . . . . . . . . . . . . . .
How to Purchase Shares . . . . . . . . . . . . . .
How to Redeem Shares . . . . . . . . . . . . . . .
Investor Programs . . . . . . . . . . . . . . . . .
Net Asset Value . . . . . . . . . . . . . . . . . .
Dividends and Distributions . . . . . . . . . . . .
Taxes . . . . . . . . . . . . . . . . . . . . . . .
Description of Shares . . . . . . . . . . . . . . .
Other Information . . . . . . . . . . . . . . . . .
</TABLE>
INVESTMENT ADVISER
PNC Asset Management Group, Inc.
Philadelphia, Pennsylvania
SUB-ADVISER
BlackRock Financial Management Inc.
New York, New York
CO-ADMINISTRATOR
PNC Mutual Fund Company
New York, New York
CO-ADMINISTRATOR AND TRANSFER AGENT
PFPC Inc.
Wilmington, Delaware
CO-ADMINISTRATOR AND DISTRIBUTOR
Provident Distributors, Inc.
Radnor, Pennsylvania
COUNSEL
Drinker Biddle & Reath
Philadelphia, Pennsylvania
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand, L.L.P.
Philadelphia, Pennsylvania
<PAGE> 114
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 115
THE PNC(R) FUND
STATEMENT OF ADDITIONAL INFORMATION
NEW JERSEY TAX-FREE INCOME PORTFOLIO
This Statement of Additional Information provides supplementary
information pertaining to shares ("Shares") representing interests in the New
Jersey Tax-Free Income Portfolio (the "Portfolio") of The PNC Fund (the
"Fund"). This Statement of Additional Information is not a prospectus, and
should be read only in conjunction with the Prospectus of the Fund relating to
the Portfolio dated ____________, as amended from time to time (the
"Prospectus"). The Prospectus may be obtained from the Fund's distributor by
calling toll-free (800) 441-7379. This Statement of Additional Information is
dated ____________. Capitalized terms used herein and not otherwise defined
have the same meanings as are given to them in the Prospectus.
CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
THE FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INVESTMENT POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TRUSTEES AND OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INVESTMENT ADVISORY, ADMINISTRATION,
DISTRIBUTION AND SERVICING ARRANGEMENTS . . . . . . . . . . . . . . . . . . . .
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PURCHASE AND REDEMPTION INFORMATION . . . . . . . . . . . . . . . . . . . . . .
VALUATION OF PORTFOLIO SECURITIES . . . . . . . . . . . . . . . . . . . . . . .
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ADDITIONAL INFORMATION CONCERNING SHARES . . . . . . . . . . . . . . . . . . .
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
APPENDIX A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS STATEMENT OF ADDITIONAL INFORMATION OR
THE PROSPECTUS IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE FUND OR ITS DISTRIBUTOR. THE PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY THE FUND OR BY THE FUND'S DISTRIBUTOR IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
<PAGE> 116
THE FUND
The Fund was organized on December 22, 1988 as a Massachusetts
business trust. The Portfolio originally commenced operations on July 1, 1991
as the New Jersey Municipal Bond Fund (the "Predecessor Portfolio"), a separate
investment portfolio of The Compass Capital Group of Funds, which was organized
as a Massachusetts business trust. On ______________, 1995 the assets and
liabilities of the Predecessor Portfolio were transferred to the Portfolio,
which had no prior operating history.
The Fund also offers other investment portfolios which are described
in separate Prospectuses and Statements of Additional Information. For
information concerning these other portfolios contact the distributor at the
telephone number stated on the cover page of this Statement of Additional
Information.
INVESTMENT POLICIES
The following supplements information contained in the Prospectus
concerning the Portfolio's investment policies. A description of applicable
credit ratings is set forth in Appendix A hereto. The information below
relates only to the Portfolio.
ADDITIONAL INFORMATION ON THE PORTFOLIO'S INVESTMENTS.
REVERSE REPURCHASE AGREEMENTS. The Portfolio may invest in reverse
repurchase agreements. Reverse repurchase agreements involve the sale of
securities held by the Portfolio pursuant to the Portfolio's agreement to
repurchase the securities at an agreed upon price, date and interest rate.
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, the
Portfolio will maintain in a segregated account cash, U.S. Government
securities or other liquid, high-grade debt securities in an amount at least
equal to the market value of the securities, plus accrued interest, subject to
the agreement.
VARIABLE AND FLOATING RATE INSTRUMENTS. With respect to purchasable
variable and floating rate instruments, the adviser or sub-adviser will
consider the earning power, cash flows and liquidity ratios of the issuers and
guarantors of such instruments and, if the instruments are subject to a demand
feature, will monitor their financial status to meet payment on demand. Such
instruments may include variable amount master demand notes that permit the
indebtedness thereunder to vary in addition to providing for periodic
adjustments in the interest rate. The absence of an active secondary market
with respect to
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<PAGE> 117
particular variable and floating rate instruments could make it difficult for
the Portfolio to dispose of a variable or floating rate note if the issuer
defaulted on its payment obligation or during periods that the Portfolio is not
entitled to exercise its demand rights, and the Portfolio could, for these or
other reasons, suffer a loss with respect to such instruments. In determining
average-weighted portfolio maturity, an instrument will usually be deemed to
have a maturity equal to the longer of the period remaining until the next
interest rate adjustment or the time the Portfolio can recover payment of
principal as specified in the instrument. Variable rate U.S. Government
obligations held by the Portfolio, however, will be deemed to have maturities
equal to the period remaining until the next interest rate adjustment.
MONEY MARKET OBLIGATIONS OF DOMESTIC BANKS, FOREIGN BANKS AND FOREIGN
BRANCHES OF U.S. BANKS. The Portfolio may purchase bank obligations, such as
certificates of deposit, bankers' acceptances and time deposits, including
instruments issued or supported by the credit of U.S. or foreign banks or
savings institutions having total assets at the time of purchase in excess of
$1 billion. The assets of a bank or savings institution will be deemed to
include the assets of its domestic and foreign branches for purposes of the
Portfolio's investment policies. Investments in short-term bank obligations
may include obligations of foreign banks and domestic branches of foreign
banks, and also foreign branches of domestic banks.
U.S. GOVERNMENT OBLIGATIONS. Examples of the types of U.S. Government
obligations which the Portfolio may hold include U.S. Treasury bills, Treasury
instruments and Treasury bonds and the obligations of Federal Home Loan Banks,
Federal Farm Credit Banks, Federal Land Banks, the Federal Housing
Administration, the Farmers Home Administration, the Export-Import Bank of the
United States, the Small Business Administration, the Federal National Mortgage
Association, the Government National Mortgage Association, the General Services
Administration, the Student Loan Marketing Association, the Central Bank for
Cooperatives, the Federal Home Loan Mortgage Corporation, the Federal
Intermediate Credit Banks, the Maritime Administration, the International Bank
for Reconstruction and Development (the "World Bank"), the Asian-American
Development Bank and the Inter-American Development Bank.
LEASE OBLIGATIONS. The Portfolio may hold participation certificates
in a lease, an installment purchase contract, or a conditional sales contract
("lease obligations").
The sub-adviser will monitor the credit standing of each municipal
borrower and each entity providing credit support
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<PAGE> 118
and/or a put option. In determining whether a lease obligation is liquid, the
sub-adviser will consider, among other factors, the following: (i) whether the
lease can be cancelled; (ii) the degree of assurance that assets represented by
the lease could be sold; (iii) the strength of the lessee's general credit
(e.g., its debt, administrative, economic, and financial characteristics); (iv)
the likelihood that the municipality would discontinue appropriating funding
for the leased property because the property is no longer deemed essential to
the operations of the municipality (e.g., the potential for an "event of
nonappropriation"); (v) legal recourse in the event of failure to appropriate;
(vi) whether the security is backed by a credit enhancement such as insurance;
and (vii) any limitations which are imposed on the lease obligor's ability to
utilize substitute property or services other than those covered by the lease
obligation.
Municipal leases, like other municipal debt obligations, are subject
to the risk of non-payment. The ability of issuers of municipal leases to make
timely lease payments may be adversely impacted in general economic downturns
and as relative governmental cost burdens are allocated and reallocated among
federal, state and local governmental units. Such non-payment would result in
a reduction of income to the Portfolio, and could result in a reduction in the
value of the municipal lease experiencing non-payment and a potential decrease
in the net asset value of the Portfolio. Issuers of municipal securities might
seek protection under the bankruptcy laws. In the event of bankruptcy of such
an issuer, the Portfolio could experience delays and limitations with respect
to the collection of principal and interest on such municipal leases and the
Portfolio may not, in all circumstances, be able to collect all principal and
interest to which it is entitled. To enforce its rights in the event of a
default in lease payments, the Portfolio may take possession of and manage the
assets securing the issuer's obligations on such securities, which may increase
the Portfolio's operating expenses and adversely affect the net asset value of
the Portfolio. When the lease contains a non-appropriation clause, however,
the failure to pay would not be a default and the Portfolio would not have the
right to take possession of the assets. Any income derived from the
Portfolio's ownership or operation of such assets may not be tax-exempt. In
addition, the Portfolio's intention to qualify as a "regulated investment
company" under the Internal Revenue Code of 1986, as amended, may limit the
extent to which the Portfolio may exercise its rights by taking possession of
such assets, because as a regulated investment company the Portfolio is subject
to certain limitations on its investments and on the nature of its income.
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<PAGE> 119
COMMERCIAL PAPER. The Portfolio may purchase commercial paper rated
(at the time of purchase) "A-1" by Standard & Poor's Ratings Group, Division of
McGraw Hill ("S&P") or "Prime-1" by Moody's Investor Services, Inc. ("Moody's")
or, when deemed advisable by a Portfolio's adviser or sub-adviser, "high
quality" issues rated "A-2" or "Prime-2" by S&P or Moody's, respectively.
These ratings symbols are described in Appendix A. Commercial paper
purchasable by the Portfolio includes "Section 4(2) paper," a term that
includes debt obligations issued in reliance on the "private placement"
exemption from registration afforded by Section 4(2) of the Securities Act of
1933. Section 4(2) paper is restricted as to disposition under the Federal
securities laws, and is frequently sold (and resold) to institutional investors
such as the Fund through or with the assistance of investment dealers who make
a market in the Section 4(2) paper, thereby providing liquidity. Certain
transactions in Section 4(2) paper may qualify for the registration exemption
provided in Rule 144A under the Securities Act of 1933.
REPURCHASE AGREEMENTS. The Portfolio may invest in repurchase
agreements. The repurchase price under the repurchase agreements described in
the Prospectus generally equals the price paid by the Portfolio involved plus
interest negotiated on the basis of current short-term rates (which may be more
or less than the rate on securities underlying the repurchase agreement). The
financial institutions with whom the Portfolio may enter into repurchase
agreements will be banks 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, if such banks and non-bank dealers are deemed creditworthy by the
Portfolio's adviser or sub-adviser. The Portfolio's adviser or sub-adviser
will continue to monitor creditworthiness of the seller under a repurchase
agreement, and will require the seller to maintain during the term of the
agreement the value of the securities subject to the agreement at not less than
the repurchase price (including accrued interest). In addition, the
Portfolio's adviser or sub-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.
Securities subject to repurchase agreements will be held by the Fund's
custodian (or sub-custodian) in the Federal Reserve/Treasury book-entry system
or by another authorized securities depository. Repurchase agreements are
considered to be loans by the Portfolio under the 1940 Act.
INVESTMENT GRADE DEBT OBLIGATIONS. The Portfolio may invest in
"investment grade securities," which are securities rated in the four highest
rating categories of an NRSRO. It should be noted that debt obligations rated
in the lowest of the top four ratings (i.e., "Baa" by Moody's or "BBB" by S&P)
are considered
-5-
<PAGE> 120
to have some speculative characteristics and are more sensitive to economic
change than higher rated securities.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. When the Portfolio
agrees to purchase securities on a when-issued or forward commitment basis, the
custodian will set aside cash or liquid portfolio securities equal to the
amount of the commitment in a separate account. Normally, the custodian will
set aside portfolio securities to satisfy a purchase commitment, and in such a
case the Portfolio may be required subsequently to place additional assets in
the separate account in order to ensure that the value of the account remains
equal to the amount of the Portfolio's commitments. It may be expected that
the market value of the Portfolio's net assets will fluctuate to a greater
degree when it sets aside portfolio securities to cover such purchase
commitments than when it sets aside cash. Because the Portfolio's liquidity
and ability to manage its portfolio might be affected when it sets aside cash
or portfolio securities to cover such purchase commitments, the Portfolio
expects that its commitments to purchase when-issued securities and forward
commitments will not exceed 25% of the value of its total assets absent unusual
market conditions.
The Portfolio will purchase securities on a when-issued or forward
commitment basis only with the intention of completing the transaction and
actually purchasing the securities. If deemed advisable as a matter of
investment strategy, however, the Portfolio may dispose of or renegotiate a
commitment after it has been entered into, and may sell securities it has
committed to purchase before those securities are delivered to the Portfolio on
the settlement date. In these cases the Portfolio may realize a taxable
capital gain or loss.
When the Portfolio engages in when-issued and forward commitment
transactions, it relies on the other party to consummate the trade. Failure of
such party to do so may result in the Portfolio's incurring a loss or missing
an opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a when-issued purchase
or a forward commitment to purchase securities, and any subsequent fluctuations
in their market value, is taken into account when determining the market value
of the Portfolio starting on the day the Portfolio agrees to purchase the
securities. The Portfolio does not earn interest on the securities it has
committed to purchase until they are paid for and delivered on the settlement
date.
OPTIONS. 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
-6-
<PAGE> 121
securities, and therefore, on a percentage basis, an investment in the
underlying securities themselves. The Portfolio will write call options only
if they are "covered." In the case of a call option on a security, the option
is "covered" if the Portfolio 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, cash or cash
equivalents 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 the Portfolio maintains with
its custodian cash or cash equivalents equal to the contract value. A call
option is also covered if the Portfolio 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 Portfolio in cash or cash equivalents in a segregated account
with its custodian.
When the Portfolio purchases a put option, the premium paid by it is
recorded as an asset of the Portfolio. When the Portfolio writes an option, an
amount equal to the net premium (the premium less the commission) received by
the Portfolio is included in the liability section of the Portfolio'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 the Portfolio expires
unexercised, the Portfolio realizes a loss equal to the premium paid. If the
Portfolio enters into a closing sale transaction on an option purchased by it,
the Portfolio will realize a gain if the premium received by the Portfolio 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 the Portfolio expires on the
stipulated expiration date or if the Portfolio 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 the Portfolio is exercised, the proceeds of the sale will be
increased by the net premium originally received and the Portfolio will realize
a gain or loss.
There are several risks associated with transactions in options on
securities and indexes. For example, there are significant differences between
the securities and options markets that could result in an imperfect
correlation between these markets, causing a given transaction not to achieve
its
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<PAGE> 122
objectives. 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.
FUTURES CONTRACTS AND RELATED OPTIONS. The Portfolio may invest in
futures contracts and options thereon (interest rate futures contracts or index
futures contracts, as applicable). Positions in futures contracts may be
closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market
will exist for any particular futures contract at any specific time. Thus, it
may not be possible to close a futures position. In the event of adverse price
movements, the Portfolio would continue to be required to make daily cash
payments to maintain its required margin. In such situations, if the Portfolio
has insufficient cash, it may have to sell portfolio securities to meet daily
margin requirements at a time when it may be disadvantageous to do so. In
addition, the Portfolio may be required to make delivery of the instruments
underlying futures contracts it holds. The inability to close options and
futures positions also could have an adverse impact on the Portfolio's ability
to effectively hedge.
Successful use of futures by the Portfolio is also subject to the
adviser's or sub-adviser's ability to correctly predict movements in the
direction of the market. For example, if the Portfolio has hedged against the
possibility of a decline in the market adversely affecting securities held by
it and securities prices increase instead, the Portfolio will lose part or all
of the benefit to the increased value of its securities which it has hedged
because it will have approximately equal offsetting losses in its futures
positions. In addition, in some situations, if the Portfolio has insufficient
cash, it may have to sell securities to meet daily variation margin
requirements. Such
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<PAGE> 123
sales of securities may be, but will not necessarily be, at increased prices
which reflect the rising market. The Portfolio may have to sell securities at
a time when it may be disadvantageous to do so.
The risk of loss in trading futures contracts in some strategies can
be substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the
time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss of the margin deposit, before any deduction for the
transaction costs, if the account were then closed out. A 15% decrease would
result in a loss equal to 150% of the original margin deposit, before any
deduction for the transaction costs, if the contract were closed out. Thus, a
purchase or sale of a futures contract may result in losses in excess of the
amount invested in the contract.
Utilization of futures transactions by the Portfolio involves the risk
of loss by the Portfolio of margin deposits in the event of bankruptcy of a
broker with whom the Portfolio has an open position in a futures contract or
related option.
Most futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures
positions and subjecting some futures traders to substantial losses.
The trading of futures contracts is also subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
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<PAGE> 124
STAND-BY COMMITMENTS. Under a stand-by commitment for a Municipal
Obligation, a dealer agrees to purchase at the Portfolio's option a specified
Municipal Obligation at a specified price. Stand-by commitments for Municipal
Obligations may be exercisable by the Portfolio at any time before the maturity
of the underlying Municipal Obligations and may be sold, transferred or
assigned only with the instruments involved. It is expected that such stand-by
commitments will generally be available without the payment of any direct or
indirect consideration. However, if necessary or advisable, the Portfolio may
pay for such a stand-by commitment either separately in cash or by paying a
higher price for Municipal Obligations which are acquired subject to the
commitment for Municipal Obligations (thus reducing the yield to maturity
otherwise available for the same securities). The total amount paid in either
manner for outstanding stand-by commitments for Municipal Obligations held by
the Portfolio will not exceed 1/2 of 1% of the value of the Portfolio's total
assets calculated immediately after each stand-by commitment is acquired.
Stand-by commitments will only be entered into with dealers, banks and
broker-dealers which, in the adviser's or sub-adviser's opinion, present
minimal credit risks. The Portfolio will acquire stand-by commitments solely
to facilitate portfolio liquidity and not to exercise its rights thereunder for
trading purposes. Stand-by commitments will be valued at zero in determining
net asset value. Accordingly, where the Portfolio pays directly or indirectly
for a stand-by commitment, its cost will be reflected as an unrealized loss for
the period during which the commitment is held by the Portfolio and will be
reflected in realized gain or loss when the commitment is exercised or expires.
TAX-EXEMPT DERIVATIVES. The Portfolio may hold tax-exempt derivatives
which may be in the form of tender option bonds, participations, beneficial
interests in a trust, partnership interests or other forms. A number of
different structures have been used. For example, interests in long-term
fixed-rate municipal obligations, held by a bank as trustee or custodian, are
coupled with tender option, demand and other features when the tax-exempt
derivatives are created. Together, these features entitle the holder of the
interest to tender (or put), the underlying municipal obligation to a third
party at periodic intervals and to receive the principal amount thereof. In
some cases, municipal obligations are represented by custodial receipts
evidencing rights to receive specific future interest payments, principal
payments, or both, on the underlying municipal securities held by the
custodian. Under such arrangements, the holder of the custodial receipt has
the option to tender the underlying municipal securities at its face value to
the sponsor (usually a bank or broker dealer or other
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<PAGE> 125
financial institution), which is paid periodic fees equal to the difference
between the bond's fixed coupon rate and the rate that would cause the bond,
coupled with the tender option, to trade at par on the date of a rate
adjustment. The Portfolio may hold tax-exempt derivatives, such as
participation interests and custodial receipts, for municipal obligations which
give the holder the right to receive payment of principal subject to the
conditions described above. The Internal Revenue Service has not ruled on
whether the interest received on tax-exempt derivatives in the form of
participation interests or custodial receipts is tax-exempt, and accordingly,
purchases of any such interests or receipts are based on the opinion of counsel
to the sponsors of such derivative securities. Neither the Portfolio nor its
investment adviser or sub-adviser will review the proceedings related to the
creation of any tax-exempt derivatives or the basis for such opinions.
SECURITIES LENDING. The Portfolio would continue to accrue interest
on loaned securities and would also earn income on investment collateral for
such loans. Any cash collateral received by the Portfolio in connection with
such loans would be invested in short-term U.S. Government obligations.
YIELDS AND RATINGS. The yields on certain obligations are dependent
on a variety of factors, including general market conditions, conditions in the
particular market for the obligation, the financial condition of the issuer,
the size of the offering, the maturity of the obligation and the ratings of the
issue. The ratings of Moody's and S&P represent their respective opinions as
to the quality of the obligations they undertake to rate. Ratings, however,
are general and are not absolute standards of quality. Consequently,
obligations with the same rating, maturity and interest rate may have different
market prices. Subsequent to its purchase by the Portfolio, a rated security
may cease to be rated. The adviser or sub-adviser will consider such an event
in determining whether the Portfolio should continue to hold the security.
SPECIAL CONSIDERATIONS REGARDING INVESTMENT IN NEW JERSEY MUNICIPAL
OBLIGATIONS. The concentration of investments in New Jersey Municipal
Obligations by the Portfolio raises special investment considerations. The
State of New Jersey and its political subdivisions, agencies and public
authorities are authorized to issue two general classes of indebtedness:
general obligation bonds and revenue bonds. Both classes of bonds may be
included in the Portfolio. The repayment of principal and interest on general
obligation bonds is secured by the full faith and credit of the issuer, backed
by the issuer's taxing authority, without recourse to any special project or
source of revenue. Special obligation or revenue bonds may be repaid only from
revenues received in connection with the project for which
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<PAGE> 126
the bonds are issued, special excise taxes, or other special revenue sources
and generally are issued by entities without taxing power. Neither the State
of New Jersey nor any of its subdivisions is liable for the repayment of
principal or interest on revenue bonds except to the extent stated in the
preceding sentences.
General obligation bonds of the State are repaid from revenues
obtained through the State's general taxing authority. An inability to
increase taxes may adversely affect the State's ability to authorize or repay
debt.
Public authorities, private non-profit corporations, agencies and
similar entities of New Jersey ("Authorities") are established for a variety of
beneficial purposes, including economic development, housing and mortgage
financing, health care facilities and public transportation. The Authorities
are not operating entities of the State of New Jersey, but are separate legal
entities that are managed independently. The State oversees the Authorities by
appointing the governing boards, designating management, and by significantly
influencing operations. The Authorities are not subject to New Jersey
constitutional restrictions on the incurrence of debt, applicable to the State
of New Jersey itself, and may issue special obligation or private activity
bonds in legislatively authorized amounts.
An absence or reduction of revenue will affect a bond-issuing
Authority's ability to repay debt on special obligation bonds and no assurance
can be given that sufficient revenues will be obtained to make such payments,
although in some instances repayment may be guaranteed or otherwise secured.
Various Authorities have issued bonds for the construction of health
care facilities, transportation facilities, office buildings and related
facilities, housing facilities, pollution control facilities, water and sewage
facilities and power and electric facilities. Each of these facilities may
incur different difficulties in meeting its debt repayment obligations.
Hospital facilities, for example, are subject to changes in Medicare and
Medicaid reimbursement regulations, attempts by Federal and state legislatures
to limit the costs of health care and management's ability to complete
construction projects on a timely basis as well as to maintain projected rates
of occupancy and utilization. At any given time, there are several proposals
pending on a Federal and state level concerning health care which may further
affect a hospital's debt service obligation.
Housing facilities may be subject to increases in operating costs,
management's ability to maintain occupancy levels, rent restrictions and
availability of Federal or state subsidies,
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while power and electric facilities may be subject to increased costs resulting
from environmental restrictions, fluctuations in fuel costs, delays in
licensing procedures and the general regulatory framework in which these
facilities operate. All of these entities are constructed and operated under
rigid regulatory guidelines.
Some entities which financed facilities with proceeds of private
activity bonds issued by the New Jersey Economic Development Authority, a major
issuer of special obligation bonds, have defaulted on their debt service
obligations. Because these special obligation bonds were repayable only from
revenue received from the specific projects which they funded, the New Jersey
Economic Development Authority was unable to repay the debt service to
bondholders for such facilities. Each issue of special obligation bonds,
however, depends on its own revenue for repayment, and thus these defaults
should not affect the ability of the New Jersey Economic Development Authority
to repay obligations on other bonds that it issues in the future.
The State has, in the past, experienced a period of substantial
economic growth with unemployment levels below the national average. Recently,
however, the state has experienced an economic slowdown, and its unemployment
rate has risen to the extent the State has lost its relative advantage over the
nation. To the extent that any adverse conditions exist in the future which
affect the obligor's ability to repay debt, the value of the Portfolio may be
immediately and substantially affected.
The following are cases presently pending or threatened in which the
State has a potential for either a significant loss of revenue or a significant
unanticipated expenditure: (i) several labor unions have challenged 1992
legislation mandating a revaluation of several public employee pension funds
which resulted in a refund of $773 million in public employer contributions to
the State and annual savings to the State of approximately $226 million for
fiscal 1993 and thereafter; (ii) in June 1990, the State Supreme Court held the
State's public school funding mechanism unconstitutional; legislation which was
enacted to establish a new funding system has also been challenged; (iii)
several cases filed in the State courts challenged the basis on which
recoveries of certain costs for residents in State psychiatric hospitals and
other facilities are shared between the State Department of Human Services and
the State's county governments, and certain counties are seeking the recovery
from the Department of costs they have incurred for the maintenance of such
residents; (iv) a lawsuit filed in the United States District Court in 1990
alleges that the State Department of Human Services has established
unreasonably low Medicaid payment rates for long-term care facilities; (v) a
number of taxpayers are seeking refunds of taxes paid to the Spill
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<PAGE> 128
Compensation Fund, on the grounds, inter alia, that the State law is preempted
by the Federal Superfund legislation; (vi) the 1990 Fair Automobile Insurance
Reform Act has been challenged in several State court suits, including
provisions in the Act dealing with the premium tax surtax which was intended to
raise $300 million in 1993; (vii) a suit was filed in 1991 seeking to impose
directly on the State the responsibility for funding the State's judicial
system, which has been primarily funded by the counties; (viii) several union
welfare benefit plans are challenging the State's hospital rate-setting system
in a suit filed in United States District Court; the Court held in 1992 that
certain provisions of the State system are preempted by Federal law; and (ix)
the method by which various State agencies reduced their personnel has been
challenged and the case is pending before the State Supreme Court.
ADDITIONAL INVESTMENT LIMITATIONS.
In addition to the investment limitations disclosed in the Prospectus,
the Portfolio is subject to the investment limitations enumerated in this
subsection which may be changed with respect to the Portfolio only by a vote of
the holders of a majority of the Portfolio's outstanding shares (as defined
below under "Miscellaneous").
The Portfolio may not:
1. Purchase or sell real estate, except that the
Portfolio may purchase securities of issuers which deal in real estate and may
purchase securities which are secured by interests in real estate.
2. Acquire any other investment company or investment
company security except in connection with a merger, consolidation,
reorganization or acquisition of assets or where otherwise permitted by the
1940 Act.
3. Act as an underwriter of securities within the
meaning of the Securities Act of 1933 except to the extent that the purchase of
obligations directly from the issuer thereof, or the disposition of securities,
in accordance with the Portfolio's investment objective, policies and
limitations may be deemed to be underwriting.
4. Write or sell put options, call options, straddles,
spreads, or any combination thereof, except for transactions in options on
securities, securities indices, futures contracts and options on futures
contracts.
5. Purchase securities of companies for the purpose of
exercising control.
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<PAGE> 129
6. Purchase securities on margin, make short sales of
securities or maintain a short position, except that (a) this investment
limitation shall not apply to the Portfolio's transactions in futures contracts
and related options or the Portfolio's sale of securities short against the
box, and (b) the Portfolio may obtain short-term credit as may be necessary for
the clearance or purchases and sales of portfolio securities.
7. Purchase or sell commodity contracts, or invest in
oil, gas or mineral exploration or development programs, except that the
Portfolio may, to the extent appropriate to its investment policies, purchase
securities of companies engaging in whole or in part in such activities and may
enter into futures contracts and related options.
8. Make loans, except that the Portfolio may purchase
and hold debt instruments and enter into repurchase agreements in accordance
with its investment objective and policies and may lend portfolio securities.
TRUSTEES AND OFFICERS
The trustees and executive officers of the Fund, and their business
addresses and principal occupations during the past five years, are:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH FUND DURING PAST FIVE YEARS
- ---------------- ------------------ ----------------------
<S> <C> <C>
Philip E. Coldwell Trustee Economic Consultant;
Coldwell Financial Chairman, Coldwell
Consultants Financial Consultants;
3330 Southwestern Blvd. Director, Maxus Energy
Dallas, TX 75225 Corporation (energy
Age: 72 products) from 1989 to
1993; Director or Trustee of
Temporary Investment Fund,
Inc., Trust for Federal
Securities, and Municipal
Fund for Temporary
Investment.
</TABLE>
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<PAGE> 130
<TABLE>
<S> <C> <C>
Robert R. Fortune Trustee Financial consultant;
2920 Ritter Lane Chairman, President and
Allentown, PA 18104 Chief Executive Officer,
Age: 78 Associated Electric & Gas
Insurance Services
Limited from 1984 to 1993;
Member of the Financial
Executives Institute and
American Institute of
Certified Public Accountants;
Director, Trustee or Managing
General Partner of a number
of investment companies
advised by PIMC; Director,
Prudential Utility Fund,
Inc., Prudential Structured
Maturity Fund, Inc. and
Prudential IncomeVertible
Fund, Inc.
Rodney D. Johnson Trustee President, Fairmount
Fairmont Capital Capital Advisors, Inc.
Advisers, Inc. (financial advisers)
1435 Walnut Street since 1987; Treasurer,
Philadelphia, PA 19102 North Philadelphia Health
Age: 53 System (formerly Girard
Medical Center) from 1988 to
1992; Member, Board of
Education, School District of
Philadelphia, 1983 to 1988;
Treasurer, Cascade Aphasia
Center, 1984 to 1988;
Director or Trustee of
Temporary Investment Fund,
Inc., Trust for Federal
Securities, Municipal Fund
for Temporary Investment,
Municipal Fund for California
Investors, Inc. and Municipal
Fund for New York Investors,
Inc.
</TABLE>
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<PAGE> 131
<TABLE>
<S> <C> <C>
G. Willing Pepper(1) Chairman of Retired; Chairman of the
128 Springton the Board Board, Specialty
Lake Road and President Composites Corporation
Media, PA 19063 until May 1984;
Age: 86 Chairman of the Board,
The Institute for Cancer
Research until 1979;
Director, Philadelphia
National Bank until 1978;
President, Scott Paper
Company from 1971 to 1973;
Director, Marmon Group, Inc.
until April 1986; Director,
Trustee or Managing General
Partner of a number of
investment companies advised
by PIMC.
Anthony M. Santomero Trustee Deputy Dean from
310 Keithwood Road 1990 to 1994, Richard
Wynnewood, PA 19096 K. Mellon Professor
Age: 48 of Finance since April
1984, and Dean's Advisory
Council Member since July
1984, The Wharton School,
University of Pennsylvania;
Associate Editor, Journal of
Banking and Finance since
June 1978; Associate Editor,
Journal of Economics and
Business since October 1979;
Associate Editor, Journal of
Money, Credit and Banking
since January 1980; Research
Associate, New York
University Center for
Japan-U.S. Business and
Economic Studies since July
1989; Editorial Advisory
Board,
</TABLE>
- --------------------
1.This trustee may be deemed an "interested person" of the Fund
as defined in the 1940 Act.
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<PAGE> 132
<TABLE>
<S> <C> <C>
Open Economics Review
since November 1990;
Director, The Zweig Fund and
The Zweig Total Return Fund;
Director or Trustee of
Temporary Investment Fund,
Inc., Trust for Federal
Securities, Municipal Fund
for Temporary Investment, and
Municipal Fund for California
Investors, Inc.
David R. Wilmerding, Jr. Vice-Chairman President, Gates,
One Aldwyn Center of the Board Wilmerding, Carper &
Villanova, PA 19085 Rawlings, Inc.
Age: 60 (investment advisers)
since February 1989;
Director, Beaver
Management Corporation; Until
September 1988, President,
Treasurer and Trustee, The
Mutual Assurance Company;
Until September 1988,
Chairman, President Treasurer
and Director, The Green Tree
Insurance Company (a
wholly-owned subsidiary of
The Mutual Assurance
Company); Until September
1988, Director, Keystone
State Life Insurance Company;
Director, Trustee or Managing
General Partner of a number
of investment companies
advised by PIMC.
Edward J. Roach Treasurer Certified Public
400 Bellevue Parkway and Vice- Accountant; Partner of
Suite 100 President the accounting firm of
Wilmington, DE 19809 Main Hurdman until 1981;
Age: 71 Vice Chairman of the
Board, Fox Chase Cancer
Center; Trustee Emeritus,
Pennsylvania School for the
Deaf; Trustee Emeritus,
Immaculata
</TABLE>
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<PAGE> 133
<TABLE>
<S> <C> <C>
College; President, Vice
President and/or Treasurer of
a number of investment
companies advised by PIMC.
Morgan R. Jones Secretary Partner in the law
Philadelphia National firm of Drinker Biddle &
Bank Building Reath, Philadelphia,
1345 Chestnut Street Pennsylvania.
Philadelphia, PA 19107-3496
Age: 55
</TABLE>
The Fund pays trustees who are not affiliated with PNC Asset
Management Group, Inc. ("PAMG") or Provident Distributors, Inc. ("PDI" or the
"Distributor") $5,500 annually and $500 per meeting of the Board or any
committee thereof that is not held in conjunction with a Board meeting (subject
to a cap of $6,000 per year for such meeting fees), and pays the Chairman an
additional $5,000 annually. Trustees who are not affiliated with PAMG or the
Distributor are reimbursed for any expenses incurred in attending meetings of
the Board of Trustees or any committee thereof. No officer, director or
employee of PAMG, Provident Capital Management, Inc. ("PCM"), PNC Bank,
National Association ("PNC Bank"), BlackRock Financial Management Inc.
("BlackRock"), PNC Equity Advisors Company ("PEAC"), PNC Mutual Fund Company
("PMFCO"), PFPC Inc. ("PFPC"), Provident Distributors, Inc. (formerly, MFD
Group, Inc.) ("PDI" and, collectively with PMFCO, PFPC, the "Administrators")
or the Distributor currently receives any compensation from the Fund. Drinker
Biddle & Reath, of which Mr. Jones is a partner, receives legal fees as counsel
to the Fund. As of the date of this Statement of Additional Information, the
trustees and officers of the Fund, as a group, owned less than 1% of the
outstanding shares of each Portfolio.
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<PAGE> 134
The table below sets forth the compensation actually received from the
Fund Complex of which the Portfolio is a part by the trustees for the period
ended September 30, 1995:
<TABLE>
<CAPTION>
Pension or Total Compensation
Aggregate Retirement Benefits Estimated Annual from Registrant and
Name of Person, Compensation from Accrued as Part of Benefits upon Fund Complex(1) Paid
Position Registrant Fund Expenses Retirement to Trustees
--------------- ---------- -------------- ---------- -----------
<S> <C> <C> <C> <C>
Philip E. Coldwell, Trustee $_____ n/a n/a (3)(2) $_____
Robert R. Fortune, Trustee $_____ n/a n/a (4)(2) $_____
Rodney D. Johnson, Trustee $_____ n/a n/a (5)(2) $_____
G. Willing Pepper, Chairman $_____ n/a n/a (6)(2) $_____
of the Board and President
Anthony M. Santomero, $_____ n/a n/a (4)(2) $_____
Trustee
David R. Wilmerding, Jr., $_____ n/a n/a (5)(2) $_____
Trustee
</TABLE>
SHAREHOLDER AND TRUSTEE LIABILITY. Under Massachusetts law,
shareholders of a business trust may, under certain circumstances, be held
personally liable as partners for the obligations of the trust. However, the
Fund's Declaration of Trust provides that shareholders shall not be subject to
any personal liability in connection with the assets of the Fund for the acts
or obligations of the Fund, and that every note, bond, contract, order or other
undertaking made by the Fund shall contain a provision to the effect that the
shareholders are not personally liable thereunder. The Declaration of Trust
provides for indemnification out of the trust property of any shareholder held
personally liable solely by reason of his being or having been a shareholder
and not because of his acts or omissions or
- --------------------
1. A Fund Complex means two or more investment companies that
hold themselves out to investors as related companies for
purposes of investment and investor services, or have a
common investment adviser or have an investment adviser that
is an affiliated person of the investment adviser of any of
the other investment companies.
2. Total number of such other investment companies trustee
serves on within the Fund Complex.
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<PAGE> 135
some other reason. The Declaration of Trust also provides that the Fund shall,
upon request, assume the defense of any claim made against any shareholder for
any act or obligation of the Fund, and shall satisfy any judgment thereon.
The Declaration of Trust further provides that all persons having any
claim against the trustees or Fund shall look solely to the trust property for
payment; that no trustee of the Fund shall be personally liable for or on
account of any contract, debt, tort, claim, damage, judgment or decree arising
out of or connected with the administration or preservation of the trust
property or the conduct of any business of the Fund; and that no trustee shall
be personally liable to any person for any action or failure to act except by
reason of his own bad faith, willful misfeasance, gross negligence or reckless
disregard of his duties as a trustee. With the exception stated, the
Declaration of Trust provides that a trustee is entitled to be indemnified
against all liabilities and expenses reasonably incurred by him in connection
with the defense or disposition of any proceeding in which he may be involved
or with which he may be threatened by reason of his being or having been a
trustee, and that the Fund will indemnify officers, representatives and
employees of the Fund to the same extent that trustees are entitled to
indemnification.
INVESTMENT ADVISORY, ADMINISTRATION,
DISTRIBUTION AND SERVICING ARRANGEMENTS
ADVISORY AND SUB-ADVISORY AGREEMENTS. The advisory and sub-advisory
services provided by PAMG and BlackRock and the fees received by each of them
for such services are described in the Prospectus. As stated in the
Prospectus, PIMC may from time to time voluntarily waive its advisory fees with
respect to the Portfolio and may voluntarily reimburse the Portfolio for
expenses. In addition, if the total expenses borne by the Portfolio in any
fiscal year exceed the expense limitations imposed by applicable state
securities regulations, PAMG and the Administrators will bear the amount of
such excess to the extent required by such regulations in proportion to the
fees otherwise payable to them for such year. Such amount, if any, will be
estimated and accrued daily and paid on a monthly basis. As of the date of
this Statement of Additional Information, to the knowledge of the Fund, there
were no state expense limitations more restrictive than the following: 2 1/2%
of the first $30 million of average annual net assets, 2% of the next $70
million of average annual net assets, and 1 1/2% of average annual net assets
in excess of $100 million.
PAMG renders advisory services to the Portfolio pursuant to an
Investment Advisory Agreement. BlackRock renders sub-advisory
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<PAGE> 136
services to the Portfolio pursuant to a Sub-Advisory Agreement. The Advisory
and Sub-Advisory Agreements are collectively referred to as the "Advisory
Contracts."
Under the Advisory Contracts, PAMG and BlackRock are not liable for
any error of judgment or mistake of law or for any loss suffered by the Fund or
the Portfolio in connection with the performance of the Advisory Contracts,
except a loss resulting from willful misfeasance, bad faith or gross negligence
on the part of PAMG or BlackRock in the performance of their respective duties
or from reckless disregard of their respective duties and obligations
thereunder. Each of the Advisory Contracts is terminable as to the Portfolio
by vote of the Board of Trustees or by the holders of a majority of the
outstanding voting securities of the Portfolio, at any time without penalty, on
60 days' written notice to PAMG or BlackRock, as the case may be. PAMG or
BlackRock may also terminate their advisory relationship with respect to the
Portfolio, on 60 days' written notice to the Fund. Each of the Advisory
Contracts terminates automatically in the event of its assignment.
The Predecessor Portfolio was advised by Midlantic Bank, N.A. For the
fiscal years ended February 28, 1995, 1994 and 1993, the Predecessor Portfolio
paid $607,485, $159,582 and $37,159, respectively, in investment advisory fees
to Midlantic Bank, N.A. pursuant to the prior advisory agreement. In
addition, during the fiscal years ended February 28, 1995, 1994 and 1993,
MidLantic Bank, N.A. waived $2,451, $318,099 and $100,403, respectively, in
investment advisory fees.
ADMINISTRATION AGREEMENTS. The Fund has entered into a
Co-Administration Agreement with PMFCO and a separate Administration Agreement
with PFPC and PDI (the "Administration Agreement"). The Administrators have
agreed to maintain office facilities for the Fund, furnish the Fund with
statistical and research data, clerical, accounting, and bookkeeping services,
and certain other services required by the Fund.
The Administration Agreements provide that the Administrators will not
be liable for any error of judgment or mistake of law or for any loss suffered
by the Fund or the Portfolio in connection with the performance of the
Administration Agreements, except a loss resulting from willful misfeasance,
bad faith or gross negligence in the performance of their respective duties or
from reckless disregard of their respective duties and obligations thereunder.
The Predecessor Portfolio received administrative services from SEI
Financial Management Corporation ("SEI"). During the fiscal years ended
February 28, 1995, 1994 and 1993, the Predecessor Portfolio paid $105,029,
$79,454 and $15,884,
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respectively, in administrative fees to SEI pursuant to the prior
administration agreement. In addition, during the fiscal years ended February
28, 1995, 1994 and 1993, SEI waived $77,951, $63,850 and $25,385, respectively,
in administrative fees.
CUSTODIAN AND TRANSFER AGENCY AGREEMENTS. PNC Bank is custodian of
the Fund's assets pursuant to a custodian agreement (the "Custodian
Agreement"). Under the Custodian Agreement, PNC Bank or a sub-custodian (i)
maintains a separate account or accounts in the name of the Portfolio, (ii)
holds and transfers portfolio securities on account of the Portfolio, (iii)
accepts receipts and makes disbursements of money on behalf of the Portfolio,
(iv) collects and receives all income and other payments and distributions on
account of the Portfolio's securities and (v) makes periodic reports to the
Board of Trustees concerning the Portfolio's operations. PNC Bank is
authorized to select one or more banks or trust companies to serve as
sub-custodian on behalf of the Fund, provided that, with respect to
sub-custodians other than sub-custodians for foreign securities, PNC Bank
remains responsible for the performance of all its duties under the Custodian
Agreement and holds the Fund harmless from the acts and omissions of any
sub-custodian. The Chase Manhattan Bank, N.A., State Street Bank and Trust
Company and Barclays Bank PLC serve as the Fund's sub-custodians.
For its services to the Fund under the Custodian Agreement, PNC Bank
receives a fee which is calculated based upon the Portfolio's average gross
assets, with a minimum monthly fee of $1,000 per investment portfolio. PNC
Bank is also entitled to out-of-pocket expenses and certain transaction
charges.
PFPC, an affiliate of PNC Bank, serves as the transfer and dividend
disbursing agent for the Fund pursuant to a Transfer Agency Agreement (the
"Transfer Agency Agreement"), under which PFPC (i) issues and redeems Service,
Investor, and Institutional classes of shares in the Portfolio, (ii) addresses
and mails all communications by the Portfolio to record owners of its shares,
including reports to shareholders, dividend and distribution notices and proxy
materials for its meetings of shareholders, (iii) maintains shareholder
accounts and, if requested, sub-accounts and (iv) makes periodic reports to the
Board of Trustees concerning the operations of the Portfolio. PFPC may, on 30
days' notice to the Fund, assign its duties as transfer and dividend disbursing
agent to any other affiliate of PNC Bank Corp. For its services with respect
to the Fund's Institutional and Service Shares under the Transfer Agency
Agreement, PFPC receives fees at the annual rate of .03% of the average net
asset value of outstanding Institutional and Service Shares in the Portfolio,
plus per account fees and disbursements. For its services under the Transfer
Agency Agreement with respect to
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<PAGE> 138
Investor Shares, PFPC receives per account fees, with minimum annual fees of
$24,000 for the Portfolio, plus disbursements.
DISTRIBUTOR AND DISTRIBUTION AND SERVICE PLAN. The Fund has entered
into a distribution agreement with the Distributor under which the Distributor,
as agent, offers shares of the Portfolio on a continuous basis. The
Distributor has agreed to use appropriate efforts to effect sales of the
shares, but it is not obligated to sell any particular amount of shares.
The Distributor and PMFCO are entitled to payments by each class of
Series A Investor Shares and Series B Investor Shares. The Fund's Amended and
Restated Distribution and Service Plan ("the Plan") provide, among other
things, that: (i) the Distributor shall submit quarterly reports to the Board
of Trustees regarding the amounts expended under the Plan and the purposes for
which such expenditures were made; (ii) the Plan will continue in effect for so
long as its continuance is approved at least annually by the Board of Trustees;
(iii) any material amendment thereto must be approved by the Board of Trustees,
including the trustees who are not "interested persons" of the Fund (as defined
in the 1940 Act) and who have no direct or indirect financial interest in the
operation of the Plan or any agreement entered into in connection with the Plan
("12b-1 Trustees"), acting in person at a meeting called for said purpose; (iv)
any amendment to increase materially the costs which any class of shares may
bear for distribution pursuant to the Plan shall be effective only upon
approval by a vote of a majority of the outstanding shares of such class; and
(v) while the Plan remains in effect, the selection and nomination of the
Fund's trustees who are not "interested persons" of the Fund shall be committed
to the discretion of such non-interested trustees.
The Plan is terminable as to any class of Shares without penalty at
any time by a vote of a majority of the 12b-1 Trustees, or by vote of the
holders of a majority of the shares of such respective classes. Similarly, any
agreement entered into pursuant to the Plan with a Service Organization is
terminable as to a class without penalty, at any time, by the Fund or by the
Service Organization upon written notice to the other. Each such agreement
will terminate automatically in the event of its assignment.
Amounts payable under the Plan may be used to pay commissions and
other fees payable to Service Organizations and other broker/dealers who sell
Shares.
Service Organizations and other broker/dealers receive commissions for
selling Series B Shares, which are paid at the time of the sale. These
commissions approximate the commissions
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payable with respect to sales of Series A Shares. A portion of the fees
payable under the Plan (at an annual rate of .75% of the average daily net
asset value of the Portfolio's outstanding Series B Shares) are intended to
cover the expense to the Distributor of paying such up-front commissions, and
the contingent deferred sales charge is calculated to charge the investor with
any shortfall that would occur if Series B Shares are redeemed prior to the
expiration of the six year period, after which Series B Shares automatically
convert to Series A Shares. To provide funds for the payment of up-front sales
commissions, the Distributor has entered into an agreement with PNC Investment
Corp. ("PNCIC"), an affiliate of the Fund's adviser, which provides funds for
the payment of commissions and other fees payable to Service Organizations and
broker/dealers who sell Series B Shares. Under the terms of that agreement,
the Distributor has sold and assigned to PNCIC the fees which may be payable
from time to time to the Distributor under the Series B Distribution Plan and
the contingent deferred sales charges payable to the Distributor with respect
to Series B Shares.
Service Organizations may charge their clients additional fees for
account services.
As stated in the Prospectus, the Fund intends the Portfolio to enter
into service agreements with institutions pursuant to which institutions will
render certain support services to their customers who are the beneficial
owners ("Customers") of Shares other than Institutional Shares. Such services
will be provided to Customers who are the beneficial owners of Shares and are
intended to supplement the services provided by the Fund's Administrators and
transfer agent to the Fund's shareholders of record. In consideration for
payment of up to .15% (on an annualized basis) of the average daily net asset
value of Shares owned beneficially by their Customers, institutions may provide
one or more of the following services to such Customers: processing purchase
and redemption requests from Customers and placing orders with the Fund's
transfer agent or the Distributor; processing dividend payments from the Fund
on behalf of Customers; providing sub-accounting with respect to Shares
beneficially owned by Customers or the information necessary for
sub-accounting; and other similar services. In consideration for payment of a
service fee, on an annualized basis, of up to a separate .15% (.25% for Series
A and Series B Investor Shares) of the average daily net asset value of Shares
owned beneficially by their Customers, institutions may provide one or more of
these additional services to such Customers: responding to Customer inquiries
relating to the services performed by the institution and to Customer inquiries
concerning their investments in Shares; providing information periodically to
Customers showing their positions in Shares; and other similar shareholder
liaison services. Customers who are beneficial owners of Shares should
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<PAGE> 140
read the Prospectus in light of the terms and fees governing their accounts
with institutions.
PORTFOLIO TRANSACTIONS
In executing portfolio transactions, the adviser and sub-adviser seek
to obtain the best price and execution for the Portfolio, 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 the adviser and sub-adviser generally
seek 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. Payments of commissions to brokers who
are affiliated persons of the Fund (or affiliated persons of such persons) will
be made in accordance with Rule 17e-1 under the 1940 Act.
The Portfolio has no obligation to deal with any broker or group of
brokers in the execution of portfolio transactions. The adviser and
sub-adviser may, consistent with the interests of the Portfolio, select brokers
on the basis of the research, statistical and pricing services they provide to
the Portfolio and the adviser's or sub-adviser's other clients. Information
and research received from such brokers will be in addition to, and not in lieu
of, the services required to be performed by the adviser and sub-adviser under
their 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 the adviser or sub-adviser determines in good
faith that such commission is reasonable in terms either of the transaction or
the overall responsibility of the adviser or sub-adviser to the Portfolio and
its other clients and that the total commissions paid by the Portfolio will be
reasonable in relation to the benefits to the Portfolio over the long-term. In
addition, the adviser or sub-adviser may take into account the sale of shares
of the Fund in allocating purchase and sale orders for portfolio securities to
brokers (including brokers that are affiliated with them or Distributor).
For the fiscal years ended February 28, 1995, 1994 and 1993, the
Predecessor Portfolio paid no brokerage commissions.
Over-the-counter issues, including U.S. Government securities, are
normally traded on a "net" basis without a stated commission, through dealers
acting for their own account and not as brokers. The Portfolio will primarily
engage in transactions with these dealers or deal directly with the issuer
unless a better price or execution could be obtained by using a broker. Prices
paid to a dealer will generally include a "spread," which
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is the difference between the prices at which the dealer is willing to purchase
and sell the specific security at the time, and includes the dealer's normal
profit.
Purchases of money market instruments by the Portfolio are made from
dealers, underwriters and issuers. The Portfolio does not currently expect to
incur any brokerage commission expense on such transactions because money
market instruments are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission. The price of the
security, however, usually includes a profit to the dealer.
Securities purchased in underwritten offerings include a fixed amount
of compensation to the underwriter, generally referred to as the underwriter's
concession or discount. When securities are purchased or sold directly from or
to an issuer, no commissions or discounts are paid. It is the policy of the
Portfolio to give primary consideration to obtaining the most favorable price
and efficient execution of transactions involving money market instruments. In
seeking to implement this policy of the Portfolio, the adviser and sub-adviser
will effect transactions involving money market instruments with those dealers
they believe provide the most favorable prices and are capable of providing
efficient executions.
The adviser or sub-adviser may seek to obtain an undertaking from
issuers of commercial paper or dealers selling commercial paper to consider the
repurchase of such securities from the Portfolio prior to maturity at their
original cost plus interest (sometimes adjusted to reflect the actual maturity
of the securities), if it believes that the Portfolio's anticipated need for
liquidity makes such action desirable. Any such repurchase prior to maturity
reduces the possibility that the Portfolio would incur a capital loss in
liquidating commercial paper, especially if interest rates have risen since
acquisition of the particular commercial paper.
Investment decisions for the Portfolio and for other investment
accounts managed by the adviser or sub-adviser are made independently of each
other in the light of differing conditions. 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 in a manner 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 the Portfolio is
concerned, in other cases it could be beneficial to the Portfolio. The
Portfolio will not purchase securities during the existence of any underwriting
or selling group relating to such securities of which PAMG, BlackRock, PNC
Bank, PCM, PEAC, the Administrators,
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<PAGE> 142
Distributor or any affiliated person (as defined in the 1940 Act) thereof is a
member except pursuant to procedures adopted by the Board of Trustees in
accordance with Rule 10f-3 under the 1940 Act. In no instance will portfolio
securities be purchased from or sold to PAMG, BlackRock, PNC Bank, PCM, PEAC,
the Administrators, Distributor or any affiliated person of the foregoing
entities except as permitted by SEC exemptive order or by applicable law.
The portfolio turnover rate of the Portfolio is calculated by dividing
the lesser of the Portfolio's annual sales or purchases of portfolio securities
(exclusive of purchases or sales of securities whose maturities at the time of
acquisition were one year or less) by the monthly average value of the
securities held by the Portfolio during the year. For the fiscal years ended
February 28, 1995 and 1994, the portfolio turnover rates for the Predecessor
Portfolio were 28% and 12%, respectively.
The Fund is required to identify any securities of its regular brokers
or dealers (as defined in Rule 10b-1 under the 1940 Act) or their parents held
by the Fund as of the end of its most recent fiscal year. As of September 30,
1994, the following Portfolios held the following securities: (a) Money Market
Portfolio: variable rate obligations of Goldman Sachs Group L.P., Lehman
Brothers Holdings, Inc. and Morgan Stanley Group in the principal amounts of
$47,000,000, $50,000,000 and $29,998,328, respectively; medium-term note of
Morgan Stanley Group in the principal amount of $15,000,000; and repurchase
agreements with Kidder, Peabody & Co., Morgan Stanley & Co. and PaineWebber
Group in the principal amounts of $100,000,000, $65,000,000 and $10,000,000,
respectively; (b) Government Money Market Portfolio: repurchase agreements with
Kidder, Peabody & Co. and Morgan Stanley & Co. in the principal amounts of
$9,058,000 and $70,000,000, respectively; (c) Managed Income Portfolio:
corporate bonds and variable rate obligations of Morgan Stanley Group in the
principal amounts of $4,925,000 and $10,000,000, respectively; medium-term note
of Salomon Brothers, Inc. in the principal amount of $3,730,680; (d) Short-Term
Bond Portfolio: corporate bonds of Lehman Brothers, Inc. and Merrill Lynch Co.,
Inc. in the principal amounts of $992,500 and $956,250, respectively;
medium-term note of Salomon Brothers, Inc. in the principal amount of $932,670;
Intermediate-Term Bond Portfolio: corporate bonds of Lehman Brothers Holdings,
Inc. in the principal amount of $975,000; and Index Equity Portfolio: common
stock of Merrill Lynch & Co., Inc. and Salomon, Inc. in the principal amounts
of $380,875 and $280,450, respectively.
PURCHASE AND REDEMPTION INFORMATION
COMPUTATION OF PUBLIC OFFERING PRICE FOR SERIES A INVESTOR SHARES OF
THE PORTFOLIO. An illustration of the computation of
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the public offering price per Series A Investor Share of the Portfolio, based
on the value of the Predecessor Portfolio's net assets as of February 28, 1995
follows:
<TABLE>
<CAPTION>
NEW JERSEY
TAX-FREE
INCOME
PORTFOLIO
---------
<S> <C>
Net Assets . . . . . . . . . . . . . . . . . . . . $96,895,646
Outstanding
Shares. . . . . . . . . . . . . . . . . . . . . . 8,857,006
==========
Net Asset Value
Per Share . . . . . . . . . . . . . . . . . . . . $ 10.94
Maximum Sales Charge,
4.50% of offering price
(4.71% of net asset
value per share). . . . . . . . . . . . . . . . . $ 0.52
----------
Offering to Public . . . . . . . . . . . . . . . . $ 11.46
==========
</TABLE>
Series B Investor Shares of the Portfolio are sold at the net asset
value per share next determined after a purchase order is received. Series B
Investor Shares of the Portfolio are subject to a contingent deferred sales
charge which is payable on redemption of such Series B Investor Shares.
Service and Institutional Shares of the Portfolio are sold at the net
asset value per share next determined after a purchase order is received.
EXCHANGE PRIVILEGE. By use of the exchange privilege, the investor
authorizes the Fund's transfer agent to act on telephonic or written exchange
instructions from any person representing himself to be the investor and
believed by the Fund's transfer agent to be genuine. The records of the Fund's
transfer agent pertaining to such instructions are binding. The exchange
privilege may be modified or terminated at any time upon 60 days' notice to
affected shareholders. The exchange privilege is only available in states
where the exchange may legally be made.
A front-end sales charge or a contingent deferred sales charge will be
imposed (unless an exemption from either sales charge applies) when Investor
Shares of a Money Market Portfolio are redeemed and the proceeds are used to
purchase Series A Investor Shares and Series B Investor Shares, respectively,
of the Portfolio.
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<PAGE> 144
INVESTMENTS OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES.
Investors may purchase Series A Shares of the Portfolio at net asset value,
without a sales charge, with the proceeds from the redemption of shares of any
other investment company which were sold with a sales charge or commission in
accordance with the terms set forth in the Prospectus. This does not include
shares of an affiliated mutual fund which were or would be subject to a
contingent deferred sales charge upon redemption. For purposes of this
restriction, the term "affiliated mutual fund" means:
i) any Portfolio of the Fund; and
ii) any other investment company, if such company and the Fund
hold themselves out to investors as related companies for
purposes of investment and investor services, and if:
a) that company and the Fund have a common investment
adviser or distributor; or
b) the investment adviser or distributor of such company
or the Fund is an "affiliated person" (as defined in
Section 2(a)(3) of the 1940 Act) of the investment
adviser or distributor of the Fund or the company,
respectively.
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<PAGE> 145
MISCELLANEOUS. The Fund reserves the right, if conditions exist which
make cash payments undesirable, to honor any request for redemption or
repurchase of the Portfolio's shares by making payment in whole or in part in
securities chosen by the Fund and valued in the same way as they would be
valued for purposes of computing the Portfolio's net asset value. If payment
is made in securities, a shareholder may incur transaction costs in converting
these securities into cash. The Fund has elected, however, to be governed by
Rule 18f-1 under the 1940 Act so that the Portfolio 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 Portfolio.
Under the 1940 Act, the Portfolio may suspend the right to redemption
or postpone the date of payment upon redemption for any period during which the
New York Stock Exchange (the "NYSE") is closed (other than customary weekend
and holiday closings), or during which trading on the NYSE is restricted, or
during which (as determined by the SEC by rule or regulation) an emergency
exists as a result of which disposal or valuation of portfolio securities is
not reasonably practicable, or for such other periods as the SEC may permit.
(The Portfolio may also suspend or postpone the recordation of the transfer of
its shares upon the occurrence of any of the foregoing conditions.)
In addition to the situations described in the Prospectus, the Fund
may redeem shares involuntarily to reimburse the Portfolio 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.
VALUATION OF PORTFOLIO SECURITIES
In determining the approximate market value of portfolio investments,
the Fund may employ outside organizations, which may use, without limitation, a
matrix or formula method that takes into consideration market indexes,
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 the Fund's books at their face
value. Other assets, if any, are valued at fair value as determined in good
faith under the supervision of the Board of Trustees.
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<PAGE> 146
PERFORMANCE INFORMATION
TOTAL RETURN. For purposes of quoting and comparing the performance
of shares of the Portfolio to the performance of other mutual funds and to
stock or other relevant indexes in advertisements or in communications to
shareholders, performance may be stated in terms of total return. The total
return for each class of the Portfolio will be calculated independently of the
other classes within the Portfolio. Under the rules of the SEC, funds
advertising performance must include total return quotes calculated according
to the following formula:
1/n
ERV
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value at the end of the
period covered by the computation of a
hypothetical $1,000 payment made at the
beginning of the period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation,
expressed in terms of years.
In calculating the ending redeemable value for Series A Investor
Shares of the Portfolio, the maximum front-end sales charge is deducted from
the initial $1,000 payment and all dividends and distributions by the Portfolio
are assumed to have been reinvested at net asset value as described in the
Prospectus on the reinvestment dates during the period. In calculating the
ending redeemable value for Series B Investor Shares of the Portfolio, the
maximum contingent deferred sales charge is deducted at the end of the period
and all dividends and distributions by the Portfolio are assumed to have been
reinvested at net asset value as described in the Prospectus on the
reinvestment dates during the period. Total return, or "T" in the formula
above, is computed by finding the average annual compounded rates of return
over the specified periods that would equate the initial amount invested to the
ending redeemable value.
The Predecessor Portfolio offered and sold only one class of shares.
Based on the foregoing calculation, the average annual total return for the
Predecessor Portfolio for periods ended February 28, 1995 were as follows:
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<PAGE> 147
<TABLE>
<CAPTION>
Average Annual Total Return
---------------------------
For the Year For the 5
ended years ended Since commencement of
Portfolio 2/28/95 2/28/95 operations(1)
--------- ------- ------- -------------
<S> <C> <C> <C>
Predecessor Portfolio (2.31)% N/A 6.47%
</TABLE>
- -------------------------------
(1) Commenced operations on July 1, 1991.
Each class of the Portfolio may also from time to time include in
advertisements and communications to shareholders a total return figure that is
not calculated according to the formula set forth above in order to compare
more accurately the performance of each class of the Portfolio's shares with
other performance measures. For example, in comparing the total return of the
Portfolio's shares with data published by Lipper Analytical Services, Inc., CDA
Investment Technologies, Inc. or Weisenberger Investment Company Service, or
with the performance of the Standard & Poor's 500 Stock Index, EAFE, the Dow
Jones Industrial Average or the Lehman Brothers Government Corporate Bond
Index, as appropriate, the Portfolio may calculate the aggregate total return
for its shares of a certain class for the period of time specified in the
advertisement or communication by assuming the investment of $10,000 in the
Portfolio's shares and assuming the reinvestment of each dividend or other
distribution at net asset value on the reinvestment date. Percentage increases
are determined by subtracting the initial value of the investment from the
ending value and by dividing the remainder by the beginning value. The
Portfolio does not, for these purposes, deduct from the initial value invested
or the ending value any amount representing front-end or deferred sales
charges, respectively, charged to purchasers of Series A and Series B Investor
Shares, respectively. The Series A and Series B Investor classes of the
Portfolio will, however, disclose the maximum applicable sales charge and will
also disclose that the performance data does not reflect sales charges and that
inclusion of sales charges would reduce the performance quoted.
YIELD. The Portfolio may advertise its yield on its Service, Series A
Investor, Series B Investor and Institutional Shares. Under the rules of the
SEC, the Portfolio must calculate yield using the following formula:
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<PAGE> 148
a-b 6
YIELD = 2[(----- +1) - 1]
cd
Where: a = dividends and interest earned during the
period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends.
d = the maximum offering price per share on the
last day of the period.
For the purpose of determining net investment income earned during the
period (variable "a" in the formula), dividend income on equity securities held
by the Portfolio is recognized by accruing 1/360th of the stated dividend rate
of the security each day that the security is in the Portfolio. Except as
noted below, interest earned on any debt obligations held by the Portfolio is
calculated by computing the yield to maturity of each obligation held by the
Portfolio based on the market value of the obligation (including actual accrued
interest) at the close of business on the last business day of each month, or,
with respect to obligations purchased during the month, the purchase price
(plus actual accrued interest) and dividing the result by 360 and multiplying
the quotient by the market value of the obligation (including actual accrued
interest) in order to determine the interest income on the obligation for each
day of the subsequent month that the obligation is held by the Portfolio. For
purposes of this calculation, it is assumed that each month contains 30 days.
The maturity of an obligation with a call provision is the next call date on
which the obligation reasonably may be expected to be called or, if none, the
maturity date.
With respect to debt obligations purchased at a discount or premium,
the formula generally calls for amortization of the discount or premium.
However, interest earned on tax-exempt obligations that are issued without
original issue discount and have a current market discount is calculated by
using the coupon rate of interest instead of the yield to maturity. In the
case of tax-exempt obligations that are issued with original issue discount but
which have discounts based on current market value that exceed the
then-remaining portion of the original issue
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<PAGE> 149
discount (market discount), the yield to maturity is the imputed rate based on
the original issue discount calculation. On the other hand, in the case of
tax-exempt obligations that are issued with original issue discount but which
have discounts based on current market value that are less than the
then-remaining portion of the original issue discount (market premium), the
yield to maturity is based on the market value.
With respect to mortgage or other receivables-backed obligations which
are expected to be subject to monthly payments of principal and interest ("pay
downs"), (a) gain or loss attributable to actual monthly pay downs are
accounted for as an increase or decrease to interest income during the period;
and (b) the Portfolio may elect either (i) to amortize the discount and premium
on the remaining security, based on the cost of the security, to the
weighted-average maturity date, if such information is available, or to the
remaining term of the security, if any, if the weighted-average maturity date
is not available, or (ii) not to amortize discount or premium on the remaining
security. The amortization schedule will be adjusted monthly to reflect
changes in the market values of debt obligations.
Undeclared earned income will be subtracted from the maximum offering
price per share (variable "d" in the formula). Undeclared earned income is the
net investment income which, at the end of the base period, has not been
declared as a dividend, but is reasonably expected to be and is declared and
paid as a dividend shortly thereafter. In the case of Series A Investor Shares
of the Portfolio, the Portfolio's maximum offering price per share for purposes
of the formula includes the maximum front-end sales charge imposed by the
Portfolio -- currently 4.50% of the per share offering price.
The Portfolio may advertise the tax-equivalent yield for its shares of
a specified class. Under the rules of the SEC, the Portfolio must calculate
such tax-equivalent yield by dividing that portion of the yield of the
Portfolio which is tax-exempt by one minus a stated income tax rate and adding
the product to that portion, if any, of the yield of the Portfolio which is not
tax-exempt.
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<PAGE> 150
The annualized yield information for the 30-day period ended February
28, 1995 for the Predecessor Portfolio was as follows:
<TABLE>
<CAPTION>
Tax-Equivalent Yield
(assumes a Federal income
Portfolio Yield tax rate of 28%)
--------- ----- -------------------
<S> <C> <C>
Predecessor Portfolio 4.40% 7.29%
</TABLE>
OTHER INFORMATION REGARDING INVESTMENT RETURNS. In addition to
providing performance information that demonstrates the total return or yield
of shares of a particular class of the Portfolio over a specified period of
time, the Fund may provide certain other information demonstrating hypothetical
investment returns. Such information may include, but is not limited to,
illustrating the compounding effects of a dividend in a dividend reinvestment
plan or the impact of tax-free investing. As illustrated below, the Fund may
demonstrate, using certain specified hypothetical data, the compounding effect
of dividend reinvestment on investments in the Portfolio.
[CHART TO BE TAPED HERE]
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<PAGE> 151
The Portfolio may illustrate in advertising or sales literature the
benefits of tax-free investing. For example, Table 1 shows taxpayers how to
translate Federal tax savings from investments the income on which is not
subject to Federal income tax into an equivalent yield from a taxable
investment. Similarly, Table 2 shows New Jersey shareholders the approximate
yield that a taxable investment must earn at various income brackets to produce
after-tax yields equivalent to those of the Portfolio. The yields below are
for illustration purposes only and are not intended to represent current or
future yields for the Portfolio, which may be higher or lower than the yields
shown.
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<PAGE> 152
TABLE 1
<TABLE>
<CAPTION>
Federal TAX-EXEMPT YIELD
1995 Taxable Marginal
Income Bracket Tax Rate* 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
- ------------------------------------------------------------------------------------------------------------------------------------
Single Return Joint Return
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - $23,350 $ 0 - $39,000 15.0% 3.529% 4.118% 4.706% 5.294% 5.882% 6.471% 7.059%
$23,351 - $56,550 $39,001 - $94,250 28.0% 4.167% 4.861% 5.556% 6.250% 6.944% 7.639% 8.333%
$56,551 -$117,950 $94,251 -$143,600 31.0% 4.348% 5.072% 5.797% 6.522% 7.246% 7.971% 8.696%
$117,951-$256,500 $143,601-$256,500 36.0% 4.688% 5.469% 6.250% 7.031% 7.812% 8.594% 9.375%
Over $256,500 Over $256,500 39.6% 4.967% 5.795% 6.623% 7.450% 8.278% 9.106% 9.934%
</TABLE>
*Rates do not include the phase out of personal exemptions or itemized
deductions. It is assumed that the investor is not subject to the alternative
minimum tax. Where applicable, investors should consider that the benefit of
certain itemized deductions and the benefit of personal exemptions are limited
in the case of higher income individuals. For 1995, taxpayers with adjusted
gross income in excess of a threshold amount of approximately $114,700 are
subject to an overall limitation on certain itemized deductions, requiring a
reduction in such deductions equal to the lesser of (i) 3% of adjusted gross
income in excess of the threshold of approximately $114,700 or (ii) 80% of the
amount of such itemized deductions otherwise allowable. The benefit of each
personal exemption is phased out at the rate of two percentage points for each
$2,500 (or fraction thereof) of adjusted gross income in the phase-out zone.
For single taxpayers the range of adjusted gross income comprising the
phase-out zone for 1995 is estimated to be from $114,700 to $237,201 and for
married taxpayers filing a joint return from $172,050 to $294,551. The Federal
tax brackets, the threshold amounts at which itemized deductions are subject to
reduction, and the range over which personal exemptions are phased out will be
further adjusted for inflation for each year after 1995.
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<PAGE> 153
TABLE 2
<TABLE>
<CAPTION>
Approximate
Combined
Federal
Federal NJ and NJ Tax-Exempt Yield
1995 Taxable Marginal Marginal Marginal Tax
Income Bracket* Tax Rate Tax Rate Rate 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0%
--------------- -------- -------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Single Return Taxable Yield - Single Return
-------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 - 20,000 15.0% 1.700% 16.445% 3.590% 4.189% 4.787% 5.386% 5.984% 6.582% 7.181% 7.779% 8.378%
20,001 - 23,350 15.0% 2.125% 16.806% 3.606% 4.207% 4.808% 5.409% 6.010% 6.611% 7.212% 7.813% 8.414%
23,251 - 35,000 28.0% 2.125% 29.530% 4.257% 4.967% 5.676% 6.386% 7.095% 7.805% 8.514% 9.224% 9.933%
35,001 - 40,000 28.0% 4.250% 31.060% 4.352% 5.077% 5.802% 6.527% 7.253% 7.978% 8.703% 9.428% 10.154%
40,001 - 56,550 28.0% 6.013% 32.329% 4.433% 5.172% 5.911% 6.650% 7.389% 8.128% 8.866% 9.605% 10.344%
56,551 - 75,000 31.0% 6.013% 35.149% 4.626% 5.397% 6.168% 6.939% 7.710% 8.481% 9.252% 10.023% 10.794%
75,001 - 117,950 31.0% 6.580% 35.540% 4.654% 5.430% 6.205% 6.981% 7.757% 8.532% 9.308% 10.084 10.859%
117,951 - 256,500 36.0% 6.580% 40.211% 5.018% 5.854% 6.690% 7.526% 8.363% 9.199% 10.035% 10.872% 11.708%
OVER 256,500 39.6% 6.580% 43.574% 5.317% 6.203% 7.089% 7.975% 8.861% 9.747% 10.633% 11.520% 12.406%
<CAPTION>
Joint Return Taxable Yield - Joint Return
------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 - 20,000 15.0% 1.700% 16.445% 3.590% 4.189% 4.787% 5.386% 5.984% 6.582% 7.181% 7.779% 8.378%
20,001 - 39,000 15.0% 2.125% 16.806% 3.606% 4.207% 4.808% 5.409% 6.010% 6.611% 7.212% 7.813% 8.414%
39,001 - 50,000 28.0% 2.125% 29.530% 4.257% 4.967% 5.676% 6.386% 7.095% 7.805% 8.514% 9.224% 9.933%
50,001 - 70,000 28.0% 2.975% 30.142% 4.294% 5.010% 5.726% 6.442% 7.157% 7.873% 8.589% 9.305% 10.020%
70,001 - 80,000 28.0% 4.250% 31.060% 4.352% 5.077% 5.802% 6.527% 7.253% 7.978% 8.703% 9.428% 10.154%
80,001 - 94,250 28.0% 6.013% 32.329% 4.433% 5.172% 5.911% 6.650% 7.389% 8.128% 8.866% 9.605% 10.344%
94,251 - 143,600 31.0% 6.013% 35.149% 4.626% 5.397% 6.168% 6.939% 7.710% 8.481% 9.252% 10.023% 10.794%
143,601 - 150,000 36.0% 6.013% 39.848% 4.987% 5.819% 6.650% 7.481% 8.312% 9.144% 9.975% 10.806 11.637%
150,001 - 256,500 36.0% 6.580% 40.211% 5.018% 5.854% 6.690% 7.526% 8.363% 9.199% 10.035% 10.872% 11.708%
OVER 256,500 39.6% 6.580% 43.574% 5.317% 6.203% 7.089% 7.975% 8.861% 9.747% 10.633% 11.520% 12.406%
</TABLE>
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<PAGE> 154
* The taxable income brackets applicable to New Jersey do not correspond
to the Federal taxable income brackets. The taxable income brackets
presented in this table represent the breakpoints for both the Federal
and New Jersey marginal tax rate changes. When applying these
brackets, Federal taxable income will be different than New Jersey
taxable income because New Jersey does not start with Federal taxable
income in computing its own state income tax base. No state tax
credits, exemptions, or local taxes have been taken into account in
arriving at the combined marginal tax rate. The income amount shown
is income subject to Federal income tax reduced by adjustments to
income, exemptions, and itemized deductions (including the deduction
for state and local income taxes). If the standard deduction is taken
for Federal income tax purposes, the taxable equivalent yield required
to equal a specified tax-exempt yield is at least as great as that
shown in the table. It is assumed that the investor is not subject to
the alternative minimum tax. Where applicable, investors should
consider that the benefit of certain itemized deductions and the
benefit of personal exemptions are limited in the case of
higher-income individuals. For 1995, taxpayers with adjusted gross
income in excess of $114,700 are subject to an overall limitation on
certain itemized deductions, requiring a reduction in such deductions
equal to the lesser of (i) 3% of adjusted gross income in excess of
$114,700 or (ii) 80% of the amount of such itemized deductions
otherwise allowable. The benefit of each personal exemption is phased
out at the rate of two percentage points for each $2,500 (or fraction
thereof) of adjusted gross income in the phase-out zone. For single
taxpayers the range of adjusted gross income comprising the phase-out
zone for 1995 is from $114,700 to $237,201, and for married taxpayers
filing a joint return the range is from $172,050 to $294,551. The
Federal tax brackets, the threshold amounts at which itemized
deductions are subject to reduction, and the range over which personal
exemptions are phased out will be further adjusted for inflation for
each year after 1995.
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<PAGE> 155
MISCELLANEOUS. Yields on shares of the Portfolio may fluctuate daily
and do not provide a basis for determining future yields. Because such yields
will fluctuate, they cannot be compared with yields on savings account or other
investment alternatives that provide an agreed to or guaranteed fixed yield for
a stated period of time. In comparing the yield of one fund to another,
consideration should be given to each fund's investment policies, including the
types of investments made, lengths of maturities of the portfolio securities,
and whether there are any special account charges which may reduce the
effective yield. The fees which may be imposed by Authorized Dealers, Service
Organizations and other institutions on their customers are not reflected in
the calculations of total returns or yields for the Portfolio.
The Fund may also from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on an investment
in the Portfolio are reinvested by being paid in additional Portfolio shares,
any future income or capital appreciation of the Portfolio would increase the
value, not only of the original investment in the Portfolio, but also of the
additional Portfolio shares received through reinvestment. The Fund may also
include discussions or illustrations of the potential investment goals of a
prospective investor, investment management techniques, policies or investment
suitability of the Portfolio, economic conditions, the effects of inflation
and historical performance of various asset classes, including but not limited
to, stocks, bonds and Treasury bills. From time to time advertisements or
communications to shareholders may summarize the substance of information
contained in shareholder reports (including the investment composition of the
Portfolio), as well as the views of the Portfolio's adviser and/or sub-adviser
as to current market, economy, trade and interest rate trends, legislative,
regulatory and monetary developments, investment strategies and related matters
believed to be of relevance to the Portfolio. The Fund may also include in
advertisements charts, graphs or drawings which illustrate the potential risks
and rewards of investment in various investment vehicles, including but not
limited to, stocks, bonds, treasury bills and shares of the Portfolio. In
addition, advertisement or shareholder communications may include a discussion
of certain attributes or benefits to be derived by an investment in the
Portfolio. Such advertisements or communicators may include symbols, headlines
or other material which highlight or summarize the information discussed in
more detail therein.
-41-
<PAGE> 156
TAXES
The following is only a summary of certain additional tax
considerations generally affecting the Portfolio and its shareholders that are
not described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Portfolio or its shareholders, and the
discussion here and in the Prospectuses is not intended as a substitute for
careful tax planning. Investors are urged to consult their tax advisers with
specific reference to their own tax situation.
The Portfolio will elect to be taxed as a regulated investment company
under Part I of Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"). As a regulated investment company, the Portfolio generally is
exempt from Federal income tax on its net investment income and realized
capital gains that it distributes to shareholders, provided that it distributes
an amount equal to at least the sum of (a) 90% of its investment company
taxable income (net investment income and the excess of net short-term capital
gain over net long-term capital loss, if any, for the year) and (b) 90% of its
net tax-exempt interest income, if any, for the year (the "Distribution
Requirement") and satisfies certain other requirements of the Code that are
described below. Distributions of investment company taxable income and net
tax-exempt interest income made during the taxable year or, under specified
circumstances, within twelve months after the close of the taxable year will
satisfy the Distribution Requirement.
In addition to satisfaction of the Distribution Requirement, the
Portfolio must derive at least 90% of its gross income from dividends,
interest, certain payments with respect to securities loans and gains from the
sale or other disposition of stock or securities or foreign currencies
(including, but not limited to, gains from forward foreign currency exchange
contacts), or from other income derived with respect to its business of
investment in such stock, securities, or currencies (the "Income Requirement")
and derive less than 30% of its gross income from the sale or other disposition
of stock, securities and certain other investments (including securities and
forward foreign currency exchange contracts, but only to the extent that such
contracts are not directly related to the Portfolio's principal business of
investing in stock or securities) held for less than three months (the
"Short-Short Gain Test"). Future Treasury regulations may provide that foreign
currency gains that are not "directly related" to the Portfolio's principal
business of investing in stock or securities will not satisfy the Income
Requirement. Interest (including original issue discount and "accrued market
discount") received by the Portfolio at maturity or upon disposition of a
security held for less than three months will not be treated as gross income
derived from the sale or
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<PAGE> 157
other disposition of such security held for less than three months for purposes
of the Short-Short Gain Test. However, any other income that is attributable
to realized market appreciation will be treated as gross income from the sale
or other disposition of securities for this purpose.
In addition to the foregoing requirements, at the close of each
quarter of its taxable year, at least 50% of the value of the Portfolio's
assets must consist of cash and cash items, U.S. government securities,
securities of other regulated investment companies, and securities of other
issuers (as to which the Portfolio has not invested more than 5% of the value
of its total assets in securities of such issuer and as to which the Portfolio
does not hold more than 10% of the outstanding voting securities of such
issuer), and no more than 25% of the value of the Portfolio's total assets may
be invested in the securities of any one issuer (other than U.S. Government
securities and securities of other regulated investment companies), or in two
or more issuers which such Portfolio controls and which are engaged in the same
or similar trades or businesses.
The Portfolio is designed to provide investors with tax-exempt
interest income. Shares of the Portfolio would not be suitable for tax-exempt
institutions and may not be suitable for retirement plans qualified under
Section 401 of the Code, H.R. 10 plans and individual retirement accounts
because such plans and accounts are generally tax-exempt and, therefore, not
only would not gain any additional benefit from the Portfolio's dividends being
tax-exempt but also such dividends would be taxable when distributed to the
beneficiary. In addition, the Portfolio may not be an appropriate investment
for entities which are "substantial users" of facilities financed by private
activity bonds or "related person" thereof. "Substantial user" is defined
under U.S. Treasury Regulations to include a non-exempt person who regularly
uses a part of such facilities in his trade or business and (a) whose gross
revenues derived with respect to the facilities financed by the issuance of
bonds are more than 5% of the total revenues derived by all users of such
facilities, (b) who occupies more than 5% of the entire usable area of such
facilities, or (c) for whom such facilities or a part thereof were specifically
constructed, reconstructed or acquired. "Related persons" include certain
related natural persons, affiliated corporations, a partnership and its
partners and an S corporation and its shareholders.
In order for the Portfolio to pay exempt interest dividends for any
taxable year, at the close of each quarter of the taxable year at least 50% of
the value of the Portfolio must consist of exempt interest obligations. Exempt
interest dividends distributed to shareholders are not included in the
shareholder's gross income for regular Federal income tax purposes. However,
all shareholders required to file a Federal income tax return are
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<PAGE> 158
required to report the receipt of exempt interest dividends and other exempt
interest on their returns. Moreover, while such dividends and interest are
exempt from regular Federal income tax, they may be subject to alternative
minimum tax (currently imposed at the rates of 26% and 28% in the case of
non-corporate taxpayers and at the rate of 20% in the case of corporate
taxpayers) in two circumstances. First, exempt interest dividends derived from
certain "private activity" bonds issued after August 7, 1986, generally will
constitute an item of tax preference for both corporate and non-corporate
taxpayers. Second, exempt interest dividends derived from all bonds,
regardless of the date of issue, must be taken into account by corporate
taxpayers in determining certain adjustments for alternative minimum tax
purposes. In addition, exempt interest dividends paid to corporate taxpayers
may in these two circumstances be subject to tax under the environmental tax
under Section 59A of the Code, which is imposed at the rate of 0.12% on the
excess of the modified alternative minimum taxable income of a corporate
taxpayer over $2 million for taxable years beginning before January 1996.
Receipt of exempt interest dividends may result in collateral Federal income
tax consequences to certain other taxpayers, including financial institutions,
property and casualty insurance companies, individual recipients of Social
Security or Railroad Retirement benefits, and foreign corporations engaged in
trade or business in the United States. Prospective investors should consult
their own tax advisors as to such consequences.
If the Portfolio distributes exempt interest dividends during the
shareholder's taxable year, no deduction generally will be allowed for any
interest expense on indebtedness incurred to purchase or carry shares of the
Portfolio.
Distributions of investment company taxable income will be taxable
(other than interest on tax-exempt Municipal Obligations held by the Portfolio)
to shareholders as ordinary income, regardless of whether such distributions
are paid in cash or are reinvested in shares. Shareholders receiving any
taxable distribution from the Portfolio in the form of additional shares will
be treated as receiving a taxable distribution in an amount equal to the fair
market value of the shares received, determined as of the reinvestment date.
The Portfolio may purchase securities that do not bear tax-exempt interest.
Any income on such securities recognized by the Portfolio will be distributed
and will be taxable to its shareholders.
The Portfolio intends to distribute to shareholders any of its excess
of net long-term capital gain over net short-term capital loss ("net capital
gain") for each taxable year. Such gain is distributed as a capital gain
dividend and is taxable to shareholders as long-term capital gain, regardless
of the length of time the shareholder has held his shares, whether such gain
-44-
<PAGE> 159
was recognized by the Portfolio prior to the date on which a shareholder
acquired shares of the Portfolio and whether the distribution was paid in cash
or reinvested in shares.
Generally, futures contracts held by the Portfolio at the close of the
Portfolio's taxable year will be treated for Federal income tax purposes as
sold for their fair market value on the last business day of such year, a
process known as "mark-to-market." Forty percent of any gain or loss resulting
from such constructive sale will be treated as short-term capital gain or loss
and 60% of such gain or loss will be treated as long-term capital gain or loss
without regard to the length of time the Portfolio holds the futures contract
("the 40-60 rule"). The amount of any capital gain or loss actually realized
by the Portfolio in a subsequent sale or other disposition of those futures
contracts will be adjusted to reflect any capital gain or loss taken into
account by the Portfolio in a prior year as a result of the constructive sale
of the contracts. With respect to futures contracts to sell, which will be
regarded as parts of a "mixed straddle" because their values fluctuate
inversely to the values of specific securities held by the Portfolio, losses as
to such contracts to sell will be subject to certain loss deferral rules which
limit the amount of loss currently deductible on either part of the straddle to
the amount thereof which exceeds the unrecognized gain (if any) with respect to
the other part of the straddle, and to certain wash sales regulations. Under
short sales rules, which also will be applicable, the holding period of the
securities forming part of the straddle will (if they have not been held for
the long-term holding period) be deemed not to begin prior to termination of
the straddle. With respect to certain futures contracts, deductions for
interest and carrying charges will not be allowed. Notwithstanding the rules
described above, with respect to futures contracts to sell which are properly
identified as such, the Portfolio may make an election which will exempt (in
whole or in part) those identified futures contracts from being treated for
Federal income tax purposes as sold on the last business day of the Fund's
taxable year, but gains and losses will be subject to such short sales, wash
sales, loss deferral rules and the requirement to capitalize interest and
carrying charges. Under temporary regulations, the Portfolio would be allowed
(in lieu of the foregoing) to elect either (1) to offset gains or losses from
portions which are part of a mixed straddle by separately identifying each
mixed straddle to which such treatment applies, or (2) to establish a mixed
straddle account for which gains and losses would be recognized and offset on a
periodic basis during the taxable year. Under either election, the 40-60 rule
will apply to the net gain or loss attributable to the futures contracts, but
in the case of a mixed straddle account election, not more than 50% of any net
gain may be treated as long-term and no more than 40% of any net loss may be
treated as short-term.
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<PAGE> 160
Options on futures contracts generally receive Federal tax treatment similar to
that described above.
Under the Federal income tax provisions applicable to regulated
investment companies, less than 30% of a company's gross income for a taxable
year must be derived from gains realized on the sale or other disposition of
securities held for less than three months. The Internal Revenue Service has
issued a private letter ruling with respect to certain other investment
companies to the following effect: gains realized from a futures contract to
purchase or to sell will be treated as being derived from a security held for
three months or more regardless of the actual period for which the contract is
held if the gain arises as a result of a constructive sale of the contract at
the end of the taxable year as described above, and will be treated as being
derived from a security held for less than three months only if the contract is
terminated (or transferred) during the taxable year (other than by reason of
mark-to-market) and less than three months elapses between the date the
contract is acquired and the termination date. Although private letter rulings
are not binding on the Internal Revenue Service with respect to the Portfolio,
the Fund believes that the Internal Revenue Service would take a comparable
position with respect to the Portfolios. In determining whether the 30% test
is met for a taxable year, increases and decreases in the value of the
Portfolio's futures contracts and securities that qualify as part of a
"designated hedge," as defined in the Code, may be netted.
If for any taxable year the Portfolio does not qualify as a regulated
investment company, all of its taxable income will be subject to tax at regular
corporate rates without any deduction for distributions to shareholders, and
all distributions (including amounts derived from interest on Municipal
Obligations) will be taxable as ordinary dividends to the extent of the
Portfolio's current and accumulated earnings and profits. Such distributions
will be eligible for the dividends received deduction in the case of corporate
shareholders.
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute specified percentages of their
ordinary taxable income and capital gain net income (excess of capital gains
over capital losses). The Portfolio intends to make sufficient distributions
or deemed distributions of its ordinary taxable income and any capital gain net
income prior to the end of the each calendar year to avoid liability for this
excise tax.
The Fund will be required in certain cases to withhold and remit to
the United States Treasury 31% of dividends and gross sale proceeds paid to any
shareholder (i) who has provided either an incorrect tax identification number
or no number at all, (ii) who is subject to backup withholding by the Internal
Revenue
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<PAGE> 161
Service for failure to report the receipt of interest or dividend income
properly, or (iii) who has failed to certify to the Fund that he is not subject
to backup withholding or that he is an "exempt recipient."
Shareholders will be advised annually as to the Federal income tax
consequences of distributions made by the Portfolio each year.
The foregoing general discussion of Federal income tax consequences is
based on the Code and the regulations issued thereunder as in effect on the
date of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.
Although the Portfolio expects to qualify as a "regulated investment
company" and to be relieved of all or substantially all Federal income taxes,
depending upon the extent of its activities in states and localities in which
its offices are maintained, in which its agents or independent contractors are
located or in which it is otherwise deemed to be conducting business, the
Portfolio may be subject to the tax laws of such states or localities.
Shareholders should consult their tax advisors about state and local tax
consequences, which may differ from the Federal income tax consequences
described above.
ADDITIONAL INFORMATION CONCERNING SHARES
Shares of the Fund have noncumulative voting rights and, accordingly,
the holders of more than 50% of the Fund's outstanding shares (irrespective of
class) may elect all of the trustees. Shares have no preemptive rights and
only such conversion and exchange rights as the Board may grant in its
discretion. When issued for payment as described in the Prospectus, shares
will be fully paid and non-assessable by the Fund.
There will normally be no meetings of shareholders for the purpose of
electing trustees unless and until such time as required by law. At that time,
the trustees then in office will call a shareholders' meeting to elect
trustees. Except as set forth above, the trustees shall continue to hold
office and may appoint successor trustees. The Fund's Declaration of Trust
provides that meetings of the shareholders of the Fund shall be called by the
trustees upon the written request of shareholders owning at least 10% of the
outstanding shares entitled to vote.
The Funds' Declaration of Trust authorizes the Board of Trustees,
without shareholder approval (unless otherwise required
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<PAGE> 162
by applicable law), to: (i) sell and convey the assets belonging to a class of
shares to another management investment company for consideration which may
include securities issued by the purchaser and, in connection therewith, to
cause all outstanding shares of such class to be redeemed at a price which is
equal to their net asset value and which may be paid in cash or by distribution
of the securities or other consideration received from the sale and conveyance;
(ii) sell and convert the assets belonging to one or more classes of shares
into money and, in connection therewith, to cause all outstanding shares of
such class to be redeemed at their net asset value; or (iii) combine the assets
belonging to a class of shares with the assets belonging to one or more other
classes of shares if the Board of Trustees reasonably determines that such
combination will not have a material adverse effect on the shareholders of any
class participating in such combination and, in connection therewith, to cause
all outstanding shares of any such class to be redeemed or converted into
shares of another class of shares at their net asset value. However, the
exercise of such authority may be subject to certain restrictions under the
1940 Act. The Board of Trustees may authorize the termination of any class of
shares after the assets belonging to such class have been distributed to its
shareholders.
MISCELLANEOUS
COUNSEL. The law firm of Drinker Biddle & Reath, 1345 Chestnut
Street, Philadelphia, Pennsylvania 19107-3496, serves as the Fund's counsel.
INDEPENDENT ACCOUNTANTS. Coopers & Lybrand, L.L.P., 2400 Eleven Penn
Center, Philadelphia, Pennsylvania 19103, serves as the Fund's independent
accountants.
FIVE PERCENT OWNERS. The name, address and percentage ownership of
each person that on September 29, 1995 owned of record or beneficially 5% or
more of the outstanding shares of a Portfolio was as follows:
Money Market Portfolio: BHC Securities, 2005 Market St., Phila., PA 19103,
6.0%; PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113, 85.1%; Government
Money Market Portfolio: PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113,
76.5%; PNC Bank Pittsburgh, 960 Ft. Duquesne Blvd., Pittsburgh, PA 15222, 5.0%;
Municipal Money Market Portfolio: PNC Bank Pittsburgh, 960 Ft. Duquesne Blvd.,
Pittsburgh, PA 15222, 12.1%; PNC Bank Ohio, 201 E. Fifth St., Cincinnati, OH
45202, 8.1%; PNC Bank, Saxon and Co., 200 Stevens Dr., Suite 260, Lester, PA
19113, 73.1%; Ohio Municipal Money Market Portfolio: BHC Securities, 2005
Market St., Phila., PA 19103, 26.4%; PNC Bank, 200 Stevens Dr., Suite 260,
Lester, PA 19113, 58.9%; North Carolina Municipal Money
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<PAGE> 163
Market Portfolio: Branch Banking & Trust Company, P.O. Box 1847, Wilson, N.C.
27893, 5.6%; Centura Bank, P.O. Box 1220, Rocky Mount, NC 27802, 13.1%; United
Carolina Bank Whiteville, P.O. Drawer 632, Whiteville, NC 28472, 22.3%; First
Charter National Bank, P.O. Box 228, Concord, NC 28926, 13.1%; McWood & Co.,
First Citizens Bank, P.O. Box 29522, Raleigh, NC 27626, 13.0%; North Carolina
Trust Co., 301 North Elm St., Greensboro, NC 27402, 17.0%; Pennsylvania
Municipal Money Market Portfolio: BHC Securities, 2005 Market St., Phila., PA
19103, 5.6%; PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113, 85.3%;
Virginia Municipal Money Market Portfolio: Oldom & Co., First Virginia Bank
Inc., 6400 Arlington Blvd., Falls Church, VA 22042, 77.4%; Warritrust &
Company, F&M Bank, P.O. Box 93, Warrenton, VA 22186, 5.8%; Piedmont Company,
Piedmont Trust Bank, P.O. Box 4751, Martinsville, VA 24115, 9.9%; Managed
Income Portfolio: PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113, 92.3;
Tax-Free Income Portfolio: BHC Securities, 2005 Market St., Phila., PA 19103,
15.5%; PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113, 41.5%; Ohio
Tax-Free Income Portfolio: BHC Securities, 2005 Market St., Phila., PA 19103,
32.3%; PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113, 60.6%;
Pennsylvania Tax-Free Income: BHC Securities, 100 N. 20th St., Phila., PA
19103, 46.4%; PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113, 24.9%;
Intermediate Government Portfolio: PNC Bank, 200 Stevens Dr., Suite 260,
Lester, PA 19113, 91.2%; Short-Term Bond Portfolio: Medical Practice Account,
1020 Walnut St., Phila., PA 19107, 14.3%; PNC Bank, 200 Stevens Dr., Suite 260,
Lester, PA 19113, 83.7%; Intermediate-Term Bond Portfolio: PNC Bank, 200
Stevens Dr., Suite 260, Lester, PA 19113, 92.9%; Government Income Portfolio:
BHC Securities, 100 N. 20th St., Phila., PA 19103, 20.3%; International
Emerging Markets Portfolio: First Charter National Bank, P.O. Box 228,
Concord, NC 28026, 5.6%; PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA
19113, 88.7%; Growth Equity Portfolio: PNC Bank, 200 Stevens Dr., Suite 260,
Lester, PA 19113, 96.4%; Index Equity Portfolio: PNC Bank, 200 Stevens Dr.,
Suite 260, Lester, PA 19113, 91.5%; Small Cap Value Equity Portfolio: BHC
Securities, 100 N. 20th St., Phila., PA 19103, 5.0%; PNC Bank, 200 Stevens Dr.,
Suite 260, Lester, PA 19113, 81.6%; International Equity Portfolio: PNC Bank,
200 Stevens Dr., Suite 260, Lester, PA 19113, 91.6%; Balanced Portfolio: BHC
Securities, 100 N. 20th St., Phila., PA 19103, 24.9%; PNC Bank, 200 Stevens
Dr., Suite 260, Lester, PA 19113, 60.5%; Value Equity Portfolio: PNC Bank, 200
Stevens Dr., Suite 260, Lester, PA 19113, 91.1%; Small Cap Growth Equity
Portfolio: PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113, 90.1%; and
Core Equity Portfolio: PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113,
98.1%.
On September 29, 1995, PNC Bank held of record approximately 79% of
the Fund's outstanding shares, and may be deemed a controlling person of the
Fund under the 1940 Act. PNC Bank is a national bank organized under the laws
of the United
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<PAGE> 164
States. All of the capital stock of PNC Bank is owned by PNC Bancorp, Inc.
All of the capital stock of PNC Bancorp, Inc. is owned by PNC Bank Corp., a
publicly-held bank holding company.
BANKING LAWS. Banking laws and regulations currently prohibit a bank
holding company registered under the Federal Bank Holding Company Act of 1956
or any bank or non-bank affiliate thereof from sponsoring, organizing,
controlling or distributing the shares of a registered, open-end investment
company continuously engaged in the issuance of its shares, and prohibit banks
generally from underwriting securities, but such banking laws and regulations
do not prohibit such a holding company or affiliate or banks generally from
acting as investment adviser, administrator, transfer agent or custodian to
such an investment company, or from purchasing shares of such a company as
agent for and upon the order of customers. PAMG, BlackRock, PCM, PEAC, PMFCO,
PFPC and PNC Bank are subject to such banking laws and regulations.
PAMG, BlackRock, PCM, PEAC, PMFCO, PFPC and PNC Bank believe they may
perform the services for the Fund contemplated by their respective agreements
with the Fund without violation of applicable banking laws or regulations. It
should be noted, however, that there have been no cases deciding whether bank
and non-bank subsidiaries of a registered bank holding company may perform
services comparable to those that are to be performed by these companies, and
future changes in either Federal or state statutes and regulations relating to
permissible activities of banks and their subsidiaries or affiliates, as well
as further judicial or administrative decisions or interpretations of present
and future statutes and regulations, could prevent these companies from
continuing to perform such services for the Fund. If such were to occur, it is
expected that the Board of Trustees would recommend that the Fund enter into
new agreements or would consider the possible termination of the Fund. Any new
advisory or sub-advisory agreement would be subject to shareholder approval.
SHAREHOLDER APPROVALS. As used in this Statement of Additional
Information and in the Prospectus, a "majority of the outstanding shares" of a
class, series or Portfolio means, with respect to the approval of an investment
advisory agreement, a distribution plan or a change in a fundamental investment
policy, the lesser of (1) 67% of the shares of the particular class, series or
Portfolio represented at a meeting at which the holders of more than 50% of the
outstanding shares of such class, series or Portfolio are present in person or
by proxy, or (2) more than 50% of the outstanding shares of such class, series
or Portfolio.
THE FUND'S NAME. PNC Bank Corp. is the owner of the registered
service mark "PNC." The Fund has entered into a licensing agreement with
respect to its non-exclusive use of
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<PAGE> 165
"PNC," under which it has agreed not to claim any interest to the name "PNC"
except under the agreement. The license will terminate if it is breached by
the Fund or if neither PAMG nor any of PNC Bank Corp.'s affiliates continues as
the investment adviser or manager of the Fund.
FINANCIAL STATEMENTS
The unaudited financial statements for the Predecessor Portfolio
contained in its Semi-Annual Report to Shareholders dated August 31, 1995 and
the audited financial statements for the Predecessor Portfolio contained in its
Annual Report to Shareholders dated February 28, 1995 are incorporated by
reference in this Statement of Additional Information. No other parts of the
Semi-Annual Report or the Annual Report are incorporated by reference herein.
Additional copies of the 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.
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<PAGE> 166
APPENDIX A
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt considered short-term in the relevant
market. The following summarizes the rating categories used by Standard and
Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However,
the relative degree of safety is not as high as for issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It is,
however, somewhat more vulnerable to the adverse effects of changes and
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are considered
to have a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and well
established access to a range of financial markets and assured sources of
alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are considered
to have a strong capacity for repayment of short-term promissory obligations.
This will normally be evidenced by many
A-1
<PAGE> 167
of the characteristics cited above but to a lesser degree. Earnings trends and
coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected
by external conditions. Ample alternative liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned by
Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay interest and
repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt
in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
A-2
<PAGE> 168
"BB" - Debt has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
"CCC" - Debt has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The "CCC" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The "C" rating
may be used to cover a situation where a bankruptcy petition has been filed,
but debt service payments are continued.
CI" - This rating is reserved for income bonds on which no interest is
being paid.
"D" - Debt is in payment default. This rating is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S & P believes such payments
will be made during such grace period. "D" rating is also used upon the filing
of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid, and
certain other obligations that S & P believes may experience high volatility or
high variability in expected
A-3
<PAGE> 169
returns due to non-credit risks. Examples of such obligations are: securities
whose principal or interest return is indexed to equities, commodities, or
currencies; certain swaps and options; and interest only and principal only
mortgage securities.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be
in default.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally.
These are bonds secured by (a) earnings of projects under construction, (b)
earnings of projects unseasoned
A-4
<PAGE> 170
in operation experience, (c) rentals which begin when facilities are completed,
or (d) payments to which some other limiting condition attaches. Parenthetical
rating denotes probable credit stature upon completion of construction or
elimination of basis of condition.
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" to "B" in its bond rating system. The modifier 1
indicates that the issuer ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issuer ranks at the lower end of its generic rating
category.
MUNICIPAL NOTE RATINGS
A Standard and Poor's rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high quality,
with margins of protection ample although not so large as in the preceding
group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades.
A-5
<PAGE> 171
Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate
quality, carrying specific risk but having protection commonly regarded as
required of an investment security and not distinctly or predominantly
speculative.
"SG" - Loans bearing this designation are of speculative quality and
lack margins of protection.
A-6
<PAGE> 172
Dear Shareholder:
We are pleased to present the Seventh Annual Report of the Compass Funds. The
year was both challenging and exciting as we continued to enhance the Compass
Fund Family for you, our shareholders. The Balanced Fund, which commenced
operations during the year, has grown rapidly and recently achieved the
necessary asset level to be reported in major newspapers throughout the
country.
This has been a difficult period for both the stock and bond markets due to a
number of events such as rising interest rates in the United States, the
earthquake tragedy in Kobe, Japan, the peso devaluation in Mexico and finally
the bankruptcy of the Barings Bank in England. We are proud to report that 11
of 15 Compass Funds which have been in operation for the full year have
outperformed the median mutual fund in their respective categories for the year
ended February 28, 1995 as reported by Lipper Analytical Services. In addition,
four Compass Funds performed in the top quartile.
Our new transfer agent (State Street Bank and Trust Company) was introduced
during the year, enabling the funds to implement the latest technology for
shareholder services and client statements.
ECONOMIC COMMENT
Domestically, economic growth continued to accelerate during the past 12 months
as the Gross Domestic Product advanced by a robust 4%. This growth was
accomplished during a period when inflation continued to show no signs of
accelerating, as the Consumer Price Index increased by a modest 2.7%. The
Federal Reserve's interest rate hikes beginning last February no doubt helped
to contain inflationary pressures, while allowing the economy to expand above
trendline growth.
Recent economic statistics indicate a slowing trend. In December, retail sales
showed a surprising decline of .1%; housing starts, a key component to economic
activity, reported a decline of 9.8% during the month of January. The
unemployment rate rose to a higher than expected 5.7% of the workforce, and
inventory buildup is becoming increasingly evident in the auto and retail
industries. We do expect GDP growth to average 3% or less during 1995, with
most of the gains coming during the first half of the year as higher interest
rates finally take hold and slow economic activity.
Another major factor that potentially could cause the U.S. economy to moderate
is Mexico. Ten percent of U.S. exports flow to Mexico. The recent liquidity
crisis causing the Mexican Government to devalue the peso will make it
virtually impossible to have a normal trading relationship with this important
partner. With 700,000 U.S. jobs tied to the Mexican economy, the Clinton
administration had no alternative but to proceed with emergency stop gap
funding to alleviate the immediate liquidity problem.
The recent weakness of the U.S. dollar versus the Japanese yen and German mark
should, to some extent, improve our ability to export goods and services to our
European and Asian trading partners. This dollar weakness has caused some
concern that inflation may accelerate later in the year.
The recovery experienced in the United States had a positive influence on
international economic activity. In Europe, economic growth averaged about
2.5%, while consumer inflation rose between 1.7% in France, to a high of 4.2%
in Spain. The Japanese economy continued to languish with growth of less than
1%, coupled with very low inflationary pressures. Interest rates worldwide
trended higher than the low levels experienced in the prior year.
EQUITY MARKET REVIEW
The stock market advanced during the past 12 months overcoming escalating
interest rates. For the year ending February 28, 1995, the Standard & Poor's
500 Stock Index rose 7.36%. An important milestone was reached as the Dow Jones
Industrial Average closed at 4,011.05 on the Fund's fiscal year end.
1
<PAGE> 173
There were two noteworthy economic sectors in which the stocks showed
significant outperformance. Consumer staple stocks, such as foods, beverages
and tobacco, advanced by more than 20%, and technology issues, particularly
semi-conductor and computer software companies, gained more than 18%. Both
areas showed improved fundamentals and accelerating earnings, rewarding
shareholders accordingly. Areas that underperformed the market included
transportation, with a decline of approximately 9%, and consumer cyclicals,
which consolidated on average by 5%.
There was little difference between equity investment styles and return during
the past 12 months, with both growth and value managers showing similar
results. Small company stocks, as measured by the Nasdaq Composite Index,
underperformed such broad market averages as the Standard & Poor's 500 Stock
Index during this period.
The International Equity markets, as measured by the Morgan Stanley Europe,
Australian and Far East Index (EAFE), lagged with a decline of 4.2%, in dollar
terms, during the past 12 months. The primary determinant to negative
performance was Japan, which makes up approximately 45% of the EAFE Index. The
Japanese market, as measured by the NIKKEI Index, declined by 10.25%. The
Compass International Equity Fund continued to be underweighted in the Japanese
market. Along with improving economies in Europe and strengthening currencies
against the U.S. dollar, the European equity markets were firmer. The German
market advanced in U.S. dollar terms by 17%, the Netherlands appreciated by
more than 14% and the Belgium market was up nearly 8%.
BOND MARKET REVIEW
The bond market withstood six Federal Reserve Board tightenings, strong
economic growth throughout the year ended February 28, 1995, and chaos caused
by derivative investments during a period of rising interest rates. There was
little to choose from the standpoint of investment return this year, as the
Lehman Brothers Government/Corporate Bond Index provided a total return of only
1.34% and the Lehman Brothers 10-Year General Obligation Index was up a modest
1.71%. Globally, the interest rate environment was aligned with the United
States as the Salomon Brothers World Government Bond Index returned .98%.
During January and February, the bond markets, both domestically and
internationally, have rallied as there is some evidence of a slowing economy in
the United States. With expectations of continued modest inflation and slower
economic growth, bond market performance should improve over last year's
results.
We value you as a shareholder and a client, appreciating your continued
interest in the Compass Funds. We encourage you to review the Portfolio
Managers' comments regarding each of the bond and stock funds during the past
year. The Funds remain committed to a sound investment approach, which
emphasizes quality in conjunction with prudent policies. We welcome your
questions and comments, which may be directed to your Financial Service
Representative or Investor Services at 1-800-451-8371.
Sincerely yours,
<TABLE>
<S> <C>
Alfred J. DiMatties Joseph K. Leinbach
Director Director
Trust Investments Mutual Fund Administration
Midlantic Bank, N.A. Midlantic Bank, N.A.
</TABLE>
2
<PAGE> 174
TABLE OF CONTENTS
<TABLE>
<S> <C>
MANAGER'S DISCUSSION OF FUND PERFORMANCE........................... 4
STATEMENTS OF NET ASSETS/SCHEDULE OF INVESTMENTS................... 15
STATEMENTS OF ASSETS AND LIABILITIES............................... 55
STATEMENTS OF OPERATIONS........................................... 58
STATEMENTS OF CHANGES IN NET ASSETS................................ 60
FINANCIAL HIGHLIGHTS............................................... 65
NOTES TO FINANCIAL STATEMENTS...................................... 68
REPORT OF INDEPENDENT AUDITOR'S OPINION............................ 75
NOTICE TO SHAREHOLDERS............................................. 76
</TABLE>
<PAGE> 175
EQUITY INCOME FUND
The Equity Income Fund seeks current income and capital appreciation by
investing primarily in common stocks. On average, stocks selected for the fund
have higher than average dividend yields and lower than average
price-to-earnings and price-to-book ratios. The yield of the fund's stocks is
currently 3.3% versus 2.8% for the average stock in the S&P 500 Index. The
stocks in the fund currently sell for approximately 10 times our 1995 earning
projections versus a multiple of about 14 times earnings for the S&P 500 Index.
The fund returned 3.87% for the 12 months ended February 28, 1995 versus 7.36%
for the S&P 500 Index. The primary factors that influenced the fund's
performance were expenses, which the Index does not incur, and the
underperformance of higher-yielding and cyclically-sensitive industry sectors
that the fund emphasizes in meeting its investment objectives. Despite
underperformance versus the broad market as represented by the S&P 500 Index,
the fund outperformed the average of other equity income funds as represented
by the Lipper Equity Income Fund Average, which returned 2.01%.
During the fiscal year, performance was held back by underweighted positions
versus the Index in the strong-performing healthcare and technology sectors,
which are lower-yielding sectors. Performance was aided by a considerable
overweighting in the finance sector and strong stock selection in that group.
For 1995, we expect that corporate profits will grow at a level that is below
1994's pace but still quite good. The growth in corporate profits continues to
generate substantially increased levels of capital investment and stock
repurchases. Investment-driven productivity gains should also continue. The
strength of foreign economies will more than make up for slower economic growth
at home. Given this outlook, the fund continues to focus on sectors with the
greatest sensitivity to a global expansion, in particular, cyclical commodities
such as aluminum and paper. The fund also has significant commitments in energy
and finance, which we believe offer compelling valuations and good growth
prospects.
ANNUALIZED TOTAL RETURN(1)
<TABLE>
<CAPTION>
SINCE
ONE YEAR FIVE YEAR INCEPTION
<S> <C> <C> <C>
WITH SALES CHARGE -0.06% 11.27% 10.20%
WITHOUT SALES CHARGE 3.87% 12.13% 10.94%
S&P 500 INDEX 7.35% 11.35% 10.94%
</TABLE>
COMPARISON OF CHANGE IN THE VALUE OF A $10,000 INVESTMENT
[S&P 500 Index Graph]
(1) For the period ended February 28, 1995. The S&P 500 Index is an unmanaged
index which excludes transaction and holding charges. Past performance of
the portfolio does not predict future results.
4
<PAGE> 176
GROWTH FUND
The Growth Fund seeks capital appreciation by investing primarily in common
stocks. Income is a secondary consideration. Emphasis is placed on companies
that have demonstrated consistent historical earnings growth. The fund returned
2.75% for the 12 months ended February 28, 1995 versus 7.36% for the S&P 500
Index. The primary factors that influenced the fund's performance were
expenses, which the Index does not incur, and emphasis on specific growth
sectors which underperformed the broad market for the year. The fund's
performance pattern was similar to that of other growth funds and, despite
underperformance versus the broad market, the fund outperformed the average of
other growth funds as represented by the Lipper Growth Fund Average, which
returned .92%.
In the first half of the period, the stock market was dominated by
economically-sensitive issues which responded favorably to accelerating
economic growth. Later in the year, as interest rates continued to rise, the
fear that inflation would choke off the recovery dominated investors' thoughts.
As a result, investors fled from cyclical stocks, which was a boon for consumer
stable issues such as food, beverage, tobacco and household products. The
Growth Fund was significantly underweighted versus the Index in this
strong-performing sector. Performance was also negatively impacted by an
overweighting in a lagging sector, information and entertainment. Brighter
spots included an underweighting in the very weak consumer discretionary sector
and considerable overweighting in the technology sector combined with strong
performance in that group.
We do not anticipate any major change in strategy in the coming year and remain
committed to the stocks of companies that will benefit from what we believe
will be global economic expansion. We will continue to favor the stocks of
companies whose long-term earnings are expected to grow faster than the average
company represented in the S&P 500 Index.
ANNUALIZED TOTAL RETURN(1)
<TABLE>
<CAPTION>
SINCE
ONE YEAR FIVE YEAR INCEPTION
<S> <C> <C> <C>
WITH SALES CHARGE -1.10% 7.48% 7.38%
WITHOUT SALES CHARGE 2.75% 8.30% 8.09%
S&P 500 INDEX 7.35% 11.35% 10.94%
</TABLE>
COMPARISON OF CHANGE IN THE VALUE OF A $10,000 INVESTMENT
[S&P 500 Index Graph]
(1) For the period ended February 28, 1995. The S&P 500 Index is an unmanaged
index which excludes transaction and holding charges. Past performance of
the portfolio does not predict future results.
5
<PAGE> 177
SMALL CAP VALUE FUND
The Small Cap Value Fund seeks capital appreciation by investing primarily in
common stocks of small-sized market capitalization companies.
For the year ending February 28, 1995, the Small Cap Value Fund had a total
return of -4.70%. This compares to the NASDAQ/OTC Index return of .16% over the
same period.
During 1994, the Small Cap Value Fund's strategy remained consistent with its
purchases, concentrated in issues having price-to-sales, price-to-earnings and
price-to-book value ratios that are substantially discounted versus comparable
ratios of the S&P 500 and the Russell 2000 indexes. The Small Cap Value Fund,
with steep discounts from the median valuation stock, performed slightly behind
most small cap indices. In general, equity returns in 1994 were disappointing
for most investors. Big cap growth stocks slightly outperformed the overall
market, but we believe this result represents a counter cyclical move in what
is still a value cycle.
We feel the decline in 1994 was a temporary situation which will be rectified
in 1995. While we could be wrong, we anticipate a 1995 which is nicely above
average in terms of equity returns, big cap or small cap, growth or value. Our
optimism is predicated on a growing economy, lower than anticipated inflation,
a declining yield curve spread and the oversold nature of the equity market. We
also expect it to be value led.
ANNUALIZED TOTAL RETURN(1)
<TABLE>
<CAPTION>
SINCE
ONE YEAR INCEPTION
<S> <C> <C>
WITH SALES CHARGE -8.27% 7.09%
WITHOUT SALES CHARGE -4.70% 8.22%
NASDAQ/OTC INDEX 0.16% 14.97%
</TABLE>
COMPARISON OF CHANGE IN THE VALUE OF A $10,000 INVESTMENT
[NASDAQ/OTC Index Graph]
(1) For the period ended February 28, 1995. The NASDAQ/OTC Index is an
unmanaged index which excludes transaction and holding charges. Past
performance of the portfolio does not predict future results.
6
<PAGE> 178
BALANCED FUND
During the first eight months of operation, the Balanced Fund achieved a total
return of 8.94% compared to the median return of balanced funds as measured by
Lipper Analytical Services, which advanced by 9.54%. At February 28, 1995, the
Balanced Fund's assets were allocated 49.4% equities and securities convertible
into equity investments, 39.2% high grade government and corporate bonds, and a
cash reserve of 11.4%. The asset allocation remained relatively constant during
most of this time period. However, the equity position was reduced about 3% in
the latter part of February following a sharp rise in the stock market during
the months of January and February.
Equities in the portfolio performed well in absolute terms, by providing a
total return of 9.7%. The fund's performance benefited by a concentration in
technology issues, as this sector outperformed the general market
significantly. The portfolio was also enhanced due to stock selection in the
consumer staples area, the best performing stock group during the past eight
months. The fund's performance was negatively impacted by consumer cyclical
stocks, in particular, retailers. On an individual stock selection basis, the
four best performing stocks during the time period were Merck, with a gain of
41%, Pepsico, advancing 22%, Engelhard, up 20% and McDonald's, which registered
a gain of 16%. Our primary focus will continue to be on companies which have
clear earnings visibility, strong balance sheets and visionary management that
can improve the company's competitive position.
The strategy for the fixed-income portion of the portfolio focused mainly on
liquidity and quality. Emphasis was put on high coupon bond issues to maximize
income. In an effort to remain defensive in a volatile interest rate
environment, average maturity and duration were shortened slightly to 7.44 and
4.66 years, respectively. The average quality of the portfolio remained
extremely high with the equivalent of an AAA rating.
Looking ahead, the bond portfolio will continue to concentrate on liquidity as
well as quality. Although we will continue to focus on government and
government agency securities, the fund will search for opportunities to
increase its corporate bond exposure to enhance current yield. Special emphasis
will be placed on companies whose bonds are trending toward an improved quality
rating.
ANNUALIZED TOTAL RETURN(1)
<TABLE>
<CAPTION>
SINCE
INCEPTION
<S> <C>
WITH SALES CHARGE 2.83%
WITHOUT SALES CHARGE 8.94%
LIPPER BALANCED FUND AVERAGE 9.54%
</TABLE>
COMPARISON OF CHANGE IN THE VALUE OF A $10,000 INVESTMENT
[Lipper Balanced Fund Average Graph]
(1) For the period ended February 28, 1995. The Lipper Balanced Fund Average
is an unmanaged index which excludes transaction and holding charges. Past
performance of the portfolio does not predict future results.
7
<PAGE> 179
SHORT/INTERMEDIATE FUND
The Short/Intermediate Fund invests principally in obligations issued by the
U.S. Government or its agencies and high-grade corporate obligations. The
fund's weighted average maturity may range between two and five years to reduce
volatility. The fund's objective is to seek current income and preservation of
capital.
For the fiscal year ending February 28, 1995, the Short/Intermediate Fund
realized a return of 2.27%. This compares to a total return of 3.26% for the
Lehman Brothers 1-3 Year Government Bond Index. The fund's net assets as of its
fiscal year end were $202 million.
As a result of the Federal Reserve Board's monetary policy shift towards
tightening, interest rates rose throughout the yield curve. Recognizing the
rise in interest rates would hurt bond prices, the fund's average weighted
maturity was shortened to its allowable minimum of two years. In addition, bond
swaps were initiated to capture some of the rising current coupon income now
available in the marketplace. Our emphasis on high quality securities helped
provide the fund with additional relative performance gains. Of the issues held
by the fund, over 70% are rated in the Aa category or better by Moody's
Investor Services.
Monetary policy will remain one of the primary forces that will significantly
influence interest rates in the coming months. We anticipate remaining fully
invested, while maintaining an average portfolio maturity range of two to four
years.
ANNUALIZED TOTAL RETURN(1)
<TABLE>
<CAPTION>
SINCE
ONE YEAR FIVE YEAR INCEPTION
<S> <C> <C> <C>
WITH SALES CHARGE -1.59% 6.35% 6.43%
WITHOUT SALES CHARGE 2.27% 7.17% 7.14%
LEHMAN BROTHERS 1-3 YEAR
GOVERNMENT BOND INDEX 3.24% 7.10% 7.39%
</TABLE>
COMPARISON OF CHANGE IN THE VALUE OF A $10,000 INVESTMENT
[Lehman Brothers 1-3 Year Government Bond Index Graph]
(1) For the period ended February 28, 1995. The Lehman Brothers 1-3 Year
Government Bond Index is an unmanaged index which excludes transaction and
holding charges. Past performance of the portfolio does not predict future
results.
8
<PAGE> 180
FIXED INCOME FUND
The Fixed Income Fund invests principally in obligations issued by the U.S.
Government or its agencies and high-grade corporate obligations. Based on
expectations of future interest rates, the fund varies its weighted average
maturity in an effort to maximize return.
The Fixed Income Fund realized a total return of .65% for the fiscal year
ending February 28, 1995. This compares to a total return of 1.34% for the
Lehman Brothers Government/Corporate Bond Index for the same period. The fund's
net assets as of its fiscal year end were $244 million.
During the course of the year the Federal Reserve Board was active in raising
interest rates. As bond prices eroded, the fund deployed defensive type
strategies. The portfolio's weighted average maturity was shortened by over
three quarters of a year to 8.71 years, and the duration was adjusted downward
from 5.33 years to 4.92 years. Bond swaps were initiated to capture some of the
rising current coupon income now available in the marketplace. In addition, a
cash equivalent balance of more than 5% was maintained throughout most of the
year.
This fund continues to benefit from its commitment to high-quality corporate
bond securities, asset-backed investments and government obligations. Over 75%
of the individual issues that represent the fund are rated Aa or better by
Moody's Investor Services.
We anticipate the interest rate environment will remain captive to monetary
policy and inflation expectations. We will continue to seek out selective value
opportunities along the yield curve in both the government and corporate bond
markets.
ANNUALIZED TOTAL RETURN(1)
<TABLE>
<CAPTION>
SINCE
ONE YEAR FIVE YEAR INCEPTION
<S> <C> <C> <C>
WITH SALES CHARGE -3.16% 7.77% 7.34%
WITHOUT SALES CHARGE 0.65% 8.59% 8.05%
LEHMAN BROTHERS GOVERNMENT/
CORPORATE BOND INDEX 1.35% 8.87% 8.90%
</TABLE>
COMPARISON OF CHANGE IN THE VALUE OF A $10,000 INVESTMENT
[Lehman Brothers Government/Corporate Bond Index Graph]
(1) For the period ended February 28, 1995. The Lehman Brothers
Government/Corporate Bond Index is an unmanaged index which excludes
transaction and holding charges. Past performance of the portfolio does
not predict future results.
9
<PAGE> 181
MUNICIPAL BOND FUND
The Municipal Bond Fund seeks current income that is exempt from federal
taxation with the preservation of capital.
For the fiscal year ended February 28, 1995, the Municipal Bond Fund realized a
total return of 1.17%. This compares to a total return of 1.71% for the Lehman
Brothers 10-Year General Obligation Index for the same time period.
Our strategy as we entered 1994, anticipating the Federal Reserve's tightening
of monetary policy, was to shorten our average weighted maturity to 7 years
from 12 years. This reduced the price sensitivity of the fund to rising
interest rates. Although new issuance supply was expected to contract 38%, we
wanted to establish a very defensive strategy until we saw signs that the
economy was slowing.
Over 85% of the fund's assets were invested in AA and AAA rated bonds,
anticipating that if interest rates increased, higher quality issues would be
insulated from price declines more than lower quality paper. A combination of
Federal Reserve tightening, a plunging dollar and derivative losses worldwide
adversely affected bond prices during the year. During the third quarter, we
thought the Federal Reserve had just about completed its tightening; therefore,
we started to extend the average weighted maturity of the fund.
ANNUALIZED TOTAL RETURN(1)
<TABLE>
<CAPTION>
SINCE
ONE YEAR FIVE YEAR INCEPTION
<S> <C> <C> <C>
WITH SALES CHARGE -2.62% 5.98% 5.93%
WITHOUT SALES CHARGE 1.17% 6.80% 6.71%
LEHMAN BROTHERS 10-YEAR
GENERAL OBLIGATION INDEX 1.71% 7.95% 7.84%
</TABLE>
COMPARISON OF CHANGE IN THE VALUE OF A $10,000 INVESTMENT
[Lehman Brothers 10-year General Obligation Index Graph]
(1) For the period ended February 28, 1995. The Lehman Brothers 10-Year
General Obligation Index is an unmanaged index which excludes transaction
and holding charges. Past performance of the portfolio does not predict
future results.
10
<PAGE> 182
NEW JERSEY MUNICIPAL BOND FUND
The New Jersey Municipal Bond Fund is a single state municipal debt fund that
seeks current income that is exempt from federal and state income taxation with
the preservation of capital. For the year ended February 28, 1995, the fund
provided a total return of 1.49%. This return slightly lagged the Lehman
Brothers 10-Year General Obligation Index which advanced 1.71%. This was a very
challenging and disappointing year for fixed income markets, especially the
municipal bond market. Entering 1994, market fundamentals appeared to favor the
municipal bond market. New-issuance volume was expected to contract 38% from
the record volume of $334 billion issued in 1993, slow or modest economic
growth was anticipated in the United States and abroad and inflation seemed
contained. However, action by the Federal Reserve to dramatically raise
interest rates overcame these favorable market fundamentals.
February, 1994 was a very disappointing month for the fixed income markets. The
Federal Reserve initiated its first round of tightening in more than five years
to preempt rising inflation that typically accompanies stronger economic
growth. It was the first of seven tightening moves the Federal Reserve had
engineered to help contain inflation and navigate the economy to a soft
landing. Other major factors during the period affecting the municipal bond
market included the net outflow of funds from tax-exempt mutual funds, the
derivative debacle in Orange County, California and the faltering dollar.
Our strategy during the year was to maintain our defensive posture by
purchasing pre-refunded bonds, cushion bonds and higher-coupon bonds. We
increased our weighting of AA and AAA rated issues to over 80% in anticipation
of massive redemptions of pre-refunded bonds and a lack of issuance of
high-quality New Jersey bonds. We shortened the average weighted maturity to
under 10 years and duration to 7 years to decrease the price sensitivity of the
fund during the period of the Federal Reserve's aggressive tightening. As we
approached the third quarter, we felt the Federal Reserve had just about
concluded its tightening; therefore, we started to extend the fund's average
weighted maturity to over 10 years once again.
ANNUALIZED TOTAL RETURN(1)
<TABLE>
<CAPTION>
SINCE
ONE YEAR INCEPTION
<S> <C> <C>
WITH SALES CHARGE -2.31% 6.47%
WITHOUT SALES CHARGE 1.49% 7.59%
LEHMAN BROTHERS 10-YEAR
GENERAL OBLIGATION INDEX 1.71% 7.77%
</TABLE>
COMPARISON OF CHANGE IN THE VALUE OF A $10,000 INVESTMENT
[Lehman Brothers 10-year General Obligation Index Graph]
(1) For the period ended February 28, 1995. The Lehman Brothers 10-Year
General Obligation Index is an unmanaged index which excludes transaction
and holding charges. Past performance of the portfolio does not predict
future results.
11
<PAGE> 183
PENNSYLVANIA MUNICIPAL BOND FUND
The Pennsylvania Municipal Bond Fund is a single state municipal bond fund that
seeks current income that is exempt from Federal and Pennsylvania income
taxation with preservation of capital.
For the year ended February 28, 1995, the Pennsylvania Municipal Bond Fund
provided a total return of 1.81%. This return exceeded the Lehman Brothers
10-year General Obligation Index which advanced 1.71%.
There were several factors affecting the tax-exempt bond market, including
tightening moves by the Federal Reserve to increase the federal funds rate to
6% from 3%, derivative problems worldwide and a very unstable dollar. All of
these factors applied downward pressure on bond prices.
Our strategy as we entered 1994 was to adhere to a defensive position until we
felt the Federal Reserve's tightening would be coming to a close. We maintained
an average weighted maturity of under 10 years and a duration under 7 years.
Over 80% of the fund was composed of AA and AAA rated securities in
anticipation of massive bond redemptions, pre-refunded bonds maturing and
demand for bonds due to a contraction of supply within Pennsylvania and the
United States in general. Towards the latter part of the third quarter, we
started to extend our average weighted maturity to over 10 years in the belief
the Federal Reserve would not materially increase rates again in the near term.
ANNUALIZED TOTAL RETURN(1)
<TABLE>
<CAPTION>
SINCE
ONE YEAR INCEPTION
<S> <C> <C>
WITH SALES CHARGE -1.96% -0.85%
WITHOUT SALES CHARGE 1.81% 1.73%
LEHMAN BROTHERS 10-YEAR
GENERAL OBLIGATION INDEX 1.71% 7.07%
</TABLE>
COMPARISON OF CHANGE IN THE VALUE OF A $10,000 INVESTMENT
[Lehman Brothers 10-year General Obligation Index Graph]
(1) For the period ended February 28, 1995. The Lehman Brothers 10-Year
General Obligation Index is an unmanaged index which excludes transaction
and holding charges. Past performance of the portfolio does not predict
future results.
12
<PAGE> 184
INTERNATIONAL EQUITY FUND
The International Equity Fund seeks capital appreciation by investing in equity
securities of foreign companies, most of which are denominated in foreign
currencies.
The International Equity Fund had a total return of -6.99% for the year ended
February 28, 1995. This compares to a total return of -4.44% for the EAFE Index
for the same period.
The past fiscal year has proved to be a difficult one as most major stock
markets fell in local currency terms. However, the U.S. dollar was quite weak
falling by 14% against the deutsche mark and 7% against the yen. Since the
fund's value is reported in U.S. dollars, this helped to mitigate some of the
decline of local currency equity values. Stock markets in Europe proved the
most resilient. Our strategy had generally been to underweight the U.K. while
being broadly in line with the index in continental Europe. However, within
this we underweighted Germany and overweighted France. Our stock selection
strategy was mainly focused on economically sensitive shares as the economic
recovery continued to gather strength.
Virtually all Pacific markets were very weak, most notably Hong Kong and
Malaysia. Our strategy was to significantly underweight both these markets. In
particular, we were cautious about property prices and both political and
economic problems in China. By contrast, we overweighted Singapore and Taiwan.
In Japan, we maintained a weighting below the index level at around one-third
of the fund. Japan's economic recovery was beginning to gather pace but
received a significant setback following the Kobe earthquake. The recovery will
come but has probably been delayed some six months.
Emerging markets suffered a very turbulent year, particularly in Latin America.
The fund's investments in Latin America were somewhat reduced; however, we
continue to favor emerging markets in the long run.
ANNUALIZED TOTAL RETURN(1)
<TABLE>
<CAPTION>
SINCE
ONE YEAR INCEPTION
<S> <C> <C>
WITH SALES CHARGE -10.49% 7.10%
WITHOUT SALES CHARGE -6.99% 8.23%
EAFE INDEX -4.44% 8.04%
</TABLE>
COMPARISON OF CHANGE IN THE VALUE OF A $10,000 INVESTMENT
[EAFE Index Graph]
(1) For the period ended February 28, 1995. The EAFE Index is an unmanaged
index which excludes transaction and holding charges. Past performance of
the portfolio does not predict future results.
13
<PAGE> 185
INTERNATIONAL FIXED INCOME FUND
The International Fixed Income Fund invests principally in top quality, fixed
income securities denominated in foreign currencies. The investment adviser has
the discretion to hedge foreign currency exposure back to the dollar to protect
the fund against adverse currency moves.
For the year ended February 28, 1995, the International Fixed Income Fund
provided a total return of 1.50%. This return exceeded the Salomon Brothers
Non-U.S. Hedged World Government Bond Index, which had a return of .98% over
the same period.
During the first half of the year, over 80% of the fund was invested in
European bonds. The fund's performance suffered from an overweight exposure to
the high-yielding bond markets of Italy, Spain and Sweden, where prices fell
due to concerns over budgetary policies and a general removal of liquidity from
these markets. As the year progressed, European bond exposure was consolidated
towards "core" Europe, and holdings of French and German bonds were increased
to 45% of the total portfolio. Most European currency exposure was hedged back
to the dollar, although an opportunistic exposure to the undervalued Italian
lira was taken during the first half of the year. Deutsche mark and sterling
currency exposure was maintained throughout the year in order to benefit from
the decline of the dollar.
Throughout 1994, the fund held a 20% exposure to Japanese bonds, which enhanced
the fund's performance as economic growth remained weak. The return from
Japanese bonds was aided by a 6% exposure to the yen, which appreciated by 12%
against the dollar in 1994. The fund's duration was reduced to under five years
as the outlook for bond markets became more cautious.
ANNUALIZED TOTAL RETURN(1)
<TABLE>
<CAPTION>
SINCE
ONE YEAR INCEPTION
<S> <C> <C>
WITH SALES CHARGE -2.32% 6.28%
WITHOUT SALES CHARGE 1.50% 7.40%
SALOMON BROTHERS NON-U.S. HEDGED
WORLD GOVERNMENT BOND INDEX .98% 7.09%
</TABLE>
COMPARISON OF CHANGE IN THE VALUE OF A $10,000 INVESTMENT
[Salomon Brothers Non-U.S. Hedged World
Government Bond Index Graph]
(1) For the period ended February 28, 1995. The Salomon Brothers Non-U.S.
Hedged World Government Bond Index is an unmanaged index which excludes
transaction and holding charges. Past performance of the portfolio does
not predict future results.
14
<PAGE> 186
STATEMENT OF NET ASSETS THE COMPASS CAPITAL GROUP
- -------------------------------------------------------------------------------
February 28, 1995
CASH RESERVE FUND
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
------- --------
<S> <C> <C>
COMMERCIAL PAPER (33.2%)
ABN/AMRO Canada, Schedule B
6.220%, 03/27/95.............. $ 5,000 $ 4,978
American Telephone & Telegraph
Capital
6.370%, 04/03/95.............. 10,000 9,943
Bowater PLC
6.150%, 05/12/95.............. 5,000 4,939
Broadway Capital
6.420%, 04/07/95.............. 12,000 11,922
Deutsche Bank Financial
5.860%, 05/01/95.............. 5,000 4,952
Ford Motor Credit
6.235%, 04/28/95.............. 9,500 9,406
General Electric Capital
6.480%, 04/13/95.............. 5,000 4,962
International Lease Finance
6.520%, 06/09/95.............. 10,000 9,824
International Nederlanden U.S.
Insurance Holdings
6.020%, 03/03/95.............. 5,000 4,998
6.057%, 04/24/95.............. 5,050 5,005
MCA Funding
6.605%, 07/25/95.............. 7,300 7,111
6.308%, 08/21/95.............. 5,500 5,338
New South Wales Treasury
6.010%, 03/09/95.............. 5,000 4,993
Queensland Alumina
6.030%, 03/13/95.............. 5,000 4,990
6.226%, 04/17/95.............. 10,000 9,920
South Australian Government
Financing Authority
6.215%, 03/23/95.............. 7,600 7,572
6.930%, 07/03/95.............. 11,000 10,746
Southland
6.400%, 03/14/95.............. 5,000 4,989
6.200%, 05/10/95.............. 5,000 4,941
Tasmanian Public Finance
6.360%, 03/30/95.............. 8,200 8,159
Toyota Motor Credit
6.230%, 04/03/95.............. 5,000 4,972
--------
Total Commercial Paper
(Cost $144,658,704)........... 144,660
--------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
------- --------
<S> <C> <C>
CORPORATE BONDS (23.7%)
American Express Centurion Bank
6.125%, 03/23/95 (A)................. $10,000 $10,000
6.063%, 03/26/95 (A)................. 10,000 9,998
Associates
4.190%, 05/05/95..................... 2,000 1,997
Beta Finance
6.190%, 03/01/95 (A)................. 11,000 10,999
FCC National Bank, Delaware
6.110%, 03/07/95 (A)................. 10,000 10,000
General Electric Capital
6.400%, 03/01/95 (A)................. 10,000 9,998
Goldman Sachs Group
6.190%, 03/01/95 (A)................. 10,000 10,000
6.655%, 03/01/95 (A)................. 10,000 10,000
Nationsbank, North Carolina
5.650%, 07/21/95..................... 10,000 9,984
PNC Bank
6.010%, 03/07/95 (A)................. 10,000 9,999
Southtrust Bank, Alabama
6.125%, 05/03/95..................... 10,000 10,000
--------
Total Corporate Bonds
(Cost $102,975,481).................. 102,975
--------
ASSET BACKED SECURITIES (4.6%)
Steers
6.060%, 03/07/95 (A)................. 15,000 15,000
6.250%, 05/18/95 (A)................. 5,000 5,000
--------
Total Asset Backed Securities
(Cost $19,999,870)................... 20,000
--------
GUARANTEED INVESTMENT CONTRACT (2.3%)
Peoples Security Life
6.170%, 03/01/95 (A)................. 10,000 10,000
--------
Total Guaranteed Investment
Contract
(Cost $10,000,000)................... 10,000
--------
U.S. TREASURY OBLIGATION (1.2%)
U.S. Treasury Note
3.875%, 03/31/95..................... 5,000 4,997
--------
Total U.S. Treasury Obligation
(Cost $4,997,455).................... 4,997
--------
</TABLE>
Continued
15
<PAGE> 187
STATEMENT OF NET ASSETS
- -------------------------------------------------------------------
February 28, 1995
CASH RESERVE
FUND (CONTINUED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
------- --------
<S> <C> <C>
U.S. GOVERNMENT AGENCY
OBLIGATIONS (6.4%)
Federal National Mortgage
Association
5.360%, 03/20/95.............. $ 5,000 $4,986
6.730%, 07/11/95.............. 5,000 4,881
Small Business Administration
7.000%, 03/01/95 (A).......... 7,958 8,148
Student Loan Marketing
Association
5.315%, 06/30/95.............. 5,000 5,000
5.480%, 06/30/95 (A).......... 5,000 5,000
--------
Total U.S. Government Agency
Obligations
(Cost $28,015,029)............ 28,015
--------
TIME DEPOSIT (1.9%)
Dai Ichi Kangyo Bank, Toronto
6.156%, 03/24/95.............. 5,000 5,000
Morgan Toronto
6.063%, 03/29/95.............. 3,300 3,300
--------
Total Time Deposit
(Cost $8,300,000)............. 8,300
--------
CERTIFICATES OF DEPOSIT (9.2%)
Canadian Imperial Bank
6.250%, 03/21/95.............. 5,000 5,000
6.080%, 04/19/95.............. 10,000 10,000
Dai Ichi Kangyo Bank, New York
6.100%, 03/03/95.............. 10,000 10,000
National Westminster PLC,
New York
6.080%, 04/14/95.............. 5,000 5,000
Westdeutsche Landesbank
6.120%, 06/01/95.............. 10,000 10,000
--------
Total Certificates of Deposit
(Cost $40,000,129)............ 40,000
--------
BANKERS ACCEPTANCES (0.9%)
First National Bank, Chicago
5.560%, 03/14/95.............. 4,000 3,992
--------
Total Bankers Acceptances
(Cost $3,992,142)............. 3,992
--------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
------ ---------
<S> <C> <C>
REPURCHASE AGREEMENTS (14.8%)
First Boston, 6.1875%, dated 02/28/95,
matures 03/01/95, repurchase price
$32,505,586 (collateralized by U.S.
Coupon Strips, par value
$87,163,970, maturities ranging
from 05/15/97 to 11/15/12, market
value $33,164,798)..................................$32,500 $32,500
Merrill Lynch, 6.17%, dated 02/28/95,
matures 03/01/95, repurchase price
$31,904,467 (collateralized by
Federal Home Loan Bank Bond, par
value $10,000, 7.67%, 10/06/99,
market value $10,308, Collateralized
Mortgage Obligation Trust, par
value $12,270,000, 9.10%, 01/01/20,
market value $20,567,505, Federal
Home Loan Mortgage Corporation-
Government National Mortgage
Association Collateralized Mortgage
Obligations, par value $15,000,000,
coupons ranging from 7.00% to
7.50%, maturities ranging from
03/25/24 to 04/25/24, market value
$11,963,109)........................................ 31,899 31,899
---------
Total Repurchase Agreements
(Cost $64,399,000).................................. 64,399
---------
Total Investments (98.2%)
(Cost $427,337,810)................................. 427,338
---------
OTHER ASSETS AND LIABILITIES (1.8%)
Other Assets and Liabilities, Net....................... 7,985
---------
NET ASSETS:
Portfolio shares (unlimited
authorization-no par value) based
on 435,472,526 shares of beneficial
interest............................................ 435,473
Accumulated net realized loss on
investments......................................... (150)
---------
Total Net Assets: (100.0%)........................... $435,323
=========
Net Asset Value, Offering Price and
Redemption Price Per Share.......................... $1.00
=========
</TABLE>
- -----------------
(A) Variable Rate Security-the rate reflected on the Statement of Net Assets is
the rate in effect on February 28, 1995.
PLC-Public Limited Company
The accompanying notes are an integral part of the financial statements.
16
<PAGE> 188
THE COMPASS CAPITAL GROUP
- --------------------------------------------------------------------------------
U.S. TREASURY FUND
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
------- --------
<S> <C> <C>
U. S. TREASURY OBLIGATIONS (48.8%)
U.S. Treasury Bills
5.464%, 03/02/95.................. $20,000 $ 19,997
5.337%, 03/23/95.................. 20,000 19,936
5.809%, 04/13/95.................. 25,000 24,829
5.540%, 04/20/95.................. 15,000 14,888
5.963%, 05/11/95.................. 20,000 19,771
6.114%, 08/24/95.................. 30,000 29,130
U.S. Treasury Notes
3.875%, 03/31/95.................. 25,000 24,971
4.625%, 08/15/95.................. 25,000 24,793
--------
Total U. S. Treasury Obligations
(Cost $178,315,140)............... 178,315
--------
REPURCHASE AGREEMENTS (51.1%)
First Boston, 6.1875%, dated
02/28/95, matures 03/01/95,
repurchase price $87,515,039
(collateralized by U.S. Treasury
Coupon Strips, par value
$158,234,454, maturities ranging
from 05/15/96 to 05/15/11,
market value $89,454,428)......... 87,500 87,500
Goldman Sachs Group, 6.03%, dated
02/28/95, matures 03/01/95,
repurchase price $15,002,513
(collateralized by U.S. Treasury
Note, par value $15,213,000,
5.875%, maturing 05/31/96,
market value $15,300,850)......... 15,000 15,000
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
------- --------
<S> <C> <C>
Merrill Lynch, 6.05%, dated
02/28/95, matures 03/01/95,
repurchase price $84,472,194
(collateralized by U.S.
Treasury Note, par value
$85,130,000, 7.25%, maturing
02/15/98, market value
$86,150,166).................... $84,458 $ 84,458
--------
Total Repurchase Agreements
(Cost $186,958,000)............. 186,958
--------
Total Investments (99.9%)
(Cost $365,273,140)............. 365,273
--------
OTHER ASSETS AND LIABILITIES
(0.1%)
Other Assets and Liabilities,
Net............................. 243
--------
NET ASSETS:
Portfolio shares (unlimited
authorization-no par value)
based on 365,510,980 shares of
beneficial interest............. 365,511
Accumulated net realized gain on
investments..................... 5
--------
Total Net Assets: (100.0%).......... $365,516
========
Net Asset Value, Offering Price
and Redemption Price Per
Share........................... $1.00
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
17
<PAGE> 189
STATEMENT OF NET ASSETS
- -------------------------------------------------------------------
February 28, 1995
MUNICIPAL MONEY FUND
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
------ -------
<S> <C> <C>
MUNICIPAL BONDS (102.5%)
California (2.2%)
State, Series A, RAN
5.000%, 06/28/95.................... $1,000 $ 1,003
-------
Delaware (0.7%)
State, Housing Authority, RB, (FSA)
4.000%, 06/01/95.................... 330 330
-------
Florida (4.7%)
Bay County, Medical Center Project,
RB
3.850%, 03/06/95 (B) (C)............ 800 800
Dade County, Health Facilities
Authority, Miami Childrens
Hospital Project, VRDN, RB
4.050%, 03/01/95 (A) (B) (C)........ 300 300
State, Housing Finance Agency,
Multifamily Housing, VRDN, RB
4.200%, 03/07/95 (A) (B) (C)........ 1,000 1,000
-------
2,100
-------
Georgia (0.4%)
Turner County, Industrial
Development Authority, Coats
And Clark Project, VRDN, RB
4.100%, 03/01/95 (A) (B) (C)........ 200 200
-------
Hawaii (4.2%)
State, Department of Budget And
Finance, Kuakini Medical Center
Project, VRDN, RB
3.750%, 03/01/95 (A) (B) (C)........ 1,900 1,900
-------
Idaho (3.3%)
State, Housing Finance Authority, RB
5.000%, 07/01/95 (C)................ 1,500 1,500
-------
Kansas (0.4%)
Butler County, Solid Waste
Disposal, Texaco Refining and
Marketing Project, VRDN, RB,
AMT
4.300%, 03/01/95 (A) (B)............ 200 200
-------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
------ -------
<S> <C> <C>
Louisiana (8.4%)
State, Recovery District Sales Tax,
VRDN, RB, (FGIC)
3.750%, 03/01/95 (A) (B)........... $ 700 $ 700
State, Recovery District Sales Tax,
VRDN, RB, (MBIA)
3.750%, 03/07/95 (A) (B)........... 1,500 1,500
West Baton Rouge Parish,
Industrial Development Authority,
Dow Chemical Project, Series B,
VRDN, RB
4.000%, 03/01/95 (A) (B)........... 1,600 1,600
-------
3,800
-------
Maryland (2.9%)
Howard County, Owen Brown
Project, VRDN, RB
3.700%, 03/01/95 (A) (B) (C)....... 300 300
State, Health And Higher Education
Authority, Hopkins Hospital
Project, TECP
3.750%, 03/03/95................... 1,000 1,000
-------
1,300
-------
Massachusetts (2.2%)
Bay Transportation Authority,
General Transportation Systems,
Series A, RB
3.750%, 03/01/95 (C)............... 1,000 1,000
-------
Michigan (14.6%)
Grand Rapids, Economic
Development Authority, Amway
Grand Project, Series 2, VRDN,
RB
4.150%, 03/07/95 (A) (B) (C)....... 1,500 1,500
Grand Rapids, Economic
Development Authority, Amway
Hotel Project, Series A, VRDN,
RB
4.300%, 03/07/95 (A) (B) (C)....... 2,000 1,999
Grand Rapids, Water Supply,
VRDN, RB
3.900%, 03/07/95 (A) (B) (C)....... 1,100 1,100
</TABLE>
Continued
18
<PAGE> 190
THE COMPASS CAPITAL GROUP
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
------ -----
<S> <C> <C>
MUNICIPAL BONDS, CONTINUED:
Michigan, continued:
Midland County, Economic
Development Authority, Dow
Chemical Project, Series A,
VRDN, RB
4.200%, 03/01/95 (A) (B)........ $1,000 $ 1,000
State, Industrial Development
Authority, Allen Group
Incorporated Project, VRDN, RB
3.850%, 03/07/95 (A) (B) (C).... 1,000 1,000
-------
6,599
-------
Minnesota (2.2%)
Minneapolis-St. Paul, Housing
Finance Authority, Series B, RB
4.600%, 08/01/95................ 985 985
-------
Mississippi (1.1%)
Hinds County, GO, (MBIA)
3.700%, 03/01/95................ 475 475
-------
Missouri (7.3%)
Callaway County, Industrial
Development Authority, Callaway
Community Hospital, VRDN, RB
3.800%, 03/01/95 (A) (B)........ 800 800
Kansas City, Industrial
Development Authority, Coach
House II Project, VRDN, RB
4.000%, 03/01/95 (A) (B)........ 2,000 2,000
State, Environmental Improvement
Authority, RB
3.750%, 06/01/95 (C)............ 500 500
-------
3,300
-------
New Jersey (10.6%)
Berkeley Heights, BAN
4.750%, 11/09/95................ 2,765 2,770
Elizabeth, GO, (AMBAC)
4.300%, 08/15/95................ 535 535
Woodbridge Township, Sewer
Utility, BAN
4.480%, 10/06/95................ 1,500 1,500
-------
4,805
-------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
------ -------
<S> <C> <C>
North Carolina (0.2%)
State, Health Care Facilities, Carol
Woods Project, VRDN, RB
4.000%, 03/01/95 (A) (B) (C)........ $ 100 $ 100
-------
Ohio (4.4%)
Montgomery County, BAN
4.000%, 04/27/95.................... 1,000 1,001
State, Highway Authority, Series Q,
GO
5.700%, 05/15/95.................... 1,000 1,004
-------
2,005
-------
Pennsylvania (12.0%)
Berks County, Sixth And Penn
Street Project, VRDN, RB
4.000%, 03/07/95 (A) (B) (C)........ 200 200
Delaware County, Industrial
Development Authority, United
Parcel Services Project, VRDN,
RB
3.750%, 03/01/95 (A) (B)............ 1,000 1,000
Lehigh County, Industrial
Development Authority, Pollution
Control, VRDN, RB
3.750%, 03/01/95 (A) (B) (C)........ 900 900
Montour County, Health System
Authority, Geisinger Project,
Series 1992B, VRDN, RB
3.600%, 03/01/95 (A) (B) (C)........ 300 300
Philadelphia, Hospital And Higher
Education Facility Authority,
Community College Project,
Series A, RB, (MBIA)
3.750%, 05/01/95.................... 535 535
Sayre, Health Care Facility
Authority, Pennsylvania Capital
Financing Project, Series K,
VRDN, RB, (AMBAC)
4.050%, 03/07/95 (A) (B)............ 800 800
Schuylkill County, Industrial
Development Authority,
Westwood Energy Project,
VRDN, RB
4.050%, 03/01/95 (A) (B) (C)........ 1,100 1,100
</TABLE>
Continued
19
<PAGE> 191
STATEMENT OF NET ASSETS
- -------------------------------------------------------------------
FEBRUARY 28, 1995
MUNICIPAL MONEY
FUND (CONTINUED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
------ -------
<S> <C> <C>
MUNICIPAL BONDS, CONCLUDED:
Pennsylvania, continued:
State, Higher Education Authority,
Series B, VRDN, RB
4.100%, 03/07/95 (A) (B) (C)........ $ 400 $ 400
State, Higher Educational Facilities
Authority, Temple University
Project, VRDN, RB
3.600%, 03/01/95 (A) (B) (C)........ 200 200
-------
5,435
-------
Puerto Rico (2.2%)
Governmental Development Bank,
TECP
3.900%, 04/07/95.................... 1,000 1,000
-------
Texas (2.2%)
Fort Worth, Water And Sewer
Authority, RB
8.500%, 03/01/95.................... 600 600
Harris County, Industrial
Development Authority, Pollution
Control, Series A, VRDN, RB
3.900%, 03/01/95 (A) (B)............ 400 400
-------
1,000
-------
Utah (2.6%)
State, Housing Finance Agency,
Series D, RB, AMT
4.800%, 08/01/95.................... 1,160 1,160
-------
Virginia (4.4%)
Richmond, RAN
5.500%, 06/30/95 (C)................ 1,000 1,003
State, Commonwealth
Transportation Board, Series 95A,
RB
5.800%, 05/15/95.................... 1,000 1,003
-------
2,006
-------
West Virginia (4.0%)
Marion County, Community Solid
Waste Disposal Facility, VRDN,
RB, AMT
4.300%, 03/07/95 (A) (B) (C)........ 1,800 1,800
-------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
------ -------
<S> <C> <C>
Wisconsin (3.3%)
State, Housing And Economic
Development, Series B, RB, AMT,
(FSA)
4.600%, 04/01/95.................... $1,500 $ 1,500
-------
Wyoming (2.0%)
Lincoln County, Pollution Control,
Exxon Project, Series A, VRDN,
RB
3.900%, 03/01/95 (A) (B)............ 400 400
Lincoln County, Pollution Control,
Exxon Project, Series D, VRDN,
RB
3.900%, 03/01/95 (A) (B)............ 100 100
Platte County, Pollution Control,
VRDN, RB
4.000%, 03/01/95 (A) (B) (C)........ 400 400
-------
900
-------
Total Municipal Bonds
(Cost $46,403,157).................. 46,403
-------
Total Investments (102.5%)
(Cost $46,403,157).................. 46,403
-------
OTHER ASSETS AND LIABILITIES (-2.5%)
Other Assets and Liabilities, Net....... (1,151)
-------
NET ASSETS:
Portfolio shares (unlimited
authorization-no par value)
based on 45,291,867 outstanding
shares of beneficial interest....... 45,288
Accumulated net realized loss on
investments......................... (36)
-------
Total Net Assets: (100.0%)............ $45,252
=======
Net Asset Value, Offering Price and
Redemption Price Per Share.......... $ 1.00
=======
</TABLE>
- ---------
(A) Variable Rate Security-the rate reported on the Statement of Net Assets is
the rate in effect on February 28, 1995.
(B) Put and Demand features exist requiring the issuer to repurchase the
instrument prior to maturity. The maturity date shown is the next demand
date.
Continued
20
<PAGE> 192
THE COMPASS CAPITAL GROUP
- -------------------------------------------------------------------------------
(C) Securities are held in connection with a letter of credit or other credit
support.
AMT-Alternative Minimum Tax
BAN-Bond Anticipation Note
GO-General Obligation
RAN-Revenue Anticipation Note
RB-Revenue Bond
TECP-Tax Exempt Commercial Paper
VRDN-Variable Rate Demand Note
The following organizations have provided underlying credit support for certain
securities as defined in the Statement of Net Assets:
AMBAC-American Municipal Bond Assurance Company
FGIC-Financial Guaranty Insurance Company
FSA-Financial Security Assurance
MBIA-Municipal Bond Insurance Association
NEW JERSEY MUNICIPAL
MONEY FUND
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
------ -------
<S> <C> <C>
MUNICIPAL BONDS (99.4%)
New Jersey (85.7%)
Cherry Hill Township, GO
7.000%, 08/01/95 (C)............ $1,000 $ 1,008
Essex County, Series A, BAN
5.500%, 12/12/95................ 875 878
Hackensack, BAN
5.500%, 12/20/95................ 850 855
Jersey City, BAN
5.250%, 11/17/95................ 2,000 2,007
Middlesex County, GO,
Prerefunded @ 102
7.050%, 03/15/95 (B) (C)........ 500 511
Morristown, GO
5.000%, 08/01/95 (C)............ 695 696
Port Authority, Versatile Struc-
ture Obligation, Series 1,
VRDN,
RB, AMT
3.900%, 03/01/95 (A) (B) (C).... 3,100 3,100
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
------ --------
<S> <C> <C>
Princeton Borough, BAN
3.340%, 04/14/95 (C)........... $1,000 $ 1,000
Salem County, Pollution Control
Project, VRDN, RB
3.750%, 03/01/95 (A) (B) (C)... 500 500
State Economic Development
Authority, TECP
3.500%, 03/07/95 (C)........... 1,000 1,000
4.000%, 04/13/95 (C)........... 1,000 1,000
State Economic Development
Authority, 400 International
Drive Partners Project,
VRDN, RB
3.600%, 03/01/95 (A) (B) (C)... 700 700
State Economic Development
Authority, Crowle Shipping
Project, VRDN, RB
3.550%, 03/01/95 (A) (B) (C)... 2,000 2,000
State Economic Development
Authority, Data Tac Industries
Incorporated Project, Series
W, VRDN, RB, AMT
4.100%, 03/07/95 (A) (B) (C)... 1,115 1,115
State Economic Development
Authority, Dates-Tru Project,
VRDN, RB
3.450%, 03/01/95 (A) (B) (C)... 900 900
State Economic Development
Authority, Economic Growth
Bonds, Series C-1, VRDN,
RB, AMT
4.100%, 03/07/95 (A) (B) (C)... 590 590
State Economic Development
Authority, Eldorado Terminal
Project, Series 1984 B,
VRDN, GO
3.900%, 03/01/95 (A) (B)....... 2,800 2,800
State Economic Development
Authority, Eldorado Terminal
Project, Series 1984 B,
VRDN, RB
3.900%, 03/01/95 (A) (B)....... 1,100 1,100
</TABLE>
The accompanying notes are an integral part of the financial statements.
21
<PAGE> 193
STATEMENT OF NET ASSETS
- -------------------------------------------------------------------
February 28, 1995
NEW JERSEY MUNICIPAL
MONEY FUND (CONTINUED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
------ -------
<S> <C> <C>
MUNICIPAL BONDS, CONTINUED:
New Jersey, continued:
State Economic Development
Authority, First Management
Fellowship Project, Series B,
VRDN, RB
4.000%, 03/07/95 (A) (B) (C).. $1,000 $ 1,000
State Economic Development
Authority, Jersey Avenue
Project, VRDN, RB
3.900%, 03/07/95 (A) (B) (C).. 800 800
State Economic Development
Authority, Makita U.S.A.
Incorporated Project,
VRDN, RB
4.050%, 03/07/95 (A) (B) (C).. 600 600
State Economic Development
Authority, Russell Berrie
Project, VRDN, RB
4.250%, 03/07/95 (A) (B) (C).. 200 200
State Economic Development
Authority, Series A, VRDN, GO
4.200%, 03/07/95 (A) (B) (C).. 300 300
State Economic Development
Authority, Series J, VRDN,
RB, AMT
4.200%, 03/07/95 (A) (B) (C).. 650 650
State Educational Facility
Authority, College And
University Equipment Project,
Series A, VRDN, RB, (FGIC)
3.850%, 03/07/95 (A) (B)...... 550 550
State Health Care Facilities
Financing Authority, Hospital
And Nursing Home
Improvement Project,
VRDN, RB
3.850%, 03/07/95 (A) (B) (C).. 200 200
State Health Care Facilities
Financing Authority, Hospital
Capital Asset Financing
Project, Series A,
VRDN, RB
3.850%, 03/07/95 (A) (B) (C).. 600 600
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
------ -------
<S> <C> <C>
State Health Care Facilities
Financing Authority, Hospital
Capital Asset Financing, Series
D, VRDN, RB
3.850%, 03/07/95 (A) (B) (C)....... $ 200 $ 200
State Healthcare Facilities Financ-
ing Authority, Jersey Shore
Medical Center Project, RB,
(AMBAC)
5.000%, 07/01/95 (C)............... 710 712
State Turnpike Authority, Series
D, VRDN, RB, (FGIC)
3.750%, 03/07/95 (A) (B)........... 2,000 2,000
State, TECP
3.400%, 03/02/95 (C)............... 2,000 2,000
State, Governmental,
Series 501 C 3, GO
5.800%, 08/01/95................... 1,000 1,007
State, Series A, TRAN
5.000%, 06/15/95................... 2,000 2,006
Union County, Industrial Pollution
Control Financing Authority,
Exxon Project, VRDN, RB
3.600%, 03/01/95 (A) (B) (C)....... 1,300 1,300
Woodbridge Township, Sewer
Utilities, BAN
4.480%, 10/06/95................... 1,500 1,500
-------
37,385
-------
Pennsylvania (2.3%)
State, Transportation Trust Fund,
Series A, RB
4.500%, 12/15/95................... 1,000 998
-------
Puerto Rico (11.4%)
Commonwealth Public Finance
Agency, Series A, RB
4.750%, 07/01/95................... 2,000 2,005
Commonwealth Public Finance
Authority, RB
6.350%, 07/01/95 (C)............... 960 966
</TABLE>
Continued
22
<PAGE> 194
THE COMPASS CAPITAL GROUP
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
------ --------
<S> <C> <C>
MUNICIPAL BONDS, CONCLUDED:
Puerto Rico, continued:
Governmental Development Bank,
TECP
3.900%, 04/07/95................... $2,000 $ 2,000
-------
4,971
-------
Total Municipal Bonds
(Cost $43,354,348)................. 43,354
-------
Total Investments (99.4%)
(Cost $43,354,348)................. 43,354
-------
OTHER ASSETS AND LIABILITIES (0.6%)
Other Assets and Liabilities, Net...... 256
-------
NET ASSETS:
Portfolio shares (unlimited
authorization-no par value)
based on 43,617,629 outstanding
shares of beneficial interest...... 43,617
Accumulated net realized loss on
investments........................ (7)
-------
Total Net Assets: (100.0%)........... $43,610
=======
Net Asset Value, Offering Price
and Redemption Price Per
Share.............................. $1.00
=======
</TABLE>
- ---------------------
(A) Variable Rate Security-the rate reported on the Statement of Net Assets is
the rate in effect on February 28, 1995.
(B) Put and Demand features exist requiring the issuer to repurchase the
instrument prior to maturity. The maturity date shown is the next demand
date.
(C) Securities are held in connection with a letter of credit or other credit
support.
AMT-Alternative Minimum Tax
BAN-Bond Anticipation Note
GO-General Obligation
RB-Revenue Bond
TECP-Tax-Exempt Commercial Paper
TRAN-Tax and Revenue Anticipation Note
VRDN-Variable Rate Demand Note
The following organizations have provided underlying credit support for certain
securities as defined in the Statement of Net Assets:
AMBAC-American Municipal Bond Assurance Company
FGIC-Financial Guaranty Insurance Company
PENNSYLVANIA MUNICIPAL
MONEY FUND
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
------- -------
<S> <C> <C>
MUNICIPAL BONDS (104.8%)
Pennsylvania (104.8%)
Allegheny County, Mortgage
Backed Security Program,
Series F, RB
3.700%, 06/01/95 (C)............ $ 1,075 $ 1,075
Allegheny County, Port
Authority, GAN
4.100%, 07/03/95 (C)............ 1,000 1,000
Beaver County, Industrial
Development Authority,
Duquesne Light Project,
Series B, VRDN, RB
4.050%, 03/07/95 (A) (B) (C).... 600 600
Beaver County, Industrial
Development Authority,
Duquesne Light Project,
Series A, VRDN, RB
4.050%, 03/07/95 (A) (B) (C).... 500 500
Berks County, Industrial
Development Authority, VRDN,
RB
3.850%, 03/01/95 (A) (B) (C).... 700 700
Chartiers Valley, Industrial and
Commercial Development
Authority, William Penn Place
Project, VRDN, RB
4.000%, 03/01/95 (A) (B) (C).... 200 200
Conneaut, School District
Authority, GO, (AMBAC)
9.750%, 05/01/95................ 1,000 1,009
Delaware County, Industrial
Development Authority, BP Oil
Project, VRDN, RB
3.600%, 03/07/95 (A) (B)........ 200 200
Delaware County, Industrial
Development Authority,
Pollution Control, TECP, (FGIC)
3.700%, 03/01/95................ 1,800 1,800
Delaware County, Industrial
Development Authority, Scott
Paper Project, Series A, VRDN,
RB
4.100%, 03/07/95 (A) (B) (C).... 1,000 1,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
23
<PAGE> 195
STATEMENT OF NET ASSETS
- -------------------------------------------------------------------
February 28, 1995
PENNSYLVANIA MUNICIPAL
MONEY FUND (CONTINUED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
------ -------
<S> <C> <C>
MUNICIPAL BONDS, CONTINUED:
Pennsylvania, continued:
Delaware County, Industrial
Development Authority, Scott
Paper Project, Series C, VRDN, RB
4.100%, 03/07/95 (A) (B) (C)..... $900 $900
Delaware County, Industrial
Development Authority, United
Parcel Services Project, VRDN,
RB
3.750%, 03/01/95 (A) (B) (C)..... 900 900
Emmaus, VRDN, GO
4.050%, 03/07/95 (A) (B) (C)..... 1,100 1,100
Langhorne, Hospital Revenue
Authority, Franciscan Health
Systems Project, Series C,
VRDN, RB
3.750%, 03/01/95 (A) (B) (C)..... 600 600
Lehigh County, Industrial
Development Authority,
Pollution Control, VRDN, RB
3.750%, 03/01/95 (A) (B) (C)..... 900 900
Montgomery County, Industrial
Development Authority, TECP
4.250%, 05/04/95 (C)............. 2,000 2,000
Montgomery County, Industrial
Development Authority, Quaker
Chemical Project, VRDN, RB
3.850%, 03/01/95 (A) (B) (C)..... 500 500
Montour County, Health System
Authority, Geisinger Project,
Series B, VRDN, RB
3.600%, 03/01/95 (A) (B) (C)..... 800 800
Northeastern, Hospital Authority,
TECP, (MBIA)
4.100%, 04/13/95................. 600 600
Philadelphia, Hospital And Higher
Education Facilities Authority,
Children's Hospital Project,
VRDN, RB
3.600%, 03/01/95 (A) (B) (C)..... 100 100
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
------ -------
<S> <C> <C>
Philadelphia, Hospitals And
Higher Education Facility
Authority, Community College
Project, Series B, RB, (MBIA)
3.750%, 05/01/95............... $ 390 $ 390
Philadelphia, School District,
Series B, GO, (AMBAC)
3.750%, 07/01/95............... 1,000 999
Philadelphia, School District,
TRAN
4.750%, 06/30/95............... 1,000 1,001
Philadelphia, TRAN
4.750%, 06/15/95 (C)........... 1,000 1,003
Quakertown, Hospital Authority,
HPS Group Pooled Financing
Project, VRDN, RB
3.800%, 03/07/95 (A) (B) (C)... 300 300
Reading, School District
Authority, GO, (MBIA)
6.600%, 03/01/95............... 1,140 1,140
Sayre, Health Care Facilities
Authority, Capital Financing
Project, Series H, VRDN, RB,
(AMBAC)
4.050%, 03/07/95 (A) (B)....... 290 290
Sayre, Health Care Facility
Authority, Capital Financing
Project, Series A, VRDN, RB,
(AMBAC)
4.050%, 03/07/95 (A) (B) (C)... 1,200 1,200
Sayre, Health Care Facility
Authority, Capital Financing
Project, Series D, VRDN, RB,
(AMBAC)
4.050%, 03/07/95 (A) (B)....... 800 800
Schuylkill County, Industrial
Development Authority,
Northeastern Power Project,
Series B, VRDN, RB
4.000%, 03/01/95 (A) (B) (C)... 1,500 1,500
</TABLE>
Continued
24
<PAGE> 196
THE COMPASS CAPITAL GROUP
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
------ -------
<S> <C> <C>
MUNICIPAL BONDS, CONCLUDED:
Pennsylvania, continued:
Schuylkill County, Industrial
Development Authority,
Westwood Energy Project,
VRDN, RB
4.050%, 03/01/95 (A) (B) (C)... $1,100 $ 1,100
State, Energy Development
Authority, B & W Edensburg
Project, VRDN, RB
4.100%, 03/07/95 (A) (B) (C)... 100 100
State, Energy Development
Authority, B & W Edensburg
Project, VRDN, RB, AMT
4.100%, 03/07/95 (A) (B) (C)... 510 510
State, Energy Development
Authority, Piney Creek Project,
Series A, VRDN, RB, AMT
4.100%, 03/07/95 (A) (B) (C)... 100 100
State, GO
5.700%, 08/01/95............... 625 626
5.500%, 11/15/95............... 1,000 1,007
State, Higher Education
Authority, Drexel University
Project, RB, (MBIA)
6.500%, 05/01/95............... 250 251
State, Higher Education
Authority, Lasalle University
Project, RB, (MBIA)
6.400%, 05/01/95............... 585 588
State, Higher Education
Authority, Series B, VRDN, RB
4.100%, 03/07/95 (A) (B) (C)... 3,100 3,098
State, Higher Education
Authority, University of
Pennsylvania Project, Series 1,
VRDN, RB
4.100%, 03/07/95 (A) (B) (C)... 1,000 1,000
State, Highway Authority,
Series T, GO
5.700%, 08/01/95............... 375 376
State, Housing Finance Agency,
Series 35A, RB
3.800%, 04/01/95............... 500 500
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
------ --------
<S> <C> <C>
State, Series 1, GO
3.000%, 05/01/95.................... $ 825 $ 824
State, Series 1, TRAN
4.750%, 06/30/95.................... 2,000 2,005
-------
37,192
-------
Total Municipal Bonds
(Cost $37,192,314).................. 37,192
-------
Total Investments (104.8%)
(Cost $37,192,314).................. 37,192
-------
OTHER ASSETS AND LIABILITIES (-4.8%)
Other Assets and Liabilities, Net....... (1,714)
-------
NET ASSETS:
Portfolio shares (unlimited
authorization-no par value)
based on 35,480,795 outstanding
shares of beneficial interest....... 35,481
Accumulated net realized loss on
investments......................... (3)
-------
Total Net Assets: (100.0%)............ $35,478
=======
Net Asset Value, Offering Price
and Redemption Price Per
Share............................... $ 1.00
=======
</TABLE>
- ---------
(A) Variable Rate Security-the rate reported on the Statement of Net Assets is
the rate in effect on February 28, 1995.
(B) Put and Demand Features exist requiring the issuer to repurchase the
instrument prior to maturity. The maturity date shown is the next demand
date.
(C) Securities are held in connection with a letter of credit or other credit
support.
AMT-Alternative Minimum Tax
GAN-Grant Anticipation Note
GO-General Obligation
RB-Revenue Bond
TECP-Tax-Exempt Commercial Paper
TRAN-Tax and Revenue Anticipation Note
VRDN-Variable Rate Demand Note
The following organizations have provided underlying credit support for certain
securities as defined in the Statement of Net Assets.
AMBAC-American Municipal Bond Assurance Company
FGIC-Financial Guaranty Insurance Company
MBIA-Municipal Bond Insurance Association
The accompanying notes are an integral part of the financial statements.
25
<PAGE> 197
STATEMENT OF NET ASSETS
- -------------------------------------------------------------------
February 28, 1995
EQUITY INCOME FUND
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
------- --------
<S> <C> <C>
COMMON STOCKS (93.2%)
Air Conditioning (0.7%)
York International.............. 53,200 $ 2,048
--------
Air Transportation (0.2%)
AMR*............................ 8,000 489
--------
Aircraft (2.2%)
BE Aerospace*................... 239,800 1,319
Boeing.......................... 48,700 2,246
Sequa, Class A.................. 94,900 2,669
--------
6,234
--------
Aluminum (5.8%)
Alcan Aluminum................ 100,000 2,425
Aluminum of America........... 369,400 14,407
--------
16,832
--------
Amusement & Recreation (0.0%)
Speedway Motorsports*......... 8,100 146
--------
Automotive (3.0%)
Borg Warner Automotive*....... 75,000 488
General Motors................ 191,800 8,175
--------
8,663
--------
Banks (9.7%)
Astoria Financial*............ 88,000 2,750
Bankamerica................... 276,793 13,321
California Federal Bank*...... 143,462 1,560
Coast Savings Financial*...... 63,600 938
Keycorp....................... 122,200 3,544
Long Island Bancorp*.......... 100,000 1,625
Mellon Bank................... 23,850 909
Union Bank/San Francisco...... 101,600 3,404
--------
28,051
--------
Building & Construction (2.5%)
Centex Construction*.......... 251,000 3,106
Ryland Group.................. 113,500 1,632
Southdown*.................... 144,300 2,381
--------
7,119
--------
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
------- --------
<S> <C> <C>
Chemicals (0.7%)
Rhone Poulenc SA, ADR........... 30,400 $ 726
Technip ADS 144A*............... 55,700 1,406
--------
2,132
--------
Communications Equipment (0.3%)
Alcatel Alsthom................. 61,500 999
--------
Computers & Services (0.7%)
BMC Software.................... 30,400 1,953
--------
Drilling Oil & Gas Wells (1.6%)
Noble Drilling*................. 236,400 1,300
Sonat Offshore Drilling......... 165,100 3,447
--------
4,747
--------
Electric Utilities (3.9%)
Central Maine Power............. 139,400 1,952
Central Vermont Public Service.. 50,000 694
CMS Energy...................... 65,300 1,567
New York State Electric & Gas... 49,100 1,056
Niagara Mohawk Power............ 168,200 2,502
Unicom.......................... 141,900 3,618
--------
11,389
--------
Electronic and Other Electrical
Equipment (1.2%)
Raychem......................... 83,700 3,379
--------
Energy & Power (0.6%)
Entergy......................... 72,100 1,613
--------
Environmental Services (1.1%)
WMX Technologies................ 118,100 3,115
--------
Financial Services (3.3%)
American Express................ 59,800 2,018
Brascan Limited, Class A........ 101,700 1,335
Green Point Financial........... 100,000 2,338
Lehman Brothers Holding......... 213,560 3,870
--------
9,561
--------
Food, Beverage & Tobacco (4.9%)
Chiquita Brands International... 13,000 174
Interstate Bakeries............. 253,600 3,867
</TABLE>
Continued
26
<PAGE> 198
THE COMPASS CAPITAL GROUP
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
------- --------
<S> <C> <C>
COMMON STOCKS, CONTINUED:
Food, Beverage & Tobacco, continued:
Seagram............................. 49,000 $ 1,507
Universal-Virginia.................. 428,600 8,518
--------
14,066
--------
Forestry (0.3%)
Rayonier............................ 25,900 777
--------
Gas/Natural Gas (1.8%)
Columbia Gas System................. 14,600 380
Enserch............................. 55,100 771
National Fuel Gas................... 25,000 681
Seagull Energy*..................... 197,800 3,338
--------
5,170
--------
Insurance (12.3%)
Ace Limited......................... 234,200 5,796
Aetna Life & Casualty............... 107,400 5,773
Alexander & Alexander Services...... 92,100 2,003
American Premier Underwriter........ 40,000 985
Brierley Investments, ADR........... 625,000 900
Chubb............................... 89,100 7,007
Cigna............................... 75,000 5,681
Loews............................... 10,000 971
Old Republic International.......... 110,000 2,723
Reinsurance Group of America........ 19,200 535
Unitrin............................. 64,000 3,136
--------
35,510
--------
Lumber & Wood Products (0.5%)
Georgia-Pacific..................... 19,000 1,423
--------
Machinery (3.7%)
Black & Decker...................... 266,400 7,126
Cooper Industries................... 59,100 2,320
Keystone International.............. 63,000 1,173
--------
10,619
--------
Marine Transportation (1.4%)
Alexander & Baldwin................. 92,800 2,018
London And Overseas Freighter,
ADR................................. 82,400 948
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
------- --------
<S> <C> <C>
OMI*.................................. 168,200 $ 883
Overseas Shipholding Group............ 6,900 160
--------
4,009
--------
Medical Products & Services (0.1%)
Haemonetics*.......................... 20,000 318
--------
Metals & Mining (0.2%)
Potash of Saskatchewan................ 17,300 618
--------
Miscellaneous Business Services (0.7%)
Policy Management Systems*............ 44,200 1,995
--------
Paper & Paper Products (7.7%)
Boise Cascade......................... 50,200 1,613
International Paper................... 150,800 11,517
Kimberly-Clark........................ 15,000 780
Temple-Inland......................... 102,500 5,010
Willamette Industries................. 63,200 3,397
--------
22,317
--------
Petroleum (10.6%)
Amerada Hess.......................... 60,000 2,940
Atlantic Richfield.................... 14,100 1,546
Burlington Resources.................. 87,100 3,353
Imperial Oil.......................... 45,500 1,547
Nordsk Hydro A.S., ADR................ 66,000 2,492
Occidental Petroleum.................. 5,000 99
Oryx Energy........................... 268,000 2,948
Petroleum Heat And Power,
Class A............................. 406,200 2,742
Phillips Petroleum.................... 116,600 3,892
Unocal................................ 153,000 4,341
USX-Marathon Group.................... 284,500 4,623
--------
30,523
--------
Photographic Equipment & Supplies (2.1%)
Eastman Kodak......................... 121,000 6,171
--------
Railroads (0.4%)
Canadian Pacific...................... 91,300 1,278
--------
Real Estate (4.1%)
American Real Estate Partners*........ 125,100 985
Equity Inns........................... 20,000 213
Essex Property Trust.................. 161,000 2,595
</TABLE>
Continued
27
<PAGE> 199
STATEMENT OF NET ASSETS
- -------------------------------------------------------------------------------
February 28, 1995
EQUITY INCOME FUND (CONTINUED)
<TABLE>
<CAPTION>
SHARES/
FACE MARKET
AMOUNT VALUE
(000) (000)
------- ----------
<S> <C> <C>
COMMON STOCKS, CONCLUDED:
Real Estate, continued:
Gables Residential Trust....... 56,100 $ 1,066
Koger Equity*.................. 163,500 1,206
Newhall Land & Farming......... 74,200 1,085
Storage Equities............... 163,800 2,416
Sun Communities................ 104,200 2,358
----------
11,924
----------
Retail (0.7%)
Hills Department Stores*....... 36,100 736
Kmart.......................... 100,700 1,283
----------
2,019
----------
Telephones & Telecommunication
(4.2%)
BCE............................ 249,900 7,716
Comsat......................... 122,500 2,174
LDDS Communications*........... 95,614 2,241
----------
12,131
----------
Total Common Stocks
(Cost $257,077,989)............ 269,338
----------
CONVERTIBLE PREFERRED STOCKS (3.8%)
Boise Cascade, 7.48% Series G.. 99,800 2,732
Glendale Federal Savings Bank,
8.75% Series E................. 211,450 5,841
Reynolds Metals, 7.00% Series.. 30,600 1,461
Santa Fe Energy Resources,
Series A....................... 100,000 900
----------
Total Convertible Preferred
Stocks (Cost $9,715,335)....... 10,934
----------
WARRANTS (0.1%)
Glendale Federal Savings Bank
Warrants*...................... 130,480 326
----------
Total Warrants
(Cost $369,912)................ 326
----------
CONVERTIBLE BONDS (1.6%)
AMR 6.125%, 11/01/24........... $4,775 4,309
Riverwood International
6.750%, 09/15/03............... 360 391
----------
Total Convertible Bonds
(Cost $4,849,913).............. 4,700
----------
</TABLE>
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
------ ---------
<S> <C> <C>
REPURCHASE AGREEMENT (1.0%)
JP Morgan, 6.05%, dated 02/28/95,
matures 03/01/95, repurchase
price $2,766,465 (collateralized by
United States Treasury Bonds,
par value $2,805,000, 5.125%,
11/15/95, market value
$2,779,580)........................ $2,766 $ 2,766
--------
Total Repurchase Agreement
(Cost $2,766,000).................. 2,766
--------
Total Investments (99.7%)
(Cost $274,779,149)................ 288,064
--------
OTHER ASSETS AND LIABILITIES (0.3%)
Other Assets and Liabilities, Net...... 825
--------
NET ASSETS:
Portfolio shares (unlimited
authorization-no par value)
based on 24,355,658 outstanding
shares of beneficial interest...... 277,951
Accumulated net realized loss on
investments........................ (2,408)
Net unrealized appreciation on
investments........................ 13,284
Undistributed net investment
income............................. 62
--------
Total Net Assets: (100.0%)........... $288,889
========
Net Asset Value and Redemption
Price Per Share.................... $11.86
========
Maximum Public Offering Price Per
Share ($11.86/96.25%).............. $12.32
========
</TABLE>
- ---------
*Non-income producing security
ADR-American Depository Receipt
The accompanying notes are an integral part of the financial statements.
28
<PAGE> 200
SCHEDULE OF INVESTMENTS THE COMPASS CAPITAL GROUP
- -------------------------------------------------------------------------------
GROWTH FUND
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
------- --------
<S> <C> <C>
COMMON STOCKS (91.7%)
Air Conditioning (1.1%)
York International.................. 38,700 $1,490
--------
Autoparts (1.7%)
Autozone*........................... 90,100 2,388
--------
Broadcasting, Newspapers &
Advertising (1.7%)
Comcast Corporation Special,
Class A........................... 150,000 2,363
--------
Building & Construction (1.1%)
Foster Wheeler...................... 44,900 1,470
--------
Chemical & Allied Products (6.1%)
Albemarle........................... 130,000 1,853
Engelhard........................... 111,000 2,928
Loctite............................. 17,100 787
Zeneca Group PLC, ADR............... 72,000 2,978
--------
8,546
--------
Commercial Banks (3.9%)
JP Morgan........................... 34,000 2,193
Republic New York................... 66,000 3,292
--------
5,485
--------
Communications Equipment (1.5%)
Motorola............................ 37,000 2,128
--------
Computer and Office Equipment (6.8%)
Cisco Systems*...................... 69,000 2,329
Computer Sciences*.................. 50,000 2,456
Hewlett Packard..................... 24,000 2,760
Microsoft*.......................... 30,000 1,890
TGV Software........................ 1,300 21
--------
9,456
--------
Electronic Components (3.5%)
AMP................................. 36,000 2,700
General Instrument*................. 68,000 2,159
--------
4,859
--------
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
------- --------
<S> <C> <C>
Food & Beverage (4.1%)
General Mills..................... 22,600 $ 1,370
Pepsico........................... 73,000 2,856
Sara Lee.......................... 58,000 1,523
--------
5,749
--------
Insurance (6.9%)
Ace Limited....................... 126,000 3,119
American International Group...... 26,500 2,749
American Re Insurance*............ 67,200 2,293
Value Health*..................... 38,300 1,427
--------
9,588
--------
Miscellaneous Business Services (6.5%)
Automatic Data Processing......... 42,000 2,583
Dun & Bradstreet.................. 32,000 1,652
Fiserv*........................... 107,000 2,808
Policy Management Systems*........ 44,000 1,986
--------
9,029
--------
Miscellaneous Manufacturing (1.1%)
International Game Technology..... 107,000 1,498
--------
Mortgage Bankers (2.2%)
Federal National Mortgage
Association....................... 40,000 3,085
--------
Nursing Care Facilities (1.0%)
Beverly Enterprises*.............. 109,000 1,417
--------
Oil Service (1.4%)
Schlumberger...................... 34,500 1,962
--------
Paper & Paper Products (3.3%)
International Paper............... 21,900 1,673
Kimberly-Clark.................... 50,000 2,600
--------
4,273
--------
Petroleum (6.4%)
Amoco............................. 54,000 3,199
Burlington Resources.............. 35,000 1,348
Kerr McGee........................ 32,000 1,612
Unocal............................ 99,000 2,809
--------
8,968
--------
</TABLE>
Continued
29
<PAGE> 201
SCHEDULE OF INVESTMENTS/STATEMENT OF NET ASSETS
- -------------------------------------------------------------------
February 28, 1995
GROWTH FUND (CONTINUED)
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
------- --------
<S> <C> <C>
COMMON STOCK, CONCLUDED:
Pharmeceuticals (10.6%)
Abbott Laboratories............. 77,000 $ 2,734
Biogen*......................... 25,000 1,031
Boston Scientific*.............. 134,600 2,910
Genetics Institute*............. 42,000 1,512
Hafslund Nycomed-Cl B ADR....... 80,300 1,596
Perrigo*........................ 100,000 1,388
Pfizer.......................... 43,000 3,555
--------
14,726
--------
Printing & Publishing (4.4%)
Knight-Ridder................... 26,800 1,471
Scholastic*..................... 51,700 2,611
Washington Post, Class B........ 8,000 2,026
--------
6,108
--------
Pumps and Pumping Equipment (1.5%)
Duriron......................... 120,000 2,250
--------
Retail (1.4%)
Wal-Mart Stores................. 85,000 2,019
--------
Rubber & Plastic (3.3%)
Illinois Tool Works............. 70,000 3,141
Rubbermaid...................... 46,000 1,455
--------
4,596
--------
Steel & Steel Works (0.8%)
LTV*............................ 74,000 1,138
--------
Telephones & Telecommunication
(7.3%)
AT&T............................ 36,500 1,889
Ericsson (L.M.) Telephone, ADR.. 50,000 2,843
MCI Communications.............. 90,000 1,811
Telefonos de Mexico, Class L,
ADR........................... 49,600 1,370
Vodafone Group, ADR............. 75,000 2,288
--------
10,201
--------
Trucking (2.1%)
M.S. Carriers*.................. 120,200 2,945
--------
Total Common Stocks
(Cost $117,054,965)........... 127,737
--------
</TABLE>
<TABLE>
<CAPTION>
SHARES/
FACE MARKET
AMOUNT VALUE
(000) (000)
------- --------
<S> <C> <C>
PREFERRED STOCKS (0.9%)
Petroleum Refining (0.9%)
Nokia Pfd, ADR.................. 16,500 $ 1,242
--------
Total Preferred Stocks
(Cost $666,188)............... 1,242
--------
REPURCHASE AGREEMENT (1.6%)
JP Morgan, 6.05%, dated
02/28/95, matures 03/01/95,
repurchase price $2,302,387
(collateralized by United States
Treasury Bonds par value
$2,335,000, 5.125%, 11/15/95,
market value $2,313,839)........ $2,302 2,302
--------
Total Repurchase Agreement
(Cost $2,302,000)............... 2,302
--------
Total Investments (94.2%)
(Cost $120,023,153)............. 131,281
--------
</TABLE>
- ---------------
*Non-income producing security
ADR-American Depository Receipt
PLC-Public Limited Company
SMALL CAP VALUE FUND
<TABLE>
<S> <C> <C>
COMMON STOCKS (99.0%)
Aerospace & Defense (4.4%)
AAR.......................... 31,500 $ 434
Thiokol...................... 15,400 398
Watkins Johnson.............. 9,300 339
--------
1,171
--------
Air Transportation (1.3%)
Alaska Airgroup*............. 22,600 347
--------
Aircraft (1.5%)
UNC*......................... 71,800 404
--------
Amusement & Recreation (2.9%)
Huffy........................ 23,400 360
Outboard Marine.............. 18,800 395
--------
755
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
30
<PAGE> 202
THE COMPASS CAPITAL GROUP
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
------ -------
<S> <C> <C>
COMMON STOCKS, CONTINUED:
Apparel/Textiles (4.5%)
Delta Woodside Industries....... 30,600 $ 333
Guilford Mills.................. 19,000 423
Interface....................... 30,700 433
-------
1,189
-------
Automotive (1.3%)
Arvin Industries................ 15,200 346
-------
Building & Construction (1.2%)
CRSS............................ 11,900 115
Morrison Knudsen................ 26,000 201
-------
316
-------
Building & Construction Supplies
(0.7%)
Southdown*...................... 11,000 182
-------
Computers & Services (4.2%)
Cray Research*.................. 20,700 349
Egghead*........................ 25,000 263
Intergraph*..................... 40,700 498
-------
1,110
-------
Environmental Services (0.8%)
Mid-American Waste.............. 38,300 215
-------
Financial Services (2.8%)
Capstead Mortgage............... 11,400 278
Morgan Keegan................... 29,850 448
-------
726
-------
Food, Beverage & Tobacco (3.4%)
Adolph Coors, Class B........... 15,300 249
Chiquita Brands International... 23,100 309
Rykoff-Sexton................... 21,625 332
-------
890
-------
Footwear (1.4%)
Brown Group..................... 8,800 284
L.A. Gear*...................... 18,700 72
-------
356
-------
Information Services (1.2%)
Primark*........................ 21,900 318
-------
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
------ -------
<S> <C> <C>
Insurance (6.4%)
Guaranty National................. 19,500 $ 336
John Alden Financial.............. 10,800 311
Ohio Casualty..................... 11,100 374
Provident Life & Accident
Insurance, Class B................ 14,800 348
Reliastar Financial............... 9,200 314
-------
1,683
-------
Leasing & Renting (1.5%)
Comdisco.......................... 4,600 117
PHH............................... 7,600 285
-------
402
-------
Machinery (4.0%)
Nacco Industries, Class A......... 7,200 370
SPX............................... 18,600 284
Toro.............................. 14,000 404
-------
1,058
-------
Measuring Devices (0.8%)
Tektronix......................... 6,200 212
-------
Medical Products & Services (3.5%)
Continental Medical Systems*...... 30,900 193
Spacelabs Medical*................ 17,000 412
Universal Health Services,
Class B*.......................... 12,600 315
-------
920
-------
Metals & Mining (2.2%)
Magma Copper*..................... 21,000 330
Terra Industries.................. 23,600 260
-------
590
-------
Metals Fabrication (1.4%)
Amcast Industrial................. 19,000 359
-------
Miscellaneous Business Services
(1.7%)
National Service Industries....... 9,600 258
Pinkerton's*...................... 10,700 190
-------
448
-------
Miscellaneous Consumer Services
(1.1%)
CPI............................... 19,000 285
-------
</TABLE>
Continued
31
<PAGE> 203
STATEMENT OF NET ASSETS
- -------------------------------------------------------------------
February 28, 1995
SMALL CAP VALUE FUND (CONTINUED)
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
------ -------
<S> <C> <C>
COMMON STOCKS, CONCLUDED:
Natural Gas (3.9%)
Energen...................... 19,000 $ 418
Enserch...................... 21,800 305
UGI.......................... 14,500 294
-------
1,017
-------
Paper & Paper Products (3.6%)
Nashua....................... 14,500 286
Pope And Talbot.............. 21,000 347
Stone Container.............. 13,000 304
-------
937
-------
Petroleum (3.4%)
Diamond Shamrock R&M......... 12,200 305
Pool Energy Services*........ 39,700 303
Quaker State................. 20,700 300
-------
908
-------
Printing & Publishing (2.9%)
Bowne........................ 21,300 364
Gibson Greetings............. 23,100 217
Western Publishing Group*.... 20,500 195
-------
776
-------
Real Estate (1.6%)
Pulte........................ 18,300 421
-------
Retail (11.8%)
Caldor*...................... 13,900 318
Fred's....................... 30,000 300
General Host................. 26,250 167
Genesco*..................... 53,100 126
Good Guys*................... 30,100 357
Hechinger, Class A........... 39,000 452
Ross Stores.................. 25,600 299
Ruddick...................... 19,200 391
Sizzler International........ 57,300 365
United States Shoe........... 18,100 344
-------
3,119
-------
Rubber & Plastic (0.4%)
Furon........................ 5,100 101
-------
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
------ -------
<S> <C> <C>
Semi-Conductors/Instruments (4.1%)
Applied Magnetics*................. 31,500 $ 95
M/A Communications*................ 35,600 245
Pioneer Standard Electronics....... 24,200 423
Quantum*........................... 22,300 329
-------
1,092
-------
Steel & Steel Works (2.3%)
Geneva Steel, Class A*............. 17,700 230
Quanex............................. 16,500 388
-------
618
-------
Trucking (1.2%)
Carolina Freight................... 27,300 324
-------
Utilities (3.6%)
IES Industries..................... 10,100 276
United Illuminating................ 11,000 366
Washington Water Power............. 20,600 309
-------
951
-------
Wholesale (6.0%)
Bergen Brunswig, Class A........... 25,095 684
Handleman.......................... 34,500 367
Marshall Industries*............... 12,400 322
Universal-Virginia................. 10,200 203
-------
1,576
-------
Total Common Stocks
(Cost $25,965,711)................. 26,122
-------
Total Investments (99.0%)
(Cost $25,965,711)................. 26,122
-------
OTHER ASSETS AND LIABILITIES (1.0%)
Other Assets and Liabilities, Net...... 271
-------
NET ASSETS:
Portfolio shares (unlimited
authorization-no par value) based
on 2,397,825 outstanding shares
of beneficial interest............. 25,719
Accumulated net realized gain on
investments........................ 479
Net unrealized appreciation on
investments........................ 156
</TABLE>
Continued
32
<PAGE> 204
THE COMPASS CAPITAL GROUP
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
------ -------
<S> <C>
NET ASSETS, CONCLUDED:
Undistributed net investment
income........................ $39
-------
Total Net Assets: (100.0%).... $26,393
-------
Net Asset Value and Redemption
Price Per Share............... $11.01
-------
Maximum Public Offering Price
Per Share ($11.01/96.25%)..... $11.44
-------
</TABLE>
- ------------------
*Non-income producing security
BALANCED FUND
<TABLE>
<S> <C> <C>
COMMON STOCKS (48.5%)
Aerospace & Defense (1.0%)
Raytheon...................... 3,500 $247
-------
Aircraft (0.8%)
United Technologies........... 3,000 199
-------
Automotive (1.6%)
Dana.......................... 7,500 185
Ford Motor.................... 8,000 209
-------
394
-------
Banks (3.8%)
Comerica...................... 6,500 183
JP Morgan..................... 3,000 192
Keycorp....................... 6,400 186
Mellon Bank................... 5,000 191
PNC Financial................. 6,000 153
-------
905
-------
Chemicals (3.1%)
Crompton & Knowles............ 10,000 169
E.I. Dupont de Nemours........ 4,000 224
Engelhard..................... 7,000 185
Witco......................... 5,800 166
-------
744
-------
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
------ -------
<S> <C> <C>
Communications Equipment (0.8%)
Harris............................. 4,000 $180
-------
Computers & Services (1.4%)
Novell*............................ 8,200 167
Pitney Bowes....................... 5,000 177
-------
344
-------
Drugs (3.1%)
Bristol Myers Squibb............... 4,000 248
Merck.............................. 4,300 182
Schering Plough.................... 1,700 133
Warner Lambert..................... 2,500 191
-------
754
-------
Electrical Equipment (1.0%)
Grainger (W.W.).................... 4,000 245
-------
Electronic Equipment (2.2%)
General Electric................... 6,000 329
Texas Instruments.................. 2,500 197
-------
526
-------
Environmental Services (1.2%)
Wheelabrator Technologies.......... 10,000 138
WMX Technologies................... 5,800 152
-------
290
-------
Financial Services (0.8%)
Federal National Mortgage
Association........................ 2,500 193
-------
Food, Beverage & Tobacco (3.0%)
Anheuser Busch..................... 2,800 158
Archer Daniels Midland............. 9,000 171
Pepsico............................ 5,000 196
Philip Morris Companies............ 3,000 182
-------
707
-------
Holding Company, Diversified (0.7%)
Hanson PLC, ADR.................... 8,500 159
-------
</TABLE>
The accompanying notes are an integral part of the financial statements.
33
<PAGE> 205
STATEMENT OF NET ASSETS
- -------------------------------------------------------------------
February 28, 1995
BALANCED FUND (CONTINUED)
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
------ -------
<S> <C> <C>
COMMON STOCKS, CONCLUDED:
Household Furniture & Fixtures (0.7%)
Masco................................ 6,200 $156
-------
Insurance (1.5%)
Lincoln National..................... 4,700 190
Loews................................ 1,700 165
-------
355
-------
Machinery (1.4%)
BW/IP, Inc........................... 7,000 112
Ingersoll Rand....................... 7,000 223
-------
335
-------
Miscellaneous Manufacturing (1.8%)
Duracell International............... 4,000 167
Minnesota Mining and
Manufacturing........................ 5,000 273
-------
440
-------
Oil Services (0.8%)
Schlumberger......................... 3,500 199
-------
Paper & Paper Products (1.8%)
Kimberly-Clark....................... 5,000 260
Weyerhaeuser......................... 4,000 163
-------
423
-------
Petroleum (3.4%)
Atlantic Richfield................... 2,000 219
Burlington Resources................. 5,500 212
Chevron.............................. 3,800 181
Texaco............................... 3,000 191
-------
803
-------
Professional Services (0.8%)
Dun & Bradstreet..................... 3,800 196
-------
Railroads (1.6%)
Norfolk Southern..................... 3,000 198
Union Pacific........................ 3,500 183
-------
381
-------
</TABLE>
<TABLE>
<CAPTION>
SHARES/
FACE MARKET
AMOUNT VALUE
(000) (000)
------- -------
<S> <C> <C>
Restaurants (0.6%)
McDonald's........................... 4,200 $ 140
-------
Retail (3.1%)
J. C. Penney......................... 4,000 172
May Department Stores................ 6,000 219
Toys "R" Us*......................... 6,500 181
Wal-Mart Stores...................... 7,200 171
-------
743
-------
Semi-Conductors/Instruments (1.0%)
Avnet................................ 6,000 233
-------
Telephones & Telecommunication (3.5%)
Airtouch Communications*............. 5,500 150
American Telephone & Telegraph....... 5,500 284
Bell Atlantic........................ 4,000 215
GTE.................................. 5,800 194
-------
843
-------
Utilities (2.0%)
Dominion Resources of Virginia....... 4,500 171
General Public Utilities............. 4,000 121
Pacific Gas and Electric............. 7,000 179
-------
471
-------
Total Common Stocks
(Cost $11,120,096)................... 11,605
-------
CORPORATE BONDS (6.6%)
Associates, N.A.
7.250%, 05/15/98.................... $200 199
Ford Motor Credit
7.500%, 06/15/04.................... 250 243
General Electric Capital
8.000%, 01/15/98.................... 200 204
Pepsico
6.250%, 09/01/99.................... 200 191
Southern California Edison
5.875%, 02/01/98.................... 200 191
Wal-Mart Stores
8.000%, 09/15/06.................... 300 303
WMX Technologies
8.250%, 11/15/99.................... 250 257
-------
Total Corporate Bonds
(Cost $1,569,957).................... 1,588
-------
</TABLE>
Continued
34
<PAGE> 206
THE COMPASS CAPITAL GROUP
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
------- -------
<S> <C> <C>
CONVERTIBLE BONDS (0.9%)
Time Warner
8.750%, 01/10/15................ $200 $ 201
-------
Total Convertible Bonds
(Cost $200,156).................. 201
-------
ASSET BACKED SECURITIES (1.0%)
American Express Master Trust
7.150%, 08/15/99................ 250 246
-------
Total Asset Backed Securities
(Cost $244,922).................. 246
-------
U.S. TREASURY OBLIGATIONS (30.2%)
U.S. Treasury Bonds
7.250%, 05/15/16................ 500 483
7.500%, 11/15/16................ 500 495
8.125%, 08/15/19................ 500 529
U.S. Treasury Notes
5.500%, 04/30/96................ 500 494
6.000%, 06/30/96................ 200 198
6.125%, 07/31/96................ 150 149
7.250%, 08/31/96................ 500 504
7.500%, 01/31/97................ 300 304
6.750%, 02/28/97................ 250 250
6.750%, 05/31/97................ 250 249
7.375%, 11/15/97................ 500 505
7.250%, 02/15/98................ 400 403
7.500%, 10/31/99................ 500 508
6.375%, 01/15/00................ 250 243
7.500%, 11/15/01................ 650 664
7.500%, 05/15/02................ 500 510
6.375%, 08/15/02................ 250 238
7.250%, 05/15/04................ 250 250
7.875%, 11/15/04................ 250 261
-------
Total U. S. Treasury Obligations
(Cost $7,157,533)................ 7,237
-------
U.S. GOVERNMENT AGENCY OBLIGATIONS (1.3%)
Federal Home Loan Mortgage
Corporation
7.125%, 07/21/99................. 300 299
-------
Total U.S. Government Agency
Obligations (Cost $296,344)...... 299
-------
</TABLE>
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000)/SHARES (000)
------------ -------
<S> <C> <C>
SHORT TERM INVESTMENTS (10.8%)
Chemical Bank Repurchase
Agreement, 6.05%, dated
02/28/95, matures 03/01/95,
repurchase price $1,645,276
(collateralized by U.S.
Treasury Note, par value
$1,660,000, 7.25%, maturing
02/15/98, market value
$1,679,893)................... $1,645 $1,645
Temp Cash Fund................ 942 942
-------
Total Short Term Investments
(Cost $2,587,000)............. 2,587
-------
Total Investments (99.3%)
(Cost $23,176,008)............ 23,763
-------
OTHER ASSETS AND LIABILITIES (0.7%)
Other Assets and Liabilities,
Net........................... 170
-------
NET ASSETS:
Portfolio shares (unlimited
authorization-no par value)
based on 2,323,146
outstanding shares of
beneficial interest........... 23,216
Accumulated net realized gain
on investments................ 130
Net unrealized appreciation on
investments................... 587
-------
Total Net Assets: (100.0%)...... $23,933
=======
Net Asset Value and
Redemption Price Per Share.... $10.30
=======
Maximum Public Offering Price
Per Share ($10.30/96.25%)..... $10.70
=======
</TABLE>
- ---------
*Non-income producing security.
ADR-American Depository Receipt
PLC-Public Limited Company
The accompanying notes are an integral part of the financial statements.
35
<PAGE> 207
STATEMENT OF NET ASSETS
- -------------------------------------------------------------------
February 28, 1995
SHORT/INTERMEDIATE FUND
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
------ --------
<S> <C> <C>
CORPORATE BONDS (36.2%)
Automobile, Finance (5.9%)
Ford Capital BV
9.50%, 07/01/01.................... $2,000 $ 2,160
Ford Motor Credit
8.00%, 01/15/99.................... 1,000 1,011
8.40%, 03/26/99.................... 5,000 5,118
General Motors Acceptance
8.60%, 07/17/95.................... 2,500 2,519
9.40%, 06/07/95.................... 1,000 1,008
--------
11,816
--------
Banks (2.0%)
Republic National Bank
New York
6.40%, 04/15/95.................... 4,000 4,000
--------
Beverages (6.5%)
Coca Cola
7.875%, 09/15/98................... 6,000 6,135
Pepsico
5.625%, 07/01/95................... 2,000 1,998
6.125%, 01/15/98................... 2,000 1,950
7.00%, 11/15/96.................... 3,000 3,004
--------
13,087
--------
Chemical & Allied Products (1.8%)
E.I. Dupont de Nemours
8.45%, 10/15/96.................... 3,500 3,574
--------
Electric Utility (3.4%)
Duke Power
7.50%, 04/01/99.................... 4,000 4,015
Southern California Edison
5.90%, 01/15/97.................... 3,000 2,936
--------
6,951
--------
Personal Credit Institutions (4.7%)
Associates Corporation of North
America
5.300%, 09/04/95................... 1,000 994
6.375%, 04/15/95................... 2,000 2,000
7.625%, 04/15/98................... 2,400 2,424
</TABLE>
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
------ --------
<S> <C> <C>
Beta Finance
6.19%, 04/20/95 (A).............. $2,000 $ 1,999
Household Finance
7.80%, 11/01/96.................. 2,000 2,015
--------
9,432
--------
Petroleum Refining (4.5%)
Texaco Capital
7.875%, 05/01/95................. 3,000 3,008
8.530%, 08/15/97................. 1,350 1,385
9.000%, 11/15/96................. 1,500 1,551
9.000%, 12/15/99................. 3,000 3,187
--------
9,131
--------
Retail (3.9%)
Bass America
6.75%, 08/01/99.................. 5,000 4,856
Wal-Mart Stores
8.00%, 05/01/96.................. 3,000 3,034
--------
7,890
--------
Security Brokers & Dealers (3.5%)
Goldman Sachs 4.77%, 10/16/95.... 3,000 2,966
Merrill Lynch 6.75%, 03/15/95.... 4,000 4,000
--------
6,966
--------
Total Corporate Bonds
(Cost $73,770,137)............... 72,847
--------
Collateralized Mortgage
Obligations (1.9%)
Federal Home Loan Mortgage
6.750%, 09/15/16................. 4,000 3,871
--------
Total Collateralized Mortgage
Obligations
(Cost $4,033,750)................ 3,871
--------
Asset Backed Securities (15.7%)
American Express Master Trust
7.150%, 08/15/99................. 4,750 4,682
Caterpillar Finance
6.100%, 03/17/95................. 5,000 5,000
Chase Manhattan Master Trust
8.750%, 08/15/99................. 2,000 2,040
</TABLE>
Continued
36
<PAGE> 208
THE COMPASS CAPITAL GROUP
- --------------------------------------------------------------------------------
<TABLE>
<Caption
FACE MARKET
AMOUNT VALUE
(000) (000)
------ --------
<S> <C> <C>
ASSET BACKED SECURITIES, CONCLUDED:
General Motor Acceptance
Corporation Grantor Trust
4.150%, 03/15/98................. $1,172 $ 1,153
Merrill Lynch Asset Backed
5.500%, 05/15/98................. 1,837 1,818
5.125%, 07/15/98................. 1,654 1,630
Premier Auto Trust
4.900%, 10/15/98................. 804 784
4.650%, 11/02/99................. 5,527 5,328
Standard Credit Card Master Trust
8.875%, 09/07/99................. 5,000 5,225
7.875%, 01/07/00................. 4,000 4,064
--------
Total Asset Backed Securities
(Cost $31,970,403)............... 31,724
--------
U.S. GOVERNMENT AGENCY
OBLIGATIONS (2.0%)
Federal Home Loan Mortgage
7.860%, 01/21/97................. 2,000 2,030
Tennessee Valley Authority
8.375%, 10/01/99................. 2,000 2,080
--------
Total U.S. Government Agency
Obligations (Cost $4,004,410).... 4,110
--------
U. S. TREASURY OBLIGATIONS (41.9%)
U.S. Treasury Notes
5.125%, 11/15/95................. 2,000 1,983
8.500%, 11/15/95................. 2,000 2,027
7.500%, 01/31/96................. 8,000 8,073
4.625%, 02/15/96................. 5,000 4,915
5.125%, 03/31/96................. 3,000 2,956
4.250%, 05/15/96................. 3,000 2,919
7.375%, 05/15/96................. 2,000 2,018
7.250%, 08/31/96................. 1,000 1,008
6.500%, 11/30/96................. 1,000 996
7.250%, 11/30/96................. 2,000 2,016
6.250%, 01/31/97................. 3,000 2,972
6.750%, 02/28/97................. 2,000 1,999
6.875%, 04/30/97................. 10,000 10,008
6.500%, 05/15/97................. 5,000 4,963
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT MARKET
(000)/ VALUE
SHARES (000)
------ ---------
<S> <C> <C>
6.750%, 05/31/97................... $8,000 $ 7,981
5.625%, 08/31/97................... 8,000 7,774
5.750%, 10/31/97................... 3,000 2,916
6.000%, 11/30/97................... 5,000 4,887
7.875%, 01/15/98................... 4,000 4,096
7.250%, 02/15/98................... 4,000 4,034
5.125%, 02/28/98................... 1,000 951
8.000%, 08/15/99................... 3,000 3,108
---------
Total U. S. Treasury Obligations
(Cost $86,193,884)................. 84,600
---------
SHORT TERM INVESTMENTS (1.1%)
Temp Cash Fund..................... 2,141 2,141
---------
Total Short Term Investments
(Cost $2,141,028).................. 2,141
---------
Total Investments (98.8%)
(Cost $202,113,612)................ 199,293
---------
OTHER ASSETS AND LIABILITIES (1.2%)
Other Assets and Liabilities, Net...... 2,481
---------
NET ASSETS:
Portfolio shares (unlimited
authorization-no par value)
based on 19,936,683 outstanding
shares of beneficial interest...... 207,856
Accumulated net realized loss on
investments........................ (3,296)
Net unrealized depreciation on
investments........................ (2,821)
Undistributed net investment
income............................. 35
---------
Total Net Assets: (100.0%)........... $201,774
---------
Net Asset Value and Redemption
Price Per Share.................... $10.12
---------
Maximum Public Offering Price
Per Share ($10.12/96.25%).......... $10.51
---------
</TABLE>
- -----------------
(A) Variable Rate Security-the rate reported on the Statement of Net Assets is
the rate in effect on February 28, 1995.
The accompanying notes are an integral part of the financial statements.
37
<PAGE> 209
STATEMENT OF NET ASSETS
- -------------------------------------------------------------------
February 28, 1995
FIXED INCOME FUND
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
------- --------
<S> <C> <C>
CORPORATE BONDS (41.9%)
Auto Finance (3.1%)
Ford Capital BV
9.50%, 07/01/01................ $ 1,000 $ 1,080
Ford Motor Credit
6.75%, 08/15/08................ 5,000 4,475
8.00%, 01/15/99................ 2,000 2,023
--------
7,578
--------
Banks (3.0%)
Banque Nationale de Paris
9.875%, 05/25/98............... 1,000 1,074
National Westminster Bank,
New York
9.45%, 05/01/01................ 4,000 4,334
Toronto Dominion Bank,
New York
7.875%, 08/15/04............... 2,000 1,968
--------
7,376
--------
Commercial Printing (3.9%)
R.R. Donnelley & Sons
7.00%, 01/01/03................ 2,000 1,933
8.875%, 04/15/21............... 7,000 7,656
--------
9,589
--------
Electric Utility (1.2%)
Southern California Edison
5.90%, 01/15/97................ 2,000 1,957
Teco Energy
9.25%, 06/19/97................ 1,000 1,044
--------
3,001
--------
Financial Services (1.4%)
Beta Finance
6.19%, 04/20/95 (A)............ 3,500 3,499
--------
Food, Beverage & Tobacco (6.5%)
Anheuser Busch
9.00%, 12/01/09................ 4,000 4,374
Archer Daniels Midland
7.125%, 03/01/13............... 3,000 2,764
Coca Cola
7.875%, 09/15/98............... 1,955 1,999
</TABLE>
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
------- --------
<S> <C> <C>
Grand Metropolitan Investment
7.125%, 09/15/04................... $ 5,000 $ 4,791
Pepsico
6.125%, 01/15/98................... 2,000 1,950
--------
15,878
--------
Paper & Allied Products (3.2%)
Kimberly-Clark, Callable
02/01/13 @ 100
7.875%, 02/01/23................... 3,750 3,684
Weyerhaeuser
8.84%, 04/12/99.................... 4,000 4,200
--------
7,884
--------
Personal Credit Institutions (1.7%)
Associates Corporation of North
America
8.625%, 06/15/97................... 3,000 3,083
Associates Corporation of North
America, Callable
04/15/96 @100
7.625%, 04/15/98................... 1,000 1,010
--------
4,093
--------
Petroleum Refining (2.6%)
Texaco Capital
8.50%, 02/15/03.................... 5,000 5,225
9.00%, 11/15/96.................... 1,000 1,034
--------
6,259
--------
Railroads (1.8%)
Norfolk Southern
9.00%, 03/01/21.................... 4,000 4,365
--------
Retail-Department Stores (1.3%)
J.C. Penney, Callable
07/12/00 @ 100
9.45%, 07/15/02.................... 3,000 3,218
--------
Retail-Eating Places (2.8%)
Bass America
6.625%, 03/01/03................... 1,000 930
6.75%, 08/01/99.................... 4,000 3,885
McDonald's
7.375%, 07/15/02................... 2,000 1,998
--------
6,813
--------
</TABLE>
Continued
38
<PAGE> 210
THE COMPASS CAPITAL GROUP
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
------- --------
<S> <C> <C>
CORPORATE BONDS, CONCLUDED:
Retail-Grocery Stores (2.1%)
Albertsons
4.82%, 03/25/96.................. $ 5,000 $ 4,894
--------
Retail-Variety Stores (0.8%)
Wal-Mart Stores
8.00%, 05/01/96.................. 2,000 2,023
--------
Security Brokers & Dealers (2.7%)
Merrill Lynch
7.00%, 04/27/08.................. 3,000 2,692
8.30%, 11/01/02.................. 2,000 2,030
Merrill Lynch,
Callable 04/15/98 @ 100
7.05%, 05/15/03.................. 2,000 1,868
--------
6,590
--------
Soap (0.8%)
Procter and Gamble
7.375%, 03/01/23................. 2,000 1,858
--------
Trucking (3.0%)
United Parcel Service
8.375%, 04/01/20................. 7,000 7,324
--------
Total Corporate Bonds
(Cost $104,818,508).............. 102,242
--------
COLLATERALIZED MORTGAGE
OBLIGATIONS (3.4%)
Federal Home Loan Mortgage
Corporation
8.000%, 03/15/05................. 1,773 1,786
6.750%, 09/15/16................. 6,000 5,807
Federal National Mortgage
Association
9.500%, 09/25/18................. 789 802
--------
Total Collateralized Mortgage
Obligations
(Cost $8,505,143)................ 8,395
--------
Asset Backed Securities (4.7%)
American Express Master Trust
7.150%, 08/15/99................. 2,000 1,971
Chase Manhattan Master Credit
Card Trust
8.750%, 08/15/99................. 3,000 3,060
</TABLE>
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
------- --------
<S> <C> <C>
General Motor Acceptance
Corporation Grantor Trust
4.150%, 03/15/98............. $ 703 $ 692
Merrill Lynch
5.500%, 05/15/98............. 1,102 1,091
5.125%, 07/15/98............. 1,654 1,630
Premier Auto Trust
4.900%, 10/15/98............. 3,218 3,135
--------
Total Asset Backed Securities
(Cost $11,775,461)........... 11,579
--------
GOVERNMENT POOLED MORTGAGES (1.3%)
Government National Mortgage
Association
9.000%, 09/15/16............. 539 559
9.000%, 10/15/19............. 334 346
9.000%, 11/15/19............. 544 564
9.000%, 12/15/19............. 273 283
8.500%, 03/15/20............. 208 211
8.500%, 04/15/20............. 1,255 1,276
--------
Total Government Pooled
Mortgages (Cost $3,025,554).. 3,239
--------
U.S. TREASURY OBLIGATIONS (37.9%)
U.S. Treasury Bond, Callable
02/15/02 @ 100
7.625%, 02/15/07............. 2,000 2,021
U.S. Treasury Bonds
7.250%, 05/15/16............. 10,000 9,656
8.750%, 05/15/17............. 2,000 2,243
8.125%, 08/15/19............. 6,000 6,343
7.875%, 02/15/21............. 1,000 1,030
6.250%, 08/15/23............. 5,000 4,256
U.S. Treasury Notes
5.125%, 11/15/95............. 3,000 2,974
4.250%, 12/31/95............. 5,000 4,911
4.625%, 02/15/96............. 7,500 7,372
5.125%, 03/31/96............. 2,000 1,971
7.375%, 05/15/96............. 1,000 1,009
4.375%, 11/15/96............. 3,000 2,887
6.500%, 11/30/96............. 2,000 1,992
6.500%, 05/15/97............. 2,000 1,985
6.750%, 05/31/97............. 3,000 2,993
</TABLE>
Continued
39
<PAGE> 211
STATEMENT OF NET ASSETS
- -------------------------------------------------------------------
February 28, 1995
FIXED INCOME FUND (CONTINUED)
<TABLE>
<CAPTION>
FACE
AMOUNT MARKET
(000)/ VALUE
SHARES (000)
------- --------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS, CONCLUDED:
U.S. Treasury Notes, continued:
6.500%, 08/15/97............... $ 1,000 $ 992
5.625%, 08/31/97............... 2,000 1,944
5.750%, 10/31/97............... 2,000 1,944
6.000%, 11/30/97............... 3,000 2,932
7.250%, 02/15/98............... 4,000 4,034
5.125%, 02/28/98............... 2,000 1,903
5.125%, 03/31/98............... 7,000 6,648
8.250%, 07/15/98............... 2,000 2,074
7.125%, 10/15/98............... 2,000 2,013
5.125%, 11/30/98............... 2,000 1,876
6.375%, 01/15/99............... 2,000 1,956
7.000%, 04/15/99............... 2,000 2,000
8.500%, 11/15/00............... 6,000 6,388
7.750%, 02/15/01............... 2,000 2,062
--------
Total U.S. Treasury Obligations
(Cost $95,074,699)............. 92,409
--------
U.S. GOVERNMENT AGENCY
OBLIGATIONS (1.2%)
Federal Home Loan Mortgage
Corporation
7.125%, 07/21/99............... 3,000 2,989
--------
Total U.S. Government Agency
Obligations
(Cost $2,989,800).............. 2,989
--------
YANKEE BONDS (3.4%)
Hydro Quebec
9.400%, 02/01/21............... 3,000 3,236
Province of Ontario
8.000%, 10/17/01............... 5,000 5,088
--------
Total Yankee Bonds
(Cost $8,156,580).............. 8,324
--------
SHORT TERM INVESTMENTS (5.0%)
Temp Cash Fund................. 12,134 12,134
--------
Total Short Term Investments
(Cost $12,134,069)............. 12,134
--------
Total Investments (98.8%)
(Cost $246,479,814)............ 241,311
--------
</TABLE>
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
------ ---------
<S> <C>
OTHER ASSETS AND LIABILITIES (1.2%)
Other Assets and Liabilities, Net.. $ 2,827
---------
NET ASSETS:
Portfolio shares (unlimited
authorization-no par value)
based on 24,271,783
outstanding shares of
beneficial interest................ 252,500
Accumulated net realized loss on
investments........................ (3,224)
Net unrealized depreciation on
investments........................ (5,168)
Undistributed net investment
income............................. 30
---------
Total Net Assets: (100.0%)......... $244,138
=========
Net Asset Value and Redemption
Price Per Share.................... $10.06
=========
Maximum Public Offering Price
Per Share ($10.06/96.25%).......... $10.45
=========
</TABLE>
- -------------------
(A) Variable Rate Security-the rate reported on the Statement of Net Assets is
the rate in effect on February 28, 1995.
MUNICIPAL BOND FUND
<TABLE>
<S> <C> <C>
MUNICIPAL BONDS (96.5%)
Arizona (3.5%)
Salt River Project, Series A, RB
5.300%, 01/01/03................... $ 500 $ 503
Scottsdale, Municipal Property
Corporation, RB, (FGIC),
Callable 11/01/02 @ 100
6.250%, 11/01/10................... 500 506
---------
1,009
---------
California (6.0%)
Azusa, Unified School District,
GO, (AMBAC)
5.100%, 05/01/07................... 830 784
</TABLE>
The accompanying notes are an integral part of the finanial statements.
40
<PAGE> 212
THE COMPASS CAPITAL GROUP
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
------ -------
<S> <C> <C>
MUNICIPAL BONDS, CONTINUED:
California, continued
State Public Power Authority,
San Juan Power Project,
Series A, RB, (MBIA), Callable
01/01/05 @ 100
5.375%, 01/01/10.............. $1,000 $ 945
-------
1,729
-------
Florida (1.9%)
Palm Beach County, Solid Waste
Authority, RB, Callable
07/01/97 @ 103
8.625%, 07/01/04.............. 500 553
-------
Hawaii (7.6%)
Honolulu, Series C, GO,
Prerefunded @ 101
7.150%, 06/01/00 (B).......... 1,000 1,102
State, Series BR, GO,
Prerefunded @ 100
7.000%, 06/01/00 (B).......... 1,000 1,086
-------
2,188
-------
Illinois (12.3%)
Chicago, School Finance
Authority, Series B, GO,
(MBIA), Callable
06/01/96 @ 102
7.600%, 06/01/02.............. 250 263
Kane County, Elgin Community
College Project, Series A, RB,
(FGIC)
5.300%, 12/01/09.............. 1,000 979
State Education Facilities
Authority, Shedd Aquarium
Society, Series A, RB,
Mandatory Put @ 102
8.625%, 09/26/97 (B) (C)...... 560 607
State Education Facilities
Authority, Wesleyan University
Project, RB
5.600%, 09/01/11 (C).......... 1,260 1,172
</TABLE>
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
------ -------
<S> <C> <C>
Winnebago and Boone Counties,
Rockford School District,
Series C, GO, (FGIC)
5.900%, 02/01/05.................. $ 500 $ 512
-------
3,533
-------
Kentucky (1.8%)
Jefferson County, Capital Project,
Series A, RB
5.650%, 08/15/03.................. 500 506
-------
Louisiana (1.7%)
State Recovery District Sales Tax
Revenue, VRDN, RB, (MBIA)
3.750%, 03/01/95 (A) (B).......... 500 500
-------
Michigan (3.2%)
State Municipal Bond Authority,
Revolving Fund, RB
5.400%, 10/01/14.................. 1,015 920
-------
Minnesota (3.3%)
State, GO
5.000%, 08/01/05.................. 1,000 956
-------
Nebraska (1.8%)
State Public Power Supply
Systems, RB, Callable
01/01/03 @ 102
6.000%, 01/01/08.................. 500 503
-------
New Hampshire (2.0%)
State Turnpike Authority,
Series A, RB, (FGIC), Callable
11/01/03 @ 100
7.000%, 11/01/06.................. 500 563
-------
Ohio (4.5%)
Columbus, Refuse Coal Fired
Plant, GO
6.625%, 09/15/01.................. 265 285
State Water Development
Authority, RB, (AMBAC),
Callable 12/01/02 @ 102
6.000%, 12/01/08.................. 1,000 1,015
-------
1,300
-------
</TABLE>
Continued
41
<PAGE> 213
STATEMENT OF NET ASSETS
- -------------------------------------------------------------------
February 28, 1995
MUNICIPAL BOND FUND (CONTINUED)
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
------ -------
<S> <C> <C>
MUNICIPAL BONDS, CONTINUED:
Pennsylvania (16.7%)
Geisinger Health System,
Series B, VRDN, RB
3.600%, 03/01/95 (A) (B) (C)..... $ 500 $ 500
Philadelphia, Hospital and Higher
Education Facilities Authority,
Children's Hospital Project,
VRDN, RB
3.600%, 03/01/95 (A) (B) (C)..... 600 600
Schuylkill County, Industrial
Development Authority,
Westwood Energy Project,
VRDN, RB
4.050%, 03/01/95 (A) (B) (C)..... 700 699
Schuylkill County, Redevelopment
Authority, Commonwealth
Lease, Series A, RB, (FGIC),
Callable 06/01/03 @ 100
6.950%, 06/01/04................. 500 546
Solanco School District, GO,
(FGIC), Callable
02/15/04 @ 100
6.300%, 02/15/14................. 1,000 1,006
State Higher Education
Authority, Student Loan
Assistance Agency, Series A,
RB, (FGIC)
6.800%, 12/01/00................. 630 672
State Public School Building
Authority, Series D, RB,
(FGIC), Callable
07/01/02 @ 102
6.250%, 01/01/07................. 500 519
Westmoreland County, GO,
(AMBAC)
6.050%, 06/01/97................. 250 255
-------
4,797
-------
Puerto Rico (2.1%)
Telecom Authority, RB, (MBIA)
5.250%, 01/01/05................. 500 493
</TABLE>
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
------ -------
<S> <C> <C>
University of Puerto Rico,
Series L, RB, Callable
06/01/96 @ 102
7.750%, 06/01/07 (C)............. $ 100 $ 105
-------
598
-------
South Carolina (1.8%)
Piedmont, Municipal Power
Agency, RB, (MBIA)
6.250%, 01/01/09................. 500 525
-------
South Dakota (1.8%)
State Building Lease Authority,
Series A, RB, (CGIC)
6.375%, 09/01/05................. 500 529
-------
Tennessee (3.7%)
State, Series B, GO, Callable
06/01/01 @ 101.5
6.850%, 06/01/10................. 1,000 1,073
-------
Texas (3.8%)
Harris County, GO, Callable
08/01/01 @ 102
7.000%, 08/01/09................. 500 539
University of Texas, Series A,
RB, Callable 08/15/01 @ 102
7.000%, 08/15/07................. 500 546
-------
1,085
-------
Utah (1.7%)
Salt Lake City, Motor Fuel Excise
Tax, Series A, RB
5.400%, 02/01/03................. 500 487
-------
Vermont (7.4%)
Burlington, Waterworks Systems,
Series A, RB, (FGIC), Callable
07/01/97 @ 102
6.875%, 07/01/12................. 1,000 1,046
State, Series A, GO,
Prerefunded @ 102
6.750%, 02/01/00 (B)............. 1,000 1,087
-------
2,133
-------
</TABLE>
Continued
42
<PAGE> 214
THE COMPASS CAPITAL GROUP
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT MARKET
(000)/ VALUE
SHARES (000)
------ --------
<S> <C> <C>
MUNICIPAL BONDS, CONCLUDED:
Virginia (3.5%)
Loudoun County, Industrial
Development Authority,
Marriott Project, VRDN, RB
4.050%, 03/01/95 (A) (B) (C)....... $ 500 $ 500
State Housing Development
Authority, Series A, RB, AMT
6.700%, 07/01/05 (C)............... 500 518
--------
1,018
--------
Washington (1.8%)
Port of Seattle, Series A, RB,
Callable 11/01/02 @ 102
6.250%, 11/01/10................... 500 510
--------
Washington, D.C. (1.7%)
District of Columbia, Series C,
GO, (AMBAC),
Prerefunded @ 102
7.600%, 06/01/98 (B)............... 450 492
--------
Wisconsin (0.9%)
Milwaukee, Sewer District, GO
6.125%, 10/01/03................... 250 259
--------
Total Municipal Bonds
(Cost $28,048,080)................. 27,766
--------
SHORT TERM INVESTMENTS (3.6%)
SEI Institutional Tax-Free
Portfolio
3.93%, 03/07/95.................... 1,026 1,026
--------
Total Short Term Investment
(Cost $1,026,246).................. 1,026
--------
Total Investments (100.1%)
(Cost $29,074,326)................. 28,792
--------
OTHER ASSETS AND LIABILITIES (-0.1%)
Other Assets and Liabilities, Net.... (42)
--------
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
(000)
--------
<S> <C>
NET ASSETS:
Portfolio shares (unlimited authorization-no
par value) based on 2,796,278 outstanding
shares of beneficial interest............... $30,114
Accumulated net realized loss on
investments................................. (1,091)
Net unrealized depreciation on investments.... (282)
Distributions in excess of net investment
income...................................... 9
--------
Total Net Assets: (100.0%).................... $28,750
========
Net Asset Value and Redemption Price Per
Share....................................... $ 10.28
========
Maximum Public Offering Price Per
Share ($10.28/96.25%)....................... $ 10.68
========
</TABLE>
- -----------------------------------------------------
(A) Variable Rate Security-the rate reflected on the Statement of Net Assets is
the rate in effect on February 28, 1995.
(B) Put and demand features exist requiring the issuer to repurchase the
instrument prior to maturity. The maturity date shown is the next demand
date.
(C) Securities are held in connection with a letter of credit or other credit
support.
AMT-Alternative Minimum Tax
GO-General Obligation
RB-Revenue Bond
VRDN-Variable Rate Demand Note
The following organizations have provided underlying credit support for certain
securities as defined in the Statement of Net Assets:
AMBAC-American Municipal Bond Assurance Company
CGIC-Capital Guaranty Insurance Company
FGIC-Financial Guaranty Insurance Company
MBIA-Municipal Bond Insurance Association
The accompanying notes are an integral part of the financial statements.
43
<PAGE> 215
STATEMENT OF NET ASSETS
- -------------------------------------------------------------------
February 28, 1995
NEW JERSEY MUNICIPAL
BOND FUND
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
------ -------
<S> <C> <C>
MUNICIPAL BONDS (99.4%)
Kansas (0.4%)
Butler County, Solid Waste
Disposal, VRDN, RB, AMT
4.300%, 03/01/95 (A) (B) (C)..... $ 400 $ 400
-------
New Jersey (98.0%)
Absecon, Board of Education,
COP, (MBIA)
5.625%, 12/15/02................. 770 788
Bayshore, Bayshore Regional
Sewer Authority, Series A, RB,
(MBIA)
5.250%, 05/01/06................. 1,000 963
Bergen County, Utility Authority,
Series A, RB, (FGIC), Callable
06/15/02 @ 100
5.500%, 06/15/13................. 1,000 961
Bordentown, Sewage Authority,
Series D, RB, (MBIA)
5.100%, 12/01/05................. 635 609
Borough of Roselle, Fiscal Year
Adjustment Bonds, Series 1993,
GO, (MBIA)
4.850%, 10/15/05................. 1,000 920
Brick Township, Municipal
Utilities Authority, RB
6.750%, 12/01/16................. 1,000 1,089
Brigantine, GO, (MBIA), Callable
08/01/02 @ 101
6.250%, 08/01/03................. 730 778
Burlington County, Bridge
Commission, RB
5.150%, 10/01/05 (C)............. 1,000 975
Camden County, Improvement
Authority Lease, RB
5.700%, 12/01/05 (C)............. 500 499
Camden County, Improvement
Authority Lease, RB, Callable
12/01/02 @ 101
6.000%, 12/01/12 (C)............. 500 501
</TABLE>
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
------ -------
<S> <C> <C>
Camden County, Improvement
Authority, Health Services
Center Project, Series B, RB,
(AMBAC)
4.900%, 12/01/05................ $1,000 $ 935
Camden, Board of Education, GO,
(FSA)
5.000%, 10/01/05................ 450 428
Cape May County, Bridge
Commission, RB
6.500%, 06/01/00................ 350 364
Cape May County, Municipal
Utilities Authority, Series B,
RB, (FGIC)
4.900%, 01/01/09................ 1,000 909
Carteret, GO, (FGIC)
5.050%, 10/01/05................ 925 890
5.250%, 10/01/07................ 980 940
5.450%, 10/01/09................ 500 481
Cherry Hill Township, GO
6.000%, 06/01/06................ 500 514
Delaware River Joint Toll Bridge
Commission, RB, (FGIC)
6.250%, 07/01/12................ 400 412
Dover Township, GO, (AMBAC),
Callable 10/15/02 @ 102
6.000%, 10/15/03................ 1,000 1,050
Edison Township, GO
6.500%, 06/01/04................ 500 539
Edison Township, GO, (AMBAC)
4.800%, 01/01/05................ 750 696
5.000%, 01/01/07................ 1,000 918
Edison Township, School
Authority, GO
6.500%, 06/01/03................ 1,000 1,073
Essex County, Correctional
Facility Improvement,
RB, (AMBAC), Callable
12/01/06 @ 100
6.900%, 12/01/14................ 500 533
</TABLE>
Continued
44
<PAGE> 216
THE COMPASS CAPITAL GROUP
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
------ -------
<S> <C> <C>
MUNICIPAL BONDS, CONTINUED:
New Jersey, continued:
Essex County, Improvement
Authority, Lease Capital
Equipment Program,
Series C, RB
7.000%, 09/01/98 (C)........... $ 310 $ 326
Essex County, Improvement
Authority, RB, (AMBAC)
5.300%, 12/01/06............... 1,000 968
Essex County, Series A, GO,
(MBIA)
4.600%, 10/01/03............... 1,500 1,412
Evesham Township, Municipal
Utilities Authority, Series B,
RB, (MBIA),
Callable 07/01/97 @ 100
6.800%, 07/01/01............... 1,010 1,054
6.850%, 07/01/02............... 1,080 1,126
Flemington-Raritan, GO
6.250%, 02/01/12 (C)........... 500 518
Gloucester County, Housing
Authority, RB
6.200%, 09/15/11 (C)........... 500 498
Hillside Township, GO, (MBIA)
6.600%, 02/15/07............... 1,000 1,061
Irvington Township, School
District Refunding Bonds,
Series 1993, GO, (FSA)
5.000%, 10/01/11............... 1,000 906
Knowlton Township, Board of
Education, GO
6.600%, 08/15/10............... 170 183
6.600%, 08/15/11............... 169 182
Lacey Township, Municipal
Utilities Authority, RB, (MBIA)
6.000%, 12/01/12............... 1,000 1,000
Landis, Sewer Authority,
RB, (FGIC)
5.400%, 10/01/06............... 500 486
Manchester Township, Board of
Education, COP, (MBIA)
5.300%, 12/15/07............... 500 476
</TABLE>
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
------ -------
<S> <C> <C>
Medford Township, Board of
Education, GO, (FGIC),
Callable 02/01/05 @ 100
5.950%, 02/01/11............... $ 500 $ 501
Mercer County, Hamilton Board
of Education Lease Project,
RB, (MBIA)
5.250%, 12/15/14............... 1,000 913
Mercer County, Improvement
Authority, Hamilton Township
Board of Education Project,
RB, (MBIA)
5.900%, 06/01/03............... 500 516
Mercer County, Improvement
Revenue Government Lease
Program, RB,
Prerefunded @ 101
7.250%, 12/01/98 (B)........... 985 1,067
Middletown Township, Sewer
Authority, Series A, RB, (FGIC)
5.000%, 01/01/06............... 1,000 933
5.050%, 01/01/07............... 1,095 1,017
5.100%, 01/01/08............... 1,750 1,609
Monmouth County, Utility
Authority, GO,
Callable 08/01/00 @ 102
7.000%, 08/01/06............... 1,000 1,081
Moorestown, School District,
GO, (AMBAC)
6.600%, 06/01/05............... 450 488
Morris Township, GO,
6.550%, 07/01/01............... 500 533
Morristown, GO, (FSA)
6.400%, 08/01/14............... 500 520
North Arlington, GO, (AMBAC)
4.800%, 02/01/12............... 600 527
4.800%, 02/01/13............... 441 386
North Bergen Township,
GO, (FSA)
5.900%, 08/15/01............... 500 519
North Bergen Township,
Municipal Utilities Authority,
RB, (FGIC)
5.200%, 12/15/07............... 1,000 956
</TABLE>
Continued
45
<PAGE> 217
STATEMENT OF NET ASSETS
- -------------------------------------------------------------------
February 28, 1995
NEW JERSEY MUNICIPAL
BOND FUND (CONTINUED)
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
------ -------
<S> <C> <C>
MUNICIPAL BONDS, CONTINUED:
New Jersey, continued:
Northwest Bergen County,
Utilities Authority, RB, (MBIA)
5.900%, 07/15/06................ $ 755 $ 782
Nutley, GO
7.000%, 08/01/98................ 400 407
Ocean County, General
Improvement, GO
6.300%, 04/15/97................ 1,000 1,028
5.125%, 07/01/06................ 800 759
5.150%, 07/01/09................ 1,000 926
5.150%, 07/01/10................ 1,250 1,147
Ocean County, Series A, GO
6.250%, 10/01/01................ 1,280 1,347
Ocean County, Series A, GO,
Callable 10/01/01 @102
6.250%, 10/01/05................ 1,050 1,108
Ocean County, Utility Authority,
Series A, RB,
Callable 01/01/07 @ 100
6.300%, 01/01/12 (C)............ 1,005 1,039
Parsippany Troy Hills
Township, GO
4.700%, 12/01/04................ 1,000 928
Passaic Valley, Water
Commission, Series A,
RB, (FGIC)
5.950%, 12/15/02................ 500 529
Piscataway Township, School
District, COP, (FSA)
5.150%, 06/15/06................ 500 483
Point Pleasant, GO, (MBIA)
5.700%, 12/01/03................ 500 511
Port Authority, RB
5.200%, 09/01/13 (C)............ 1,000 914
Port Authority, RB,
Callable 04/01/96 @ 102
7.250%, 04/01/14 (C)............ 1,500 1,544
Scotch Plains Township, Senior
Citizen Housing, RB
5.625%, 09/01/13 (C)............ 500 470
</TABLE>
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
------ -------
<S> <C> <C>
South Plainfield, Board of
Education, COP, (MBIA),
Callable 06/15/02 @ 100
6.500%, 12/15/07............... $ 780 $ 824
South Plainfield, GO, (AMBAC)
4.750%, 09/01/08............... 1,030 937
State Building Authority, RB
7.150%, 06/15/99............... 200 217
State Building Authority, RB,
Prerefunded @ 102
7.200%, 06/15/99 (B)........... 1,200 1,316
State Economic Development
Authority, Trenton Office
Complex Project, RB
6.625%, 06/15/01............... 1,050 1,130
State Health Care Facility, St.
Clares-Riverside Medical
Center, RB, (MBIA)
5.750%, 07/01/14............... 500 489
State Highway Authority, Garden
State Parkway Project, RB
4.900%, 01/01/05 (C)........... 1,000 961
6.200%, 01/01/10............... 750 773
6.250%, 01/01/14............... 500 507
State Highway Authority, Garden
State Parkway Project, RB,
Callable 01/01/02 @ 102
6.000%, 01/01/05............... 1,350 1,401
State Housing Finance Agency,
Series A, RB
6.700%, 05/01/05 (C)........... 500 527
State Housing Finance Agency,
Series A, RB,
Callable 05/01/02 @ 102
6.700%, 11/01/05 (C)........... 1,000 1,054
6.950%, 11/01/13 (C)........... 750 783
State Sports & Exposition
Authority, State Contract
Bonds, Series A, RB
5.300%, 09/01/09............... 955 899
</TABLE>
Continued
46
<PAGE> 218
THE COMPASS CAPITAL GROUP
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
------ -------
<S> <C> <C>
MUNICIPAL BONDS, CONTINUED:
New Jersey, continued:
State Transportation Authority,
Series A, RB
5.400%, 06/15/97............... $ 500 $ 508
6.000%, 06/15/00............... 1,030 1,069
State Turnpike Authority,
Series A, RB
6.400%, 01/01/02............... 250 265
State Turnpike Authority,
Series A, RB,
Callable 01/01/96 @ 100
6.900%, 01/01/14............... 970 983
State Turnpike Authority,
Series C, RB
6.500%, 01/01/16............... 500 528
State Turnpike Authority,
Series C, RB, (AMBAC)
6.250%, 01/01/10............... 1,350 1,380
State Wastewater Authority,
Series B, RB
7.000%, 05/15/04............... 950 1,022
State Wastewater Authority,
Treatment Trust,
RB, (AMBAC)
4.600%, 03/01/06............... 1,500 1,343
4.800%, 03/01/13............... 1,590 1,355
State Water Supply District
Authority, Wanaque North
Project, Series A, RB, (MBIA)
6.500%, 11/15/06............... 510 547
State, GO
7.000%, 04/01/97............... 1,350 1,404
6.250%, 09/15/01............... 1,000 1,063
State, GO, Callable
04/01/01 @ 100.50
7.000%, 04/01/03............... 500 544
State, GO,
Prerefunded @ 101.50
7.400%, 04/15/97 (B)........... 820 872
State, Port Authority Marine
Terminal, Series G, RB
5.500%, 01/01/15 (C)........... 2,280 2,152
</TABLE>
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
------ -------
<S> <C> <C>
State, Series C, GO, Callable
01/15/99 @ 101.5
6.500%, 01/15/08................. $1,000 $ 1,046
State, Series C, GO, Callable
01/15/99 @ 101.50
6.500%, 01/15/05................. 500 525
Stony Brook, Regional Sewer
Authority, Series B, RB
5.200%, 12/01/06 (C)............. 500 482
Tinton Falls, Board of Education,
GO, (MBIA), Callable
10/15/04 @ 100
5.875%, 10/15/09................. 1,010 1,009
Union County, Pollution Control
Financing Authority, Exxon
Project, VRDN, RB
3.600%, 03/01/95 (A) (B) (C)..... 500 500
Wanaque Valley, Regional Sewer
Authority, Series B, RB,
(AMBAC)
5.650%, 09/01/08................. 585 581
Warren County, GO, (AMBAC)
4.650%, 09/15/06................. 500 464
Warren County, Pollution Control
Finance Authority, Resource
Recovery, RB, (MBIA), Callable
12/01/02 @ 102
6.350%, 12/01/04................. 500 542
Warren County, Pollution Control
Finance Authority, Series B,
RB, (MBIA)
5.700%, 12/01/03................. 500 518
Warren Hills, Regional School
District, COP, (FSA)
4.800%, 12/15/03................. 685 653
4.900%, 12/15/04................. 710 675
Warren Township, Sewer
Authority, RB
6.450%, 12/01/05................. 275 295
Weehawken, GO, (FSA)
6.150%, 07/01/04................. 350 371
</TABLE>
Continued
47
<PAGE> 219
STATEMENT OF NET ASSETS
- -------------------------------------------------------------------
February 28, 1995
NEW JERSEY MUNICIPAL
BOND FUND (CONTINUED)
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
------ -------
<S> <C> <C>
MUNICIPAL BONDS, CONCLUDED:
New Jersey, continued:
West Long Branch, Board of
Education, COP, (MBIA)
5.000%, 12/15/09................... $1,380 $ 1,259
West Windsor Plainsboro,
Regional Board of Education,
Series 1993, COP, (MBIA)
5.800%, 03/15/06................... 1,000 1,024
Winslow Township, GO, (FGIC),
Callable 10/01/02 @ 102
6.400%, 10/01/05................... 870 914
Woodbridge Township, GO
5.800%, 08/15/03................... 500 514
6.050%, 08/15/05................... 500 521
Woodbridge Township, Series C,
GO
5.000%, 09/15/11................... 1,000 884
Woodbridge Township, Sewer
Utility, Series B, GO
5.000%, 09/15/10................... 965 858
-------
94,937
-------
Puerto Rico (1.0%)
University of Puerto Rico,
Series L, RB, Callable
06/01/96 @ 102
7.750%, 06/01/07 (C)............... 915 964
-------
Total Municipal Bonds
(Cost $97,958,123)................. 96,301
-------
Total Investments (99.4%)
(Cost $97,958,123)................. 96,301
-------
OTHER ASSETS AND LIABILITIES (0.6%)
Other Assets and Liabilities, Net.. 556
-------
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
(000)
--------
<S> <C>
NET ASSETS:
Portfolio shares (unlimited authorization-no
par value) based on 8,857,006 outstanding
shares of beneficial interest............... $98,940
Accumulated net realized loss on
investments................................. (433)
Net unrealized depreciation on investments.... (1,657)
Undistributed net investment income........... 7
--------
Total Net Assets: (100.0%).................... $96,857
========
Net Asset Value and Redemption Price Per
Share....................................... $10.94
========
Maximum Public Offering Price Per Share
($10.94/96.25%)............................. $11.37
========
</TABLE>
- ----------------
(A) Variable Rate Security-the rate reported on the Statement of Net Assets is
the rate in effect on February 28, 1995.
(B) Put and Demand features exist requiring the issuer to repurchase the
instrument prior to maturity. The maturity date shown is the next demand
date.
(C) Securities are held in connection with a letter of credit or other credit
support.
AMT-Alternative Minimum Tax
COP-Certificate of Participation
GO-General Obligation
RB-Revenue Bond
VRDN-Variable Rate Demand Note
The following organizations have provided underlying credit support for certain
securities as defined in the Statement of Net Assets:
AMBAC-American Municipal Bond Assurance Company
FGIC-Financial Guaranty Insurance Company
FSA-Financial Security Assurance
MBIA-Municipal Bond Insurance Association
The accompanying notes are an integral part of the financial statements.
48
<PAGE> 220
THE COMPASS CAPITAL GROUP
- -------------------------------------------------------------------------------
PENNSYLVANIA MUNICIPAL
BOND FUND
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
------ -------
<S> <C> <C>
MUNICIPAL BONDS (104.3%)
Pennsylvania (104.3%)
Allegheny County, Children's
Hospital, Series A, RB, (MBIA),
Callable 07/01/98 @ 102
7.000%, 07/01/06................... $ 500 $ 531
Allegheny County, Series C-40,
GO, (AMBAC), Callable
05/01/02 @ 102
5.900%, 05/01/07................... 500 504
Allegheny County, Series C-42, GO
5.000%, 10/01/10................... 500 446
Beaver County, Industrial
Development Authority, J&L
Specialty Products Corporation,
RB, Callable 09/01/97 @ 100
6.600%, 09/01/10 (C)............... 500 508
Berks County, Second Series, GO,
(FGIC)
5.000%, 05/15/10................... 500 456
Bristol Township, School District,
Series A, GO, (MBIA)
5.000%, 02/15/07................... 500 465
Central Bucks, School District,
Series A, GO, (MBIA)
5.300%, 05/15/11................... 500 469
Deer Lakes, School District, GO,
(MBIA), Callable
01/15/04 @ 100
6.450%, 01/15/19 (B)............... 500 508
Lackawanna County, GO,
(AMBAC)
5.100%, 12/01/08................... 250 231
Lancaster, Parking Authority,
RB, Callable 01/01/96 @ 100
9.375%, 01/01/05................... 450 466
Manheim, Central School District,
GO, (FGIC)
6.100%, 05/15/14................... 1,000 1,000
North Penn, School District,
Series AA, GO
5.100%, 09/01/09................... 500 461
</TABLE>
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
------ -------
<S> <C> <C>
Philadelphia, Authority for
Industrial Development,
National Board of Medical
Examiners Project, RB,
Callable 05/01/02 @ 102
6.750%, 05/01/12................. $ 500 $ 516
Philadelphia, Hospitals and
Higher Education Facilities
Authority, Willis Eye Hospital
Project, RB
5.500%, 07/01/05................. 500 474
Pittsburgh, Series D, GO,
(AMBAC)
6.125%, 09/01/17................. 500 503
Pittsburgh, Urban
Redevelopment Authority,
Series A, RB
5.500%, 10/01/10................. 500 464
Pocono Mountain, School District,
Series AA, GO, (AMBAC),
Callable 04/01/02 @ 100
5.750%, 10/01/09 (B)............. 500 491
Seneca Valley, School District,
Series A, GO, (FGIC), Callable
07/01/02 @ 100
5.750%, 07/01/10................. 500 488
Southeastern Pennsylvania
Transportation Authority, RB
5.750%, 12/01/04................. 500 502
State Financing Authority, RB,
Callable 11/01/03 @ 102
6.600%, 11/01/09................. 500 507
State Higher Education
Authority, Drexel University
Project, RB, (MBIA), Callable
05/01/00 @ 100
7.250%, 05/01/10................. 500 529
State Higher Education
Authority, Susquehanna
University Project, RB,
(AMBAC), Callable
03/01/98 @ 101
6.900%, 03/01/02................. 750 787
</TABLE>
Continued
49
<PAGE> 221
STATEMENT OF NET ASSETS/SCHEDULE OF INVESTMENTS
- -------------------------------------------------------------------
February 28, 1995
PENNSYLVANIA MUNICIPAL
BOND FUND (CONTINUED)
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
------- -------
<S> <C> <C>
MUNICIPAL BONDS, CONCLUDED:
Pennsylvania, continued:
State Higher Education
Authority, Temple University
Project, VRDN, RB
3.600%, 03/01/95 (A) (B) (C)... $ 200 $ 200
State Higher Education
Authority, Thomas Jefferson
University Hospital Project,
RB, Callable 11/01/95 @ 102
9.100%, 07/01/01............... 200 209
State Higher Education
Authority, Thomas Jefferson
University Project, RB,
Prerefunded @ 102
7.550%, 11/01/00 (B)........... 500 566
State Higher Education
Authority, Trustees University
Project, Series A, RB, Callable
1/1/97 @ 100
6.625%, 01/01/17............... 250 252
State Housing Finance Agency,
Rental Housing Projects, Series
C, RB, Callable 07/01/04 @ 100
6.400%, 07/01/12 (C)........... 500 504
State Housing Finance Agency,
Single Family Mortgage
Revenue, Series 36, RB
5.250%, 04/01/07............... 500 466
State Intergovernmental
Cooperation Authority, City of
Philadelphia Funding Program,
RB, (MBIA)
5.600%, 06/15/15............... 500 472
State Turnpike Commission, Oil
Franchise Tax Project,
Series A, RB, (AMBAC)
5.875%, 12/01/08............... 500 494
State Turnpike Commission,
Series P, RB, (AMBAC)
6.000%, 12/01/09............... 500 505
</TABLE>
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
------ --------
<S> <C> <C>
Wattsburg Area, School District,
GO, (AMBAC), Callable
04/01/02 @ 100
6.350%, 04/01/15 (B)............... $ 500 $ 507
Wayne Highlands, School
District, GO, (FGIC), Callable
10/01/99 @ 100
6.000%, 04/01/12................... 500 497
West Chester, School District, GO
6.200%, 09/01/14................... 1,000 1,003
West View, Municipal Authority,
GO
9.000%, 05/15/99 (C)............... 400 460
--------
Total Municipal Bonds
(Cost $17,943,764)................. 17,441
--------
Total Investments (104.3%)
(Cost $17,943,764)................. 17,441
--------
OTHER ASSETS AND LIABILITIES (-4.3%)
Other Assets and Liabilities, Net.. (717)
--------
NET ASSETS:
Portfolio shares (unlimited
authorization-no par value)
based on 1,743,326 outstanding
shares of beneficial interest...... 17,726
Accumulated net realized loss on
investments........................ (499)
Net unrealized depreciation on
investments........................ (503)
--------
Total Net Assets: (100.0%)......... $16,724
========
Net Asset Value and Redemption
Price Per Share.................... $9.59
========
Maximum Public Offering Price
Per Share ($9.59/96.25%)........... $9.96
========
</TABLE>
- ---------------
(A) Variable Rate Security-the rate reported on the Statement of Net Assets is
the rate in effect on February 28, 1995.
(B) Put and Demand features exist requiring the issuer to repurchase the
instrument prior to maturity. The maturity date shown is the next demand
date.
(C) Securities are held in connection with a letter of credit or other credit
support.
Continued
50
<PAGE> 222
THE COMPASS CAPITAL GROUP
- -------------------------------------------------------------------------------
GO-General Obligation
RB-Revenue Bond
VRDN-Variable Rate Demand Note
The following organizations have provided underlying credit support for certain
securities as defined in the Statement of Net Assets.
AMBAC-American Municipal Bond Assurance Company
FGIC-Financial Guaranty Insurance Company
MBIA-Municipal Bond Insurance Association
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
------- -------
<S> <C> <C>
FOREIGN STOCKS (91.1%)
Argentina (0.8%)
YPF Sociedad Anonima ADR....... 14,000 $ 266
-------
Australia (3.0%)
Broken Hill Proprietary........ 33,565 462
Mim Holdings................... 130,000 200
News Corporation............... 83,294 371
-------
1,033
-------
Brazil (0.4%)
Acesita SA ADR*................ 7,000 139
-------
Chile (0.7%)
Five Arrow Chile Fund PC....... 100,000 250
Five Arrow Chile Fund Warrants,
Expire 05/31/99 *............ 20,000 9
-------
259
-------
Denmark (1.0%)
Tele Denmark A/S "B"........... 6,500 332
-------
Finland (0.7%)
Nokia AB....................... 1,700 256
-------
France (6.7%)
Alcatel Alsthom................ 2,442 197
AXA SA......................... 7,200 311
Carrefour...................... 880 359
Eaux Generale.................. 2,500 231
Groupe Danone.................. 2,250 324
L'Oreal........................ 1,500 334
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
------- -------
<S> <C> <C>
Lafarge-Coppee................... 3,378 $ 218
Societe Nationale Elf Aquitaine.. 5,068 364
-------
2,338
-------
Germany (4.3%)
Bayer AG......................... 1,300 321
Commerzbank AG................... 1,800 417
Karstadt AG...................... 1,000 404
Lufthansa AG *................... 2,500 347
-------
1,489
-------
Hong Kong (2.2%)
Hong Kong Telecommunications..... 170,000 306
Swire Pacific "A"................ 67,000 470
-------
776
-------
India (1.2%)
Hindalco Units................... 15,000 397
-------
Indonesia (1.0%)
Gadjah Tungal.................... 308,000 379
-------
Italy (1.5%)
Assicurazioni Generali SPA....... 11,450 259
Credito Italiano................. 222,368 239
Credito Italiano Warrants, Expire
12/31/97 *....................... 34,624 9
-------
507
-------
Japan (32.0%)
CSK................................ 21,000 574
Daiwa House Industries............. 39,000 570
East Japan Railway................. 267 1,178
Fuji Bank.......................... 42,000 904
KAO................................ 33,000 359
Mitsubishi Rayon................... 300,000 1,019
Nippon Paper Company............... 96,000 606
Nippon Telegraph & Telephone....... 160 1,143
Nippon Television Network.......... 2,660 546
NSK................................ 8,000 49
Pioneer Electronics................ 54,000 1,152
Sumitomo Trust & Banking........... 53,000 615
Toshiba Corporation................ 177,000 1,120
Toyo Ink Manufacturing............. 29,000 166
Yamaha Corporation................. 108,000 1,199
-------
11,200
-------
</TABLE>
The accompanying notes are an integral part of the financial statements.
51
<PAGE> 223
SCHEDULE OF INVESTMENTS
- -------------------------------------------------------------------
February 28, 1995
INTERNATIONAL EQUITY
FUND (CONTINUED)
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
------ -------
<S> <C> <C>
FOREIGN STOCKS, CONTINUED:
Malaysia (1.8%)
Malayan Banking.................. 34,500 $ 229
Perusahaan Otomobil.............. 63,000 222
Telekom Malaysia................. 27,000 189
-------
640
-------
Mexico (0.5%)
Grupo Carso SA ADR*.............. 25,000 162
Grupo Tribasa SA ADR*............ 3,000 18
-------
180
-------
Netherlands (3.9%)
ABN-Amro Holdings................ 8,532 311
Akzo NV.......................... 2,700 316
Elsevier NV...................... 39,000 382
International Nederlanden Group.. 7,147 350
-------
1,359
-------
Norway (0.7%)
Kvaerner AS Series B............. 5,467 237
-------
Singapore (2.5%)
City Developments................ 35,500 174
Jurong Shipyard.................. 38,000 317
United Overseas Bank............. 40,775 397
-------
888
-------
Spain (1.4%)
Banco de Santander............... 6,150 221
Banco de Santander New*.......... 1,466 52
Repsol Petroleum SA.............. 8,200 233
-------
506
-------
Sweden (1.8%)
Skandia Forrestry................ 15,000 265
Stora Kopparberg "B"............. 5,650 365
-------
630
-------
Switzerland (4.4%)
BBC Brown Boveri AG.............. 400 349
CS Holdings...................... 493 205
Nestle SA........................ 385 372
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
------- -------
<S> <C> <C>
Roche Holdings AG.................... 70 $ 388
Zurich Versicherung.................. 220 211
-------
1,525
-------
Taiwan (0.8%)
President Enterprise GDR*............ 2,171 40
Tuntex Distinct GDR*................. 20,004 240
-------
280
-------
Thailand (1.8%)
Siam Commercial Bank................. 34,000 295
TPI Polene......................... 44,250 344
-------
639
-------
United Kingdom (16.0%)
B.A.T. Industries.................... 72,545 478
British Petroleum.................... 81,000 508
BTR.................................. 103,830 515
BTR Warrants, Expire 11/26/98........ 1,146 1
Delta Group.......................... 33,500 240
Farnell Electronic................... 45,000 387
FKI.................................. 140,000 300
Granada Group........................ 64,000 516
Legal & General Group................ 60,000 420
Lloyds Bank.......................... 35,000 317
Reuters Holdings..................... 72,000 505
Tesco................................ 130,000 515
Unilever............................. 28,000 518
WPP Group............................ 215,000 369
-------
5,589
-------
Total Foreign Stocks
(Cost $30,983,755)................. 31,844
-------
CONVERTIBLE PREFERRED STOCKS (0.6%)
Australia (0.6%)
News Corporation..................... 47,647 189
-------
Netherlands (0.0%)
ABN-Amro Holdings.................... 349 12
-------
Total Convertible Preferred Stocks
(Cost $210,875).................... 201
-------
</TABLE>
Continued
52
<PAGE> 224
THE COMPASS CAPITAL GROUP
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000)(1) (000)
-------- -------
<S> <C> <C>
FOREIGN BONDS (1.2%)
South Korea (0.8%)
Daewoo Corporation,
6.568%, 12/31/04............. 525 $ 281
-------
Taiwan (0.4%)
Tecom Electronics & Machinery
2.750%, 04/15/04............. 170 142
-------
Total Foreign Bonds
(Cost $670,376).............. 423
-------
Total Investments
(92.9% of Net Assets)
(Cost $31,865,006)........... $32,468
-------
</TABLE>
- ---------
* Non-income producing security
ADR-American Depository Receipt
GDR-Global Depository Receipt
PC-Participating Certificate
(1) In local currency
INTERNATIONAL FIXED
INCOME FUND
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000)(1) (000)
--------- -------
<S> <C> <C>
FOREIGN BONDS (91.3%)
Austria (2.2%)
Austria Republic
6.250%, 10/16/03..... 85,000 $ 987
-------
Canada (4.9%)
Canadian Government
9.750%, 12/01/01..... 2,900 2,240
-------
France (14.0%)
Credit Foncier
6.750%, 03/30/99..... 3,000 2,044
Government of France
7.000%, 11/12/99..... 12,000 2,339
8.500%, 04/25/03..... 10,000 2,017
-------
6,400
-------
</TABLE>
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000)(1) (000)
--------- -------
<S> <C> <C>
Germany (30.9%)
African Development Bank
7.250%, 10/21/99.............. 2,000 $ 1,389
Deutschland Republic
6.250%, 01/04/24.............. 1,600 907
European Economic Community
6.500%, 03/10/00.............. 2,700 1,820
German Unity Fund
8.000%, 01/21/02.............. 3,000 2,129
KFW International Finance
7.250%, 12/03/97.............. 3,000 2,098
LKB Baden Wurt
6.000%, 05/10/99.............. 3,000 1,989
Norddeutsche Landesbank
6.000%, 01/05/04.............. 3,000 1,841
Westdeutsche Landesbank
6.250%, 09/15/03.............. 3,000 1,902
-------
14,075
-------
Italy (8.4%)
Republic of Italy
8.500%, 01/01/99.............. 3,750,000 1,993
Societe Nationale Chemin
11.500%, 10/18/99............. 3,100,000 1,840
-------
3,833
-------
Japan (17.9%)
Asian Development Bank
5.000%, 02/05/03.............. 190,000 2,029
Interamerican Development Bank
6.000%, 10/30/01.............. 180,000 2,036
Japanese Development Bank
6.500%, 09/20/01.............. 190,000 2,209
World Bank
4.500%, 03/20/03.............. 180,000 1,877
-------
8,151
-------
New Zealand (4.2%)
New Zealand Treasury,
8.224%, 03/08/95.............. 3,060 1,935
-------
</TABLE>
The accompanying notes are an integral part of the financial statements.
53
<PAGE> 225
SCHEDULE OF INVESTMENTS
- -------------------------------------------------------------------------------
February 28, 1995
INTERNATIONAL FIXED
INCOME FUND (CONTINUED)
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000)(1) (000)
-------- -------
<S> <C> <C>
FOREIGN BONDS, CONCLUDED:
United Kingdom (8.8%)
Abbey National Treasury
8.000%, 04/02/03......... 600 $877
National Power
10.625%, 03/26/01........ 600 1,003
United Kingdom Treasury
9.500%, 10/25/04......... 1,300 2,157
-------
4,037
-------
Total Foreign Bonds
(Cost $40,191,475)....... 41,658
-------
</TABLE>
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000)(1) (000)
-------- -------
<S> <C> <C>
FOREIGN CURRENCY OPTIONS (0.0%)
United States (0.0%)
Deutsche Mark Put
06/08/95....................... 2,280 $4
-------
Total Foreign Currency Options
(Cost $61,674)................. 4
-------
Total Investments (91.3% of Net
Assets) (Cost $40,253,149)..... $41,662
=======
</TABLE>
- ---------
(1) In local currency
The accompanying notes are an integral part of the financial statements.
54
<PAGE> 226
STATEMENT OF ASSETS AND LIABILITIES THE COMPASS CAPITAL GROUP
- -------------------------------------------------------------------------------
GROWTH FUND
<TABLE>
<CAPTION>
VALUE
(000)
--------
<S> <C>
ASSETS:
Investment Securities (Cost $120,023,153).................................. $131,281
Receivable-Accrued Income.................................................. 171
Receivable-Portfolio Securities Sold....................................... 8,486
Receivable-Capital Shares Sold............................................. 18
Other Assets............................................................... 29
--------
Total Assets............................................................. 139,985
--------
LIABILITIES:
Payable-Portfolio Securities Purchased..................................... (460)
Payable-Accrued Expenses................................................... (147)
Other liabilities.......................................................... (39)
--------
Total Liabilities........................................................ (646)
--------
NET ASSETS:
Portfolio shares (unlimited authorization-no par value) based on 12,374,749
outstanding shares of beneficial interest................................ 130,313
Accumulated net realized loss on investments............................... (2,299)
Net unrealized appreciation on investments................................. 11,258
Undistributed net investment income........................................ 67
--------
Total Net Assets................................................... $139,339
========
Net Asset Value and Redemption Price Per Share................................. $11.26
========
Maximum Public Offering Price Per Share ($11.26/96.25%)........................ $11.70
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
55
<PAGE> 227
STATEMENT OF ASSETS AND LIABILITIES
- -------------------------------------------------------------------
February 28, 1995
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
MARKET
VALUE
(000)
--------
<S> <C>
ASSETS:
Investment Securities (Cost $31,865,006)........................................ $32,468
Cash............................................................................ 3,207
Other Assets.................................................................... 107
-------
Total Assets................................................................ 35,782
-------
LIABILITIES:
Payable-Portfolio Securities Purchased.......................................... (677)
Other Liabilities............................................................... (168)
-------
Total Liabilities........................................................... (845)
-------
NET ASSETS:
Portfolio shares (unlimited authorization-no par value) based on 2,930,999
outstanding shares of beneficial interest..................................... 34,494
Accumulated net realized loss on foreign currency transactions.................. (68)
Net unrealized depreciation on forward foreign currency contracts, foreign
currency and translation of other assets and liabilities in foreign currency.. (82)
Net unrealized appreciation on investments...................................... 593*
-------
Total Net Assets............................................................ $34,937
=======
Net Asset Value and Redemption Price Per Share...................................... $11.92
=======
Maximum Public Offering Price Per Share ($11.92/96.25%)............................. $12.38
=======
</TABLE>
- ---------
* Net of $10,000 accrued foreign withholding taxes.
The accompanying notes are an integral part of the financial statements.
56
<PAGE> 228
THE COMPASS CAPITAL GROUP
- --------------------------------------------------------------------------------
INTERNATIONAL FIXED INCOME FUND
<TABLE>
<CAPTION>
MARKET
VALUE
(000)
-------
<S> <C>
ASSETS:
Investment Securities (Cost $40,253,149).......................................... $41,662
Cash.............................................................................. 3,476
Receivable-Accrued Income......................................................... 1,257
Other Assets...................................................................... 6
-------
Total Assets.................................................................. 46,401
-------
LIABILITIES:
Other Liabilities................................................................. (744)
-------
Total Liabilities............................................................. (744)
-------
NET ASSETS:
Portfolio shares (unlimited authorization-no par value) based on 4,341,116
outstanding shares of beneficial interest....................................... 45,195
Accumulated net realized loss on investments...................................... (827)
Net unrealized depreciation on forward foreign currency contracts, foreign
currency and translation of other assets and liabilities in foreign currency.... (617)
Net unrealized appreciation on investments........................................ 1,409
Undistributed net investment income............................................... 497
-------
Total Net Assets.............................................................. $45,657
=======
Net Asset Value and Redemption Price Per Share........................................ $ 10.52
=======
Maximum Public Offering Price Per Share ($10.52/96.25%)............................... $ 10.93
=======
</TABLE>
The accompanying notes are an integral part of the financial statements.
57
<PAGE> 229
STATEMENT OF OPERATIONS (000)
- -------------------------------------------------------------------
February 28, 1995
<TABLE>
<CAPTION>
NEW JERSEY PENNSYLVANIA
CASH U.S. MUNICIPAL MUNICIPAL MUNICIPAL EQUITY
RESERVE TREASURY MONEY MONEY MONEY INCOME
FUND FUND FUND FUND FUND FUND
-------- -------- --------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Investment income:
Interest income................................... $20,385 $16,299 $1,438 $1,224 $1,244 $ 325
Dividend income................................... - - - - - 9,344
Less: foreign taxes withheld...................... - - - - - -
------- -------- --------- ---------- ------------ ---------
Total investment income....................... 20,385 16,299 1,438 1,224 1,244 9,669
------- -------- --------- ---------- ------------ ---------
Expenses:
Administration fees............................... 769 648 81 71 82 509
Waiver of administration fees..................... - - - (26) (46) -
Investment advisory fees.......................... 1,495 1,259 180 158 147 1,981
Waiver of investment advisory fees................ - - - - (38) -
Custodian/Transfer agent fees..................... 90 69 19 28 26 88
Pricing fees...................................... 3 3 3 1 2 20
Professional fees................................. 69 53 8 7 5 42
Registration fees................................. 20 7 3 1 1 7
Trustee fees...................................... 13 12 1 1 1 8
Printing expenses................................. 51 40 5 4 2 24
Amortization of deferred organizational
costs........................................... - - - 4 5 -
Insurance and other fees.......................... 21 36 1 - 1 10
------- -------- --------- ---------- ------------ ---------
Total expenses................................ 2,531 2,127 301 249 188 2,689
------- -------- --------- ---------- ------------ ---------
Net investment income................................. 17,854 14,172 1,137 975 1,056 6,980
------- -------- --------- ---------- ------------ ---------
Net realized gain (loss) on securities sold........... (1,037) 3 (15) (7) (2) (2,336)
------- -------- --------- ---------- ------------ ---------
Net realized loss on forward foreign currency
contracts and foreign currency transactions......... - - - - - -
------- -------- --------- ---------- ------------ ---------
Change in unrealized appreciation on forward
foreign currency contracts, foreign currency
and translation of other assets and liabilities in
foreign currency.................................... - - - - - -
------- -------- --------- ---------- ------------ ---------
Change in unrealized appreciation (depreciation)
on investment securities............................ - - - - - 5,135
------- -------- --------- ---------- ------------ ---------
Net gain (loss) on investments........................ (1,037) 3 (15) (7) (2) 2,799
------- -------- --------- ---------- ------------ ---------
Increase (decrease) in net assets resulting from
operations.......................................... $16,817 $14,175 $1,122 $ 968 $1,054 $9,779
------- -------- --------- ---------- ------------ ---------
</TABLE>
- ---------
(1) Commenced operations on July 1, 1994.
* Net of $10,000 change in accrued foreign withholding taxes.
The accompanying notes are an integral part of the financial statements.
58
<PAGE> 230
THE COMPASS CAPITAL GROUP
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NEW JERSEY PENNSYLVANIA INTERNATIONAL
SMALL CAP SHORT/ FIXED MUNICIPAL MUNICIPAL MUNICIPAL INTERNATIONAL FIXED
GROWTH VALUE BALANCED INTERMEDIATE INCOME BOND BOND BOND EQUITY INCOME
FUND FUND FUND(1) FUND FUND FUND FUND FUND FUND FUND
- ------ --------- -------- ------------ ---------- --------- ---------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 188 $ 40 $ 329 $ 14,002 $ 17,273 $ 1,810 $ 5,583 $1,002 $ 90 $ 3,270
1,836 482 169 - - - - - 502 -
- - - - - - - - (63) (15)
- ------ --------- -------- ------------ ---------- --------- ---------- ------------ ------------- -------------
2,024 522 498 14,002 17,273 1,810 5,583 1,002 529 3,255
- ------ --------- -------- ------------ ---------- --------- ---------- ------------ ------------- -------------
242 44 19 408 453 59 183 34 62 81
- - (13) - - (26) (78) (22) - -
939 217 72 1,360 1,511 198 610 114 311 362
- - (34) - - (31) (2) (47) - -
56 41 19 62 66 34 46 29 85 86
8 1 - 13 16 3 6 2 14 6
21 3 2 36 40 5 16 3 7 7
3 1 4 7 6 1 2 1 8 3
2 1 - 8 7 1 3 1 1 1
12 2 2 23 25 3 10 2 4 3
- 4 1 - - - 4 6 5 5
5 - - 7 8 1 2 1 8 6
- ------ --------- -------- ------------ ---------- --------- ---------- ------------ ------------- -------------
1,288 314 72 1,924 2,132 248 802 124 505 560
- ------ --------- -------- ------------ ---------- --------- ---------- ------------ ------------- -------------
736 208 426 12,078 15,141 1,562 4,781 878 24 2,695
- ------ --------- -------- ------------ ---------- --------- ---------- ------------ ------------- -------------
1,391 970 144 (3,296) (3,223) (1,090) (431) (481) 2,720 (827)
- ------ --------- -------- ------------ ---------- --------- ---------- ------------ ------------- -------------
- - - - - - - - (357) (2,318)
- ------ --------- -------- ------------ ---------- --------- ---------- ------------ ------------- -------------
- - - - - - - - 124* 32
- ------ --------- -------- ------------ ---------- --------- ---------- ------------ ------------- -------------
1,259 (2,226) 587 (4,916) (11,359) (353) (3,631) (238) (5,307) 1,113
- ------ --------- -------- ------------ ---------- --------- ---------- ------------ ------------- -------------
2,650 (1,256) 731 (8,212) (14,582) (1,443) (4,062) (719) (2,820) (2,000)
- ------ --------- -------- ------------ ---------- --------- ---------- ------------ ------------- -------------
$3,386 $(1,048) $1,157 $ 3,866 $ 559 $ 119 $ 719 $ 159 $(2,796) $ 695
- ------ --------- -------- ------------ ---------- --------- ---------- ------------ ------------- -------------
</TABLE>
59
<PAGE> 231
STATEMENT OF CHANGES IN NET ASSETS (000)
- -------------------------------------------------------------------
For the years ended February 28,
<TABLE>
<CAPTION>
CASH RESERVE FUND U.S. TREASURY FUND
----------------------------- -----------------------
1995 1994 1995 1994
---------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
INVESTMENT OPERATIONS:
Net investment income........................ $ 17,854 $ 12,186 $ 14,172 $ 9,185
Net realized gain (loss) on securities sold.. (1,037) 2 2 3
---------- ------------ ---------- -----------
Increase in net assets resulting from
investment operations.................. 16,817 12,188 14,174 9,188
---------- ------------ ---------- -----------
DISTRIBUTIONS:
Net investment income........................ (17,854) (12,186) (14,172) (9,185)
---------- ------------ ---------- -----------
Total distributions...................... (17,854) (12,186) (14,172) (9,185)
---------- ------------ ---------- -----------
SHARE TRANSACTIONS:
Shares issued................................ 749,041 997,057 904,680 1,266,098
Shares reinvested in lieu of cash
distributions.............................. 440 184 203 90
Shares redeemed.............................. (742,657) (1,025,246) (916,643) (1,235,303)
---------- ------------ ---------- -----------
Increase (decrease) in net assets from
capital share transactions............. 6,824 (28,005) (11,762) 30,885
---------- ------------ ---------- -----------
Contribution of capital from affiliate... 887 - - -
---------- ------------ ---------- -----------
Total increase (decrease) in net assets.. 6,674 (28,003) (11,760) 30,888
---------- ------------ ---------- -----------
NET ASSETS:
Beginning of period...................... 428,649 456,652 377,276 346,388
---------- ------------ ---------- -----------
End of period............................ $ 435,323 $ 428,649 $ 365,516 $ 377,276
========== ============ ========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
60
<PAGE> 232
THE COMPASS CAPITAL GROUP
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NEW JERSEY PENNSYLVANIA
MUNICIPAL MONEY MUNICIPAL MONEY MUNICIPAL MONEY
FUND FUND FUND
- ----------------------- --------------------- ---------------------
1995 1994 1995 1994 1995 1994
- ----------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$ 1,137 $ 1,223 $ 975 $ 703 $ 1,056 $ 348
(15) (21) (7) - (2) -
- ----------- ----------- ---------- ---------- ---------- ----------
1,122 1,202 968 703 1,054 348
- ----------- ----------- ---------- ---------- ---------- ----------
(1,137) (1,223) (975) (703) (1,056) (348)
- ----------- ----------- ---------- ---------- ---------- ----------
(1,137) (1,223) (975) (703) (1,056) (348)
- ----------- ----------- ---------- ---------- ---------- ----------
117,594 382,594 70,309 53,796 94,308 52,320
10 11 64 31 17 5
(119,744) (425,385) (66,164) (53,255) (85,499) (30,767)
- ----------- ----------- ---------- ---------- ---------- ----------
(2,140) (42,780) 4,209 572 8,826 21,558
- ----------- ----------- ---------- ---------- ---------- ----------
- - - - - -
- ----------- ----------- ---------- ---------- ---------- ----------
(2,155) (42,801) 4,202 572 8,824 21,558
- ----------- ----------- ---------- ---------- ---------- ----------
47,407 90,208 39,408 38,836 26,654 5,096
- ----------- ----------- ---------- ---------- ---------- ----------
$ 45,252 $ 47,407 $ 43,610 $ 39,408 $ 35,478 $ 26,654
=========== =========== ========== ========== ========== ==========
</TABLE>
61
<PAGE> 233
STATEMENT OF CHANGES IN NET ASSETS (000)
- -------------------------------------------------------------------
For the years ended February 28,
<TABLE>
<CAPTION>
EQUITY INCOME GROWTH SMALL CAP VALUE BALANCED
FUND FUND FUND(1) FUND(2)
------------------- ------------------- -------------------- --------
1995 1994 1995 1994 1995 1994 1995
--------- --------- --------- --------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT ACTIVITIES:
Net investment income............................. $ 6,980 $ 7,515 $ 736 $ 855 $ 208 $ 148 $ 426
Net realized gain (loss) on securities sold....... (2,336) 41,208 1,391 3,193 970 2,567 144
Change in unrealized appreciation (depreciation)
on investment securities........................ 5,135 (10,640) 1,259 2,905 (2,226) 123 587
--------- --------- --------- --------- ---------- --------- --------
Increase (decrease) in net assets from
operations.................................... 9,779 38,083 3,386 6,953 (1,048) 2,838 1,157
--------- --------- --------- --------- ---------- --------- --------
DISTRIBUTIONS:
Net investment income............................. (6,918) (7,523) (789) (734) (210) (153) (426)
Net realized gains................................ (23,258) (16,519) (3,216) (4,165) (1,457) (2,095) (14)
In excess of net realized gains................... - - - (480) - - -
--------- --------- --------- --------- ---------- --------- --------
Total distributions............................. (30,176) (24,042) (4,005) (5,379) (1,667) (2,248) (440)
--------- --------- --------- --------- ---------- --------- --------
SHARE TRANSACTIONS:
Proceeds from shares issued....................... 64,959 93,961 35,581 38,391 27,932 16,075 23,513
Dividends reinvested in lieu of cash
distributions................................... 24,070 18,186 3,390 4,735 1,390 1,882 103
Value of shares redeemed.......................... (61,887) (41,083) (49,615) (47,974) (22,494) (15,567) (400)
--------- --------- --------- --------- ---------- --------- --------
Increase (decrease) in net assets from share
transactions.................................. 27,142 71,064 (10,644) (4,848) 6,828 2,390 23,216
--------- --------- --------- --------- ---------- --------- --------
Total increase (decrease) in net assets......... 6,745 85,105 (11,263) (3,274) 4,113 2,980 23,933
--------- --------- --------- --------- ---------- --------- --------
NET ASSETS:
Beginning of period............................... 282,144 197,039 150,602 153,876 22,280 19,300 -
--------- --------- --------- --------- ---------- --------- --------
End of period..................................... $288,889 $282,144 $139,339 $150,602 $ 26,393 $ 22,280 $23,933
========= ========= ========= ========= ========== ========= ========
SHARE ISSUED AND REDEEMED:
Shares issued............................... 5,236 7,483 3,258 3,454 2,413 1,301 2,353
Shares issued in dividend
reinvestment.............................. 2,089 1,472 324 433 129 158 10
Shares redeemed............................. (5,163) (3,260) (4,518) (4,331) (1,950) (1,257) (40)
--------- --------- --------- --------- ---------- --------- --------
Net shares issued (redeemed)................ 2,162 5,695 (936) (444) 592 202 2,323
========= ========= ========= ========= ========== ========= ========
</TABLE>
(1) Formerly the Aggressive Equity Fund
(2) Commenced operations on July 1, 1994
(3) Commenced operations on August 31, 1993
The accompanying notes are an integral part of the financial statements.
62
<PAGE> 234
The Compass Capital Group
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NEW JERSEY PENNSYLVANIA
SHORT/INTERMEDIATE FIXED INCOME MUNICIPAL BOND MUNICIPAL BOND MUNICIPAL BOND
FUND FUND FUND FUND FUND(3)
- ------------------- ------------------- ------------------ ------------------- -----------------
1995 1994 1995 1994 1995 1994 1995 1994 1995 1994
- --------- --------- --------- --------- --------- -------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 12,078 $ 12,640 $ 15,141 $ 13,917 $ 1,562 $ 1,424 $ 4,781 $ 3,784 $ 878 $ 338
(3,296) 1,541 (3,223) 4,806 (1,090) 823 (431) 108 (481) (17)
(4,916) (5,373) (11,359) (6,300) (353) (1,000) (3,631) (513) (238) (265)
- --------- --------- --------- --------- --------- -------- --------- --------- -------- --------
3,866 8,808 559 12,423 119 1,247 719 3,379 159 56
- --------- --------- --------- --------- --------- -------- --------- --------- -------- --------
(12,044) (12,640) (15,108) (13,917) (1,558) (1,421) (4,773) (3,784) (879) (342)
(470) (1,200) (968) (4,715) (376) (723) (73) (187) - -
- - - - - - - - - -
- --------- --------- --------- --------- --------- -------- --------- --------- -------- --------
(12,514) (13,840) (16,076) (18,632) (1,934) (2,144) (4,846) (3,971) (879) (342)
- --------- --------- --------- --------- --------- -------- --------- --------- -------- --------
34,390 132,070 31,547 93,524 8,262 18,362 21,923 73,255 4,515 21,895
6,046 8,757 4,989 8,275 475 710 1,934 1,729 101 30
(98,249) (53,591) (49,290) (31,296) (13,728) (5,301) (34,227) (10,207) (7,038) (1,773)
- --------- --------- --------- --------- --------- -------- --------- --------- -------- --------
(57,813) 87,236 (12,754) 70,503 (4,991) 13,771 (10,370) 64,777 (2,422) 20,152
- --------- --------- --------- --------- --------- -------- --------- --------- -------- --------
(66,461) 82,204 (28,271) 64,294 (6,806) 12,874 (14,497) 64,185 (3,142) 19,866
- --------- --------- --------- --------- --------- -------- --------- --------- -------- --------
268,235 186,031 272,409 208,115 35,556 22,682 111,354 47,169 19,866 -
- --------- --------- --------- --------- --------- -------- --------- --------- -------- --------
$201,774 $268,235 $244,138 $272,409 $ 28,750 $35,556 $ 96,857 $111,354 $16,724 $19,866
========= ========= ========= ========= ========= ======== ========= ========= ======== ========
3,361 12,377 3,114 8,506 808 1,658 2,019 6,417 473 2,186
597 823 499 757 48 64 180 152 11 3
(9,629) (5,034) (4,890) (2,843) (1,355) (478) (3,191) (895) (753) (176)
- --------- --------- --------- --------- --------- -------- --------- --------- -------- --------
(5,671) 8,166 (1,277) 6,420 (499) 1,244 (992) 5,674 (269) 2,013
========= ========= ========= ========= ========= ======== ========= ========= ======== ========
</TABLE>
63
<PAGE> 235
STATEMENT OF CHANGES IN NET ASSETS (000)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL
INTERNATIONAL EQUIT FIXED INCOME
FUND FUND
------------------ ---------------------
1995 1994 1995 1994
--------- -------- -------- --------
<S> <C> <C> <C> <C>
INVESTMENT ACTIVITIES:
Net investment income.......................................................... $ 24 $ 23 $2,695 $2,608
Net realized gain (loss) on securities sold.................................... 2,720 1,516 (827) 1,909
Net realized gain (loss) on forward foreign currency contracts and foreign
currency transactions........................................................ (357) (148) (2,318) 1,001
Change in unrealized appreciation (depreciation) on forward foreign currency
contracts, foreign currency, and translation of other assets and liabilities
in foreign currency.......................................................... 124* (208) 32 (1,315)
Change in unrealized appreciation (depreciation) on investment securities...... (5,307) 5,136 1,113 (130)
--------- -------- -------- --------
Increase (decrease) in net assets from operations.......................... (2,796) 6,319 695 4,073
--------- -------- -------- --------
DISTRIBUTIONS:
Net investment income.......................................................... - (30) (570) (3,474)
Net realized gains............................................................. (2,565) (778) (1,055) (850)
--------- -------- -------- --------
Total distributions........................................................ (2,565) (808) (1,625) (4,324)
--------- -------- -------- --------
SHARE TRANSACTIONS:
Proceeds from shares issued.................................................... 11,521 16,452 7,438 11,860
Dividends reinvested in lieu of cash distributions............................. 2,543 765 1,240 2,385
Value of shares redeemed....................................................... (6,989) (2,968) (8,979) (5,363)
--------- -------- -------- --------
Increase (decrease) in net assets from share transactions.................. 7,075 14,249 (301) 8,882
--------- -------- -------- --------
Total increase (decrease) in net assets.................................... 1,714 19,760 (1,231) 8,631
--------- -------- -------- --------
NET ASSETS:
Beginning of period............................................................ 33,223 13,463 46,888 38,257
--------- -------- -------- --------
End of period.................................................................. $34,937 $33,223 $45,657 $46,888
========= ======== ======== ========
SHARE ISSUED AND REDEEMED:
Shares issued.............................................................. 837 1,270 717 1,068
Shares issued in dividend reinvestment..................................... 203 59 122 215
Shares redeemed............................................................ (518) (224) (861) (474)
--------- -------- -------- --------
Net shares issued (redeemed)............................................... 522 1,105 (22) 809
========= ======== ======== ========
</TABLE>
- ---------
* Net of $10,000 change in accrued foreign withholding taxes.
The accompanying notes are an integral part of the financial statements.
64
<PAGE> 236
FINANCIAL HIGHLIGHTS THE COMPASS CAPITAL GROUP
- -------------------------------------------------------------------------------
For the period ended February 28, 1995
For a Share Outstanding Throughout each Period.
<TABLE>
<CAPTION>
RATIO RATIO OF
OF NET
RATIO EXPENSES INCOME
RATIO OF OF NET TO TO
NET DISTRIBUTIONS NET NET EXPENSES INCOME AVERAGE AVERAGE
ASSET FROM ASSET ASSETS TO TO NET NET
VALUE NET NET VALUE END OF AVERAGE AVERAGE ASSETS ASSETS
BEGINNING INVESTMENT INVESTMENT END TOTAL PERIOD NET NET (EXCLUDING (EXCLUDING
OF PERIOD INCOME INCOME OF PERIOD RETURN (000) ASSETS ASSETS WAIVERS) WAIVERS)
--------- ---------- ------------- --------- ------ -------- -------- ------- ---------- ----------
- ---------------------------------
CASH RESERVE FUND
- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 $1.00 $0.04 $(0.04) $1.00 4.28% $435,323 0.59% 4.18% 0.59% 4.18%
1994 1.00 0.03 (0.03) 1.00 2.80 428,649 0.59 2.76 0.59 2.76
1993 1.00 0.03 (0.03) 1.00 3.30 456,652 0.59 3.24 0.59 3.24
1992 1.00 0.05 (0.05) 1.00 5.42 435,591 0.59 5.25 0.59 5.25
1991 1.00 0.08 (0.08) 1.00 7.84 408,815 0.58 7.57 0.59 7.56
1990 1.00 0.09 (0.09) 1.00 8.93 365,174 0.58 8.58 0.60 8.56
1989(1) 1.00 0.08 (0.08) 1.00 7.16* 381,082 0.47 7.49 0.56 7.40
<CAPTION>
- ---------------------------------
U.S. TREASURY FUND
- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 $1.00 $0.04 $(0.04) $1.00 4.06% $365,516 0.59% 3.94% 0.59% 3.94%
1994 1.00 0.03 (0.03) 1.00 2.63 377,276 0.59 2.60 0.59 2.60
1993 1.00 0.03 (0.03) 1.00 3.00 346,388 0.62 3.10 0.62 3.10
1992 1.00 0.05 (0.05) 1.00 5.21 958,671 0.56 4.95 0.56 4.95
1991 1.00 0.07 (0.07) 1.00 7.50 434,436 0.56 7.25 0.57 7.24
1990 1.00 0.08 (0.08) 1.00 8.56 215,195 0.59 8.24 0.61 8.22
1989(2) 1.00 0.07 (0.07) 1.00 6.75* 129,971 0.50* 7.14* 0.56* 7.08*
<CAPTION>
- ---------------------------------
MUNICIPAL MONEY FUND
- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 $1.00 $0.03 $(0.03) $1.00 2.55% $45,252 0.67% 2.53% 0.67% 2.53%
1994 1.00 0.02 (0.02) 1.00 1.98 47,407 0.62 1.94 0.62 1.94
1993 1.00 0.03 (0.03) 1.00 2.48 90,208 0.67 2.45 0.67 2.45
1992 1.00 0.04 (0.04) 1.00 3.95 56,932 0.67 4.05 0.69 4.03
1991 1.00 0.06 (0.06) 1.00 5.67 176,209 0.61 5.54 0.63 5.52
1990 1.00 0.06 (0.06) 1.00 6.17 127,419 0.65 6.00 0.68 5.97
1989(1) 1.00 0.05 (0.05) 1.00 4.35* 123,300 0.57 5.03 0.66 4.94
<CAPTION>
- ---------------------------------
NEW JERSEY MUNICIPAL MONEY FUND
- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 $1.00 $0.02 $(0.02) $1.00 2.46% $43,610 0.63% 2.46% 0.70% 2.39%
1994 1.00 0.02 (0.02) 1.00 1.79 39,408 0.65 1.77 0.72 1.70
1993 1.00 0.02 (0.02) 1.00 2.19 38,836 0.73 2.17 0.76 2.14
1992(3) 1.00 0.02 (0.02) 1.00 3.53* 35,005 0.47* 3.44* 0.62* 3.29*
<CAPTION>
- ---------------------------------
PENNSYLVANIA MUNICIPAL MONEY FUND
- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 $1.00 $0.03 $(0.03) $1.00 2.71% $35,478 0.48% 2.68% 0.69% 2.47%
1994 1.00 0.02 (0.02) 1.00 2.25 26,654 0.22 2.35 0.80 1.77
1993 1.00 0.03 (0.03) 1.00 2.49 5,096 0.67 2.53 0.87 2.33
1992(4) 1.00 0.02 (0.02) 1.00 3.72* 22,145 0.58* 3.42* 0.62* 3.38*
</TABLE>
Footnotes on page 67 following table
The accompanying notes are an integral part of the financial statements.
65
<PAGE> 237
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------
For the period ended February 28, 1995
For a Share Outstanding Throughout each Period.
<TABLE>
<CAPTION>
REALIZED DISTRIBUTIONS
NET AND ----------------------------- NET
ASSET UNREALIZED IN EXCESS ASSET
VALUE NET GAINS OR NET OF NET VALUE
BEGINNING INVESTMENT (LOSSES) ON INVESTMENT CAPITAL REALIZED END OF TOTAL
OF PERIOD INCOME INVESTMENTS INCOME GAINS GAINS PERIOD RETURN
--------- ---------- ----------- ---------- -------- --------- ------ ---------
- ------------------------
EQUITY INCOME FUND
- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995 $12.71 $0.30 $ 0.14 $(0.30) $(0.99) - $11.86 3.87%
1994 11.94 0.38 1.63 (0.39) (0.85) - 12.71 16.78
1993 11.77 0.39 0.48 (0.39) (0.31) - 11.94 7.71
1992 11.12 0.45 1.24 (0.46) (0.58) - 11.77 16.07
1991 9.93 0.45 1.17 (0.43) - - 11.12 16.87
1990(5) 10.00 0.32 (0.07) (0.32) - - 9.93 7.79*
<CAPTION>
- ------------------------
GROWTH FUND
- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995 $11.31 $0.06 $ 0.22 $(0.06) $(0.27) $ - $11.26 2.75%
1994 11.19 0.05 0.46 (0.05) (0.30) (0.04) 11.31 4.74
1993 11.36 0.13 0.26 (0.13) (0.43) - 11.19 3.49
1992 11.72 0.21 1.35 (0.21) (1.71) - 11.36 14.93
1991 10.28 0.22 1.44 (0.22) - - 11.72 16.40
1990(5) 10.00 0.23 0.27 (0.22) - - 10.28 6.70*
<CAPTION>
- ------------------------
SMALL CAP VALUE FUND
- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995 $12.33 $0.10 $(0.70) $(0.10) $(0.62) - $11.01 (4.70)%
1994 12.03 0.09 1.57 (0.09) (1.27) - 12.33 14.50
1993 12.01 0.05 0.10 (0.04) (0.09) - 12.03 1.42
1992(3) 10.00 0.04 2.01 (0.04) - - 12.01 32.73*
<CAPTION>
- ------------------------
BALANCED FUND
- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995(6) $10.00 $0.27 $ 0.30 $(0.27) - - $10.30 8.94%*
<CAPTION>
- ------------------------
SHORT/INTERMEDIATE FUND
- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995 $10.47 $0.55 $(0.33) $(0.55) $(0.02) - $10.12 2.27%
1994 10.67 0.59 (0.14) (0.59) (0.06) - 10.47 3.71
1993 10.47 0.67 0.32 (0.67) (0.12) - 10.67 9.77
1992 10.17 0.70 0.34 (0.70) (0.04) - 10.47 10.58
1991 9.96 0.75 0.20 (0.74) - - 10.17 9.89
1990(5) 10.00 0.56 (0.05) (0.55) - - 9.96 6.96*
<CAPTION>
- ------------------------
FIXED INCOME FUND
- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995 $10.66 $0.61 $(0.56) $(0.61) $(0.04) - $10.06 0.65%
1994 10.88 0.62 (0.01) (0.62) (0.21) - 10.66 5.38
1993 10.52 0.71 0.66 (0.72) (0.29) - 10.88 13.69
1992 10.11 0.76 0.47 (0.76) (0.06) - 10.52 12.62
1991 9.84 0.79 0.26 (0.78) - - 10.11 11.18
1990(5) 10.00 0.53 (0.19) (0.50) - - 9.84 4.54*
<CAPTION>
RATIO RATIO OF
OF NET
RATIO EXPENSES INCOME
RATIO OF OF NET TO TO
NET EXPENSES INCOME AVERAGE AVERAGE
ASSETS TO TO NET NET
END OF AVERAGE AVERAGE ASSETS ASSETS PORTFOLIO
PERIOD NET NET (EXCLUDING (EXCLUDING TURNOVER
(000) ASSETS ASSETS WAIVERS) WAIVERS) RATE
-------- -------- ------------ ---------- ---------- ---------
- ------------------------
EQUITY INCOME FUND
- ------------------------
<S> <C> <C> <C> <C> <C> <C>
1995 $288,889 0.95% 2.47% 0.95% 2.47% 57.96%
1994 282,144 0.93 3.06 0.93 3.06 156.21
1993 197,039 1.00 3.33 1.00 3.33 70.84
1992 142,052 0.96 4.04 0.96 4.04 111.52
1991 82,167 0.94 4.65 0.98 4.61 98.75
1990(5) 32,115 0.93* 4.29* 1.06* 4.16* 54.08
<CAPTION>
- ------------------------
GROWTH FUND
- ------------------------
<S> <C> <C> <C> <C> <C> <C>
1995 $139,339 0.96% 0.55% 0.96% 0.55% 46.28%
1994 150,602 0.94 0.56 0.94 0.56 153.03
1993 153,876 0.98 1.14 0.98 1.14 114.83
1992 115,473 1.00 1.80 1.00 1.80 144.16
1991 113,335 0.92 2.08 0.96 2.04 91.32
1990(5) 81,998 0.90* 2.72* 1.00* 2.62* 41.69
<CAPTION>
- ------------------------
SMALL CAP VALUE FUND
- ------------------------
<S> <C> <C> <C> <C> <C> <C>
1995 $26,393 1.30% 0.86% 1.30% 0.86% 15.84%
1994 22,280 1.31 0.72 1.31 0.72 49.34
1993 19,300 1.38 0.45 1.38 0.45 43.00
1992(3) 16,237 1.22* 0.65* 1.27* 0.60* 9.08
<CAPTION>
- ------------------------
BALANCED FUND
- ------------------------
<S> <C> <C> <C> <C> <C> <C>
1995(6) $23,933 0.70%* 4.10%* 1.15%* 3.65%* 30.63%
<CAPTION>
- ------------------------
SHORT/INTERMEDIATE FUND
- ------------------------
<S> <C> <C> <C> <C> <C> <C>
1995 $201,774 0.85% 5.33% 0.85% 5.33% 53.66%
1994 268,235 0.84 5.02 0.84 5.02 58.80
1993 186,031 0.88 6.28 0.88 6.28 25.95
1992 128,225 0.85 6.90 0.85 6.90 57.81
1991 77,996 0.84 7.44 0.88 7.40 42.86
1990(5) 25,695 0.88* 7.41* 0.98* 7.31* 2.46
<CAPTION>
- ------------------------
FIXED INCOME FUND
- ------------------------
<S> <C> <C> <C> <C> <C> <C>
1995 $244,138 0.85% 6.02% 0.85% 6.02% 34.69%
1994 272,409 0.83 5.53 0.83 5.53 49.41
1993 208,115 0.87 6.62 0.87 6.62 36.88
1992 150,594 0.89 7.66 0.89 7.66 120.70
1991 110,935 0.82 7.97 0.86 7.93 63.33
1990(5) 71,228 0.82* 7.10* 0.98* 6.94* 12.97
</TABLE>
The accompanying notes are an integral part of the financial statements.
66
<PAGE> 238
THE COMPASS CAPITAL GROUP
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DISTRIBUTIONS
REALIZED ----------------------------
NET AND IN NET
ASSET UNREALIZED EXCESS ASSET
VALUE NET GAINS OR NET OF NET VALUE
BEGINNING INVESTMENT (LOSSES) ON INVESTMENT CAPITAL REALIZED END OF TOTAL
OF PERIOD INCOME INVESTMENTS INCOME GAINS GAINS PERIOD RETURN
--------- ---------- ----------- ---------- -------- -------- ------ -----------
- ---------------------------------
MUNICIPAL BOND FUND
- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995 $10.79 $0.49 $(0.39) $(0.49) $(0.12) - $10.28 1.17%
1994 11.06 0.51 (0.03) (0.51) (0.24) - 10.79 4.35
1993 10.43 0.51 0.64 (0.52) - - 11.06 11.42
1992 10.25 0.60 0.19 (0.60) (0.01) - 10.43 8.40
1991 9.99 0.64 0.23 (0.61) - - 10.25 8.96
1990(7) 10.00 0.14 (0.02) (0.13) - - 9.99 4.81*
<CAPTION>
- ---------------------------------
NEW JERSEY MUNICIPAL BOND FUND
- ---------------------------------
<S> <C> <C> <C> <C> <C> <C><C> <C>
1995 $11.31 $0.51 $(0.36) $(0.51) $(0.01) - $10.94 1.49%
1994 11.30 0.54 0.04 (0.54) (0.03) - 11.31 5.18
1993 10.46 0.52 0.85 (0.53) - - 11.30 13.48
1992(3) 10.00 0.34 0.45 (0.33) - - 10.46 12.33*
<CAPTION>
- ---------------------------------
PENNSYLVANIA MUNICIPAL BOND FUND
- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995 $ 9.87 $0.44 $(0.28) $(0.44) - - $9.59 1.81%
1994(8) 10.00 0.21 (0.13) (0.21) - - 9.87 1.53*
<CAPTION>
- ---------------------------------
INTERNATIONAL EQUITY FUND
- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995 $13.79 $0.01 $(0.93) $ - $(0.95) $ - $11.92 (6.99)%
1994 10.32 0.03 3.88 (0.03) (0.41) - 13.79 38.19
1993 10.62 0.09 (0.34) (0.05) - - 10.32 (2.35)
1992(3) 10.00 0.02 0.63 - - (0.03) 10.62 9.88*
<CAPTION>
- ---------------------------------
INTERNATIONAL FIXED INCOME FUND
- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995 $10.75 $0.62 $(0.48) $(0.13) $(0.24) $ - $10.52 1.50%
1994 10.76 0.65 0.46 (0.90) (0.22) - 10.75 10.24
1993 10.21 0.52 0.47 (0.30) (0.14) - 10.76 9.55
1992(3) 10.00 0.31 0.26 - (0.06) (0.30) 10.21 8.92*
<CAPTION>
RATIO RATIO OF
OF NET
RATIO EXPENSES INCOME
RATIO OF OF NET TO TO
NET EXPENSES INCOME AVERAGE AVERAGE
ASSETS TO TO NET NET
END OF AVERAGE AVERAGE ASSETS ASSETS PORTFOLIO
PERIOD NET NET (EXCLUDING (EXCLUDING TURNOVER
(000) ASSETS ASSETS WAIVERS) WAIVERS) RATE
-------- -------- ------ ----------- ---------- -----------
- ---------------------------------
MUNICIPAL BOND FUND
- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995 $ 28,750 0.75% 4.75% 0.93% 4.57% 60.86%
1994 35,556 0.69 4.66 0.96 4.39 80.70
1993 22,682 1.01 4.80 1.30 4.49 144.89
1992 11,299 0.75 5.81 1.31 5.25 114.78
1991 7,516 0.32 6.33 1.40 5.25 30.21
1990(7) 2,620 0.39* 5.85* 1.56* 4.68* 0.00
<CAPTION>
- ---------------------------------
NEW JERSEY MUNICIPAL BOND FUND
- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995 $ 96,857 0.79% 4.71% 0.87% 4.63% 28.43%
1994 111,354 0.38 4.75 0.86 4.27 12.05
1993 47,169 0.48 5.04 1.04 4.48 16.09
1992(3) 10,673 0.52* 5.35* 1.29* 4.58* 0.00
<CAPTION>
- ---------------------------------
PENNSYLVANIA MUNICIPAL BOND FUND
- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995 $ 16,724 0.65% 4.63% 1.01% 4.27% 48.91%
1994(8) 19,866 0.22* 4.27* 0.85* 3.64* 30.68
<CAPTION>
- ---------------------------------
INTERNATIONAL EQUITY FUND
- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995 $ 34,937 1.46% 0.07% 1.46% 0.07% 47.68%
1994 33,223 1.59 0.11 1.59 0.11 51.30
1993 13,463 1.63 0.91 1.63 0.91 80.72
1992(3) 12,427 1.56* 0.25* 1.61* 0.20* 22.26
<CAPTION>
- ---------------------------------
INTERNATIONAL FIXED INCOME FUND
- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995 $ 45,657 1.24% 5.96% 1.24% 5.96% 130.64%
1994 46,888 1.38 6.00 1.38 6.00 128.14
1993 38,257 1.30 6.31 1.30 6.31 115.25
1992(3) 27,744 1.33* 6.79* 1.37* 6.75* 110.13
- ----------------
</TABLE>
* Annualized.
(1) Commenced operations on March 1, 1988.
(2) Commenced operations on March 24, 1988.
(3) Commenced operations on July 1, 1991.
(4) Commenced operations on August 15, 1991.
(5) Commenced operations on May 31, 1989.
(6) Commenced operations on July 1, 1994.
(7) Commenced operations on December 1, 1989.
(8) Commenced operations on August 31, 1993.
The accompanying notes are an integral part of the financial statements.
67
<PAGE> 239
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------
February 28, 1995
1. ORGANIZATION:
The Compass Capital Group (the "Group") was organized on October 1, 1987,
and is registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company established as a
Massachusetts business trust.
The Group is authorized to issue an unlimited number of shares which are
units of beneficial interest without par value. The Group presently offers
shares of the Cash Reserve Fund, U.S. Treasury Fund, Municipal Money Fund,
New Jersey Municipal Money Fund, Pennsylvania Municipal Money Fund, Equity
Income Fund, Growth Fund, Balanced Fund, Small Cap Value Fund (formerly
Aggressive Equity), Short/Intermediate Fund, Fixed Income Fund, Municipal
Bond Fund, New Jersey Municipal Bond Fund, Pennsylvania Municipal Bond Fund,
International Equity Fund and International Fixed Income Fund (referred to
as a "Fund" or collectively as the "Funds"). Sales of shares of the Group
may be made to customers of Midlantic Bank N.A. ("Midlantic"), and to the
general public. Effective August 27, 1994, Midlantic National Bank, the
investment adviser to the Group, merged with Continental Bank and changed
its name to Midlantic Bank, N.A.
2. SIGNIFICANT ACCOUNTING POLICIES:
The following is a summary of significant accounting policies followed by
the Group in the preparation of its financial statements. The policies are
in conformity with generally accepted accounting principles.
Securities Valuation - Investments in equity securities which are traded on
a national securities exchange (or reported on the NASDAQ national market
system) are stated at the last quoted sales price if readily available for
such equity securities on each business day; other equity securities traded
in the over-the-counter market and listed equity securities for which no
sale was reported on that date are stated at the last quoted bid price.
Option contracts are valued at the last quoted bid price quoted on the
primary exchange or board of trade which such option contracts are stated.
Debt obligations exceeding sixty days to maturity for which market
quotations are readily available are valued at the most recently quoted bid
price. Foreign securities in the International Equity Fund and International
Fixed Income Fund (the "International Funds") are valued based upon
quotations from the primary market in which they are traded. Debt
obligations with sixty days or less remaining until maturity may be valued
at their amortized cost. Restricted and illiquid securities for which
quotations are not readily available are valued at fair value using methods
determined in good faith as approved by the Board of Trustees.
Security Transactions and Related Income - Security transactions are
accounted on the date the security is purchased or sold (trade date).
Interest income is recognized on the accrual basis.
Continued
68
<PAGE> 240
THE COMPASS CAPITAL GROUP
- -------------------------------------------------------------------------------
Dividend income is recorded on the ex-dividend date. Gains or losses realized
on sales of securities are determined by comparing the identified cost of the
security lot sold with the net sales proceeds. Market discounts and premiums
are not amortized for financial reporting and Federal income tax purposes in
the taxable variable net asset value funds. Market premiums and original issue
discounts are amortized for financial reporting and Federal income tax purposes
in the Municipal Bond Fund, New Jersey Municipal Bond Fund, and Pennsylvania
Municipal Bond Fund.
Repurchase Agreements - The Group may enter into repurchase agreements with
member banks of the Federal Deposit Insurance Corporation ("FDIC") with
capital, surplus and undivided profits in excess of $100,000,000 (as of the
date of their most recently published financial statements) and from registered
broker/dealers whom Midlantic deems creditworthy under guidelines approved by
the Board of Trustees, subject to the seller's agreement to repurchase such
securities at a mutually agreed-upon date and price. The repurchase price
generally equals the price paid by the Group plus interest negotiated on the
basis of current short-term rates.
Securities pledged as collateral for repurchase agreements are held by the
custodian bank until the respective agreements mature. Provisions of the
repurchase agreements ensure that the market value of the collateral, including
accrued interest thereon, is sufficient in the event of default of the
counterparty.
The Group may also invest in tri-party repurchase agreements. Securities held
as collateral for tri-party repurchase agreements are maintained in a
segregated account by the broker's custodian bank until maturity of the
repurchase agreement.
If the counterparty defaults and the value of the collateral declines or if the
counterparty enters an insolvency proceeding, realization of the collateral by
the Funds may be delayed or limited.
Distributions to Shareholders - Distributions from net investment income are
declared daily and paid monthly for the money market funds. Distributions from
net investment income are declared and paid monthly for the variable net asset
value funds, excluding the Small Cap Value Fund which is paid quarterly and the
International Funds which are paid twice annually. Any net realized capital
gains are declared and distributed to shareholders at least annually.
Differences between undistributed net investment income or accumulated net
capital gains for financial reporting and tax purposes, if permanent, are
required to be reclassified to/from paid in capital.
Federal Income Taxes - It is the intention of the Group to continue to qualify
as a regulated investment company for Federal income tax purposes and
distribute all of its taxable income and net capital gains. Accordingly, no
provision for Federal income taxes is required.
Continued
69
<PAGE> 241
Notes to Financial Statements
- -------------------------------------------------------------------
February 28, 1995
Foreign Currency Translation - The books and records of the International Funds
are maintained in U.S. dollars. Foreign currency amounts are translated into
U.S. dollars on the following basis:
(I) market value of investment securities, assets and liabilities at the
current rate of exchange; and
(II) purchases and sales of investment securities, income and expenses at the
relevant rates of exchange prevailing on the respective dates of such
transactions.
The International Funds do not isolate that portion of gains and losses on
investment securities which is due to changes in the foreign exchange rates
from that which is due to changes in market prices of such securities.
The International Funds report certain foreign currency related transactions as
components of realized and unrealized gains for financial reporting purposes,
whereas such components are treated as ordinary income for Federal income tax
purposes.
Forward Foreign Currency Contracts - The International Funds enter into forward
foreign currency contracts as a hedge against either specific transactions or
portfolio positions. These contracts are adjusted by the daily exchange rate of
the underlying currency and any gains or losses are recorded as unrealized
until the contract settlement date. Such contracts, which protect the value of
a Fund's investment securities against a decline in the value of currency, do
not eliminate fluctuations in the underlying prices of the securities. They
simply establish an exchange rate at a future date. Also, although such
contracts tend to minimize the risk of loss due to a decline in the value of a
hedged currency, at the same time they tend to limit any potential gain that
might be realized should the value of such foreign currency increase.
The aggregate principal amounts of the contracts are not recorded as the Funds
intend to settle the contracts prior to delivery.
Other - Expenses that are directly related to one of the Funds are charged
directly to that Fund. Other operating expenses of the Group are prorated to
the Funds on the basis of relative net assets.
Continued
70
<PAGE> 242
THE COMPASS CAPITAL GROUP
- --------------------------------------------------------------------------------
3. PURCHASES AND SALES OF SECURITIES:
Purchases and sales of securities (excluding short-term and U.S. Government
securities) for the period ended February 28, 1995 were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
(000) (000)
--------- --------
<S> <C> <C>
Equity Income Fund................ $164,247 $161,787
Growth Fund....................... 60,422 81,242
Small Cap Value Fund.............. 9,473 3,712
Balanced Fund..................... 16,372 3,398
Short/Intermediate Fund........... 37,876 55,497
Fixed Income Fund................. 34,404 49,965
Municipal Bond Fund............... 19,676 30,965
New Jersey Municipal Bond Fund.... 28,269 34,325
Pennsylvania Municipal Bond Fund.. 8,902 8,841
International Equity Fund......... 18,310 15,395
International Fixed Income Fund... 54,465 53,855
</TABLE>
Purchases and sales of U.S. Government securities were:
<TABLE>
<CAPTION>
PURCHASES SALES
(000) (000)
--------- -------
<S> <C> <C>
Balanced Fund............ $8,572 $1,101
Short/Intermediate Fund.. 70,018 95,269
Fixed Income Fund........ 43,792 38,074
</TABLE>
4. RELATED PARTY TRANSACTIONS:
SEI Financial Management Corporation (the "Administrator") serves the Group
as Administrator. Under the terms of the administration agreement between the
Group and the Administrator, the Administrator earns an annual fee of .18% of
the daily net assets of the Funds. SEI Financial Services Company (the
"Distributor") serves the Group as Distributor pursuant to a distribution
agreement between the Group and the Distributor. The Distributor receives no
fee for its services.
Investment advisory services are provided to the Group by Midlantic. Under
the terms of the investment advisory agreement, Midlantic is entitled to
receive fees based on a percentage of the average net assets of the Funds.
The advisory fee is equal to .35% of the average daily net assets of the Cash
Reserve Fund and U.S. Treasury Fund; .40% of the Municipal Money Fund, New
Jersey Municipal Money Fund and Pennsylvania Municipal Money Fund; .60% of
the
Continued
71
<PAGE> 243
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------
February 28, 1995
Short/Intermediate Fund, Fixed Income Fund, Municipal Bond Fund, New Jersey
Municipal Bond Fund and Pennsylvania Municipal Bond Fund; .70% of the Growth
Fund, Equity Income Fund and Balanced Fund; .80% of the International Fixed
Income Fund; and .90% of the Small Cap Value Fund and International Equity
Fund.
The Administrator and the Adviser have voluntarily agreed to waive a portion
of their fee on certain portfolios so that total expenses of such
portfolios will not exceed certain annual expense limitations.
Fisher Investments, Inc., Morgan Grenfell Investment Services Limited and
Seligman Henderson Co. have entered into subadvisory agreements with
Midlantic as subadvisors for the Small Cap Value Fund, International
Fixed Income Fund and International Equity Fund, respectively. Wellington
Management Company has also entered into a subadvisory agreement with
Midlantic for the Equity Income Fund and Growth Fund.
During the period ended February 28, 1995, Midlantic Corporation, an
affiliate of the Adviser, purchased a security from the Cash Reserve Fund
for $5,000,000 which represented the amortized cost and carrying value
of the security. The securities aggregate market value was $4,112,500 at the
time of purchase. In connection with this transaction the Fund recorded a
realized loss of $887,500 on the sale of the security in the statement of
operations along with offsetting capital contribution from the affiliate.
The transaction did not change the net asset value of the Fund.
5. INVESTMENT TRANSACTIONS:
At February 28, 1995 the total cost of securities and the net realized
gains or losses on securities sold for Federal income tax purposes was not
materially different from amounts reported for financial reporting purposes.
The aggregate unrealized appreciation and depreciation information at
February 28, 1995 for each variable net asset value fund is as follows:
<TABLE>
<CAPTION>
EQUITY SMALL SHORT/ FIXED
INCOME GROWTH CAP VALUE BALANCED INTERMEDIATE INCOME
(000) (000) (000) (000) (000) (000)
--------- -------- --------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Aggregate gross unrealized
appreciation................. $24,040 $15,696 $3,041 $ 795 $ 842 $ 2,315
Aggregate gross unrealized
depreciation................. (10,756) (4,438) (2,885) (208) (3,663) (7,483)
--------- -------- --------- -------- ------------ ---------
Net unrealized
appreciation/(depreciation).. $13,284 $11,258 $ 156 $ 587 $(2,821) $(5,168)
========= ======== ========= ======== ============ =========
</TABLE>
Continued
72
<PAGE> 244
THE COMPASS CAPITAL GROUP
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MUNICIPAL NEW JERSEY PENNSYLVANIA INTERNATIONAL INTERNATIONAL
BOND MUNICIPAL BOND MUNICIPAL BOND EQUITY FIXED INCOME
(000) (000) (000) (000) (000)
--------- -------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Aggregate gross unrealized
appreciation................. $ 189 $ 1,009 $ 25 $ 2,783 $1,777
Aggregate gross unrealized
depreciation................. (471) (2,666) (528) (2,190) (368)
--------- -------------- -------------- ------------- -------------
Net unrealized
appreciation/(depreciation).. $(282) $(1,657) $(503) $ 593 $1,409
========= ============== ============== ============= =============
</TABLE>
6. CAPITAL LOSS CARRYFORWARDS:
Under current tax law, capital losses realized after October 31 may be
deferred and treated as occurring on the first day of the following fiscal
year. The following deferred losses will be treated as arising on the first
day of the fiscal year ending February 29, 1996. Additionally, the following
capital losses realized by the funds as of February 28, 1995 are available to
offset future net capital gains through the following fiscal years:
<TABLE>
<CAPTION>
DEFERRED CAPITAL
LOSSES LOSSES EXPIRATION
FUND (000) (000) DATE
- ----- -------- ------- ----------
<S> <C> <C> <C>
Cash Reserve.................. - $ 150 2003
Municipal Money............... - 19 2003
Municipal Money............... - 16 2002
Municipal Money............... - 305 2001
New Jersey Municipal Money.... - 7 2003
Pennsylvania Municipal Money.. - 2 2003
Equity Income................. - 225 2003
Growth........................ 2,299 - -
International Fixed Income.... - 459 2003
Short/Intermediate............ 1,045 2,251 2003
Fixed Income.................. 1,010 2,214 2003
Municipal Bond................ 369 722 2003
New Jersey Municipal Bond..... 55 378 2003
Pennsylvania Municipal Bond... 410 89 2003
</TABLE>
Continued
73
<PAGE> 245
Notes to Financial Statements
- -------------------------------------------------------------------------------
February 28, 1995
7. FORWARD FOREIGN CURRENCY CONTRACTS
A summary of forward foreign currency contracts that were outstanding at
February 28, 1995 is as follows:
<TABLE>
<CAPTION>
NET
CONTRACTS TO UNREALIZED
SETTLEMENT DELIVER/ APPRECIATION/
DATES RECEIVE IN EXCHANGE FOR (DEPRECIATION)
----------------- ---------------- --------------- --------------
INTERNATIONAL EQUITY FUND
<S> <C> <C> <C> <C>
Foreign Currency Sale 04/20/95 JY 378,070,000 $ 3,850,000 $ (87,770)
--------------- --------------
<CAPTION>
INTERNATIONAL FIXED INCOME FUND
<S> <C> <C> <C> <C>
Foreign Currency Sales 03/08/95 NZ 1,600,000 $ 1,021,440 $ 8,857
03/14/95-04/21/95 DM 12,480,000 8,165,044 (409,269)
03/14/95-05/16/95 JY 740,000,000 7,542,623 (171,377)
03/14/95 SP 260,000,000 1,963,598 (72,331)
03/15/95 FF 10,500,000 1,938,342 (107,923)
04/21/95-05/16/95 UK 1,465,000 2,280,766 (27,628)
04/21/95-05/16/95 IT2,920,000,000 1,782,389 41,989
04/25/95 CA 1,100,000 770,470 (17,116)
--------------- --------------
$25,464,672 $(754,798)
=============== ==============
Foreign Currency Purchases 03/08/95 NZ 700,000 $ 440,538 $ 2,467
03/14/95 DM 330,000 219,124 7,395
03/14/95 SP 260,000,000 1,981,481 54,448
04/25/95 CA 1,100,000 774,806 12,780
--------------- --------------
$ 3,415,949 $ 77,090
=============== ==============
$(677,708)
==============
</TABLE>
CURRENCY LEGEND
- --------------------
CA Canadian Dollar
DM German Marks
FF French Francs
IT Italian Lira
JY Japanese Yen
NZ New Zealand Dollar
SP Spanish Pesetas
UK British Pounds Sterling
74
<PAGE> 246
To the Shareholders and Trustees of
The Compass Capital Group:
We have audited the accompanying statements of net assets of the Cash Reserve
Fund, the U.S. Treasury Fund, the Municipal Money Fund, the New Jersey
Municipal Money Fund, the Pennsylvania Municipal Money Fund, the Equity Income
Fund, the Growth Fund, the Small Cap Value Fund, the Balanced Fund, the
Short/Intermediate Fund, the Fixed Income Fund, the Municipal Bond Fund, the
New Jersey Municipal Bond Fund, and the Pennsylvania Municipal Bond Fund, and
the schedules of investments and statements of assets and liabilities of the
Growth Fund, the International Equity Fund, and the International Fixed Income
Fund of the Compass Capital Group (the "Group"), as of February 28, 1995 and
the related statements of operations for the year then ended, and the statement
of changes in net assets and the financial highlights for each of the
respective periods presented. These financial statements and the financial
highlights are the responsibility of the Group's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free from material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
February 28, 1995, by correspondence with the Fund's custodian and brokers, or
other auditing procedures where correspondence from brokers was not received.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective funds comprising the Compass Capital Group as of February 28,
1995, the results of their operations for the year then ended, the changes in
their net assets for each of the two years then ended and the financial
highlights for each of the respective periods presented in conformity with
generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
- ---------------------------
COOPERS & LYBRAND, L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
April 14, 1995
<PAGE> 247
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
LETTER TO SHAREHOLDERS..................................................
STATEMENTS OF NET ASSETS/SCHEDULE OF INVESTMENTS........................
STATEMENTS OF ASSETS AND LIABILITIES....................................
STATEMENTS OF OPERATIONS................................................
STATEMENTS OF CHANGES IN NET ASSETS.....................................
FINANCIAL HIGHLIGHTS....................................................
NOTES TO FINANCIAL STATEMENTS...........................................
</TABLE>
<PAGE> 248
STATEMENT OF NET ASSETS THE COMPASS CAPITAL GROUP
-------------------------------------------------------------------------
August 31, 1995 (Unaudited)
CASH RESERVE FUND
<TABLE>
<CAPTION>
FACE AMOUNT VALUE
(000) (000)
----------- ---------
<S> <C> <C>
COMMERCIAL PAPER (23.1%)
ABN/AMRO New York
5.740%, 10/10/95................ $ 5,000 $ 4,969
Asset Securitization Cooperative
5.765%, 10/19/95................ 4,500 4,466
Bayerische Landesbank Girozentrale
5.740%, 09/18/95................ 5,000 4,987
Commerzbank A.G.
5.735%, 09/11/95................ 5,000 4,992
E.I. Dupont de Nemours
5.720%, 11/07/95................ 10,000 9,896
International Nederlanden U.S.
Funding Corporation
5.700%, 10/16/95................ 5,000 4,965
Jet Funding
5.898%, 10/31/95................ 10,197 10,097
MCA Funding
6.340%, 09/12/95................ 8,000 7,985
Mitsubishi International
5.830%, 10/24/95................ 5,000 4,958
New South Wales Treasury
5.600%, 01/09/96................ 10,000 9,803
New Zealand
5.781%, 11/20/95................ 4,000 3,949
Rexam PLC
5.750%, 09/13/95................ 5,000 4,991
5.793%, 09/19/95................ 5,000 4,986
Sherwood Medical
5.800%, 09/27/95................ 5,000 4,979
South Australian Government
Financing Authority
5.700%, 10/13/95................ 5,000 4,967
Southland
5.760%, 09/12/95................ 5,000 4,991
5.808%, 10/25/95................ 5,000 4,957
State Bank of New South Wales,
Delaware
6.270%, 09/07/95................ 10,000 9,990
---------
Total Commercial Paper
(Cost $110,928,205)............. 110,928
---------
CORPORATE BONDS (21.4%)
Abbey National North America
Corporation
7.400%, 12/15/95................ 10,000 10,024
American Express Centurion Bank
5.875%, 09/12/95 (A)............ 10,000 10,000
5.938%, 09/26/95 (A)............ 10,000 9,999
Associates
8.375%, 06/01/96................ 4,100 4,172
Bear Stearns
6.313%, 09/15/95................ $ 3,500 $ 3,500
FCC National Bank, Delaware
5.700%, 09/06/95 (A)............ 10,000 10,000
Ford Motor Credit
8.625%, 04/15/96................ 6,100 6,187
General Electric Capital
5.950%, 09/01/95 (A)............ 5,000 5,000
5.960%, 09/01/95 (A)............ 5,000 5,000
6.150%, 09/01/95 (A)............ 10,000 9,999
Merrill Lynch
5.620%, 09/06/95 (A)............ 5,000 5,000
Nationsbank, North Carolina
5.375%, 12/01/95................ 10,350 10,330
Toyota Motor Credit
5.980%, 09/01/95 (A)............ 10,000 9,996
5.680%, 09/06/95 (A)............ 3,700 3,698
---------
Total Corporate Bonds
(Cost $102,905,314)............. 102,905
---------
ASSET BACKED SECURITIES (7.7%)
Ford Credit Auto Lease Trust
6.000%, 05/15/96................ 4,000 3,999
John Deere Owner Trust
5.812%, 09/15/95 (A)............ 8,113 8,113
Steers
6.190%, 09/01/95 (A)............ 10,000 10,000
5.987%, 09/18/95 (A)............ 10,000 10,000
5.941%, 11/18/95 (A)............ 5,000 5,000
---------
Total Asset Backed Securities
(Cost $37,112,288).............. 37,112
---------
GUARANTEED INVESTMENT CONTRACT
(2.1%)
Peoples Security Life
6.070%, 09/01/95 (A)............ 10,000 10,000
---------
Total Guaranteed Investment
Contract (Cost $10,000,000)..... 10,000
---------
U.S. GOVERNMENT AGENCY OBLIGATIONS
(12.0%)
Federal Home Loan Bank
6.100%, 06/05/96................ 10,000 9,996
5.725%, 07/25/96................ 10,000 10,000
Federal Home Loan Mortgage
Corporation
6.000%, 09/01/95 (A)............ 5,000 5,005
Federal National Mortgage
Association
6.063%, 11/13/95................ 5,000 4,940
5.590%, 07/01/96................ 10,000 9,987
</TABLE>
Continued
<PAGE> 249
STATEMENT OF NET ASSETS
-------------------------------------------------------------------------
August 31, 1995 (Unaudited)
CASH RESERVE
FUND (CONTINUED)
<TABLE>
<CAPTION>
FACE AMOUNT VALUE
(000) (000)
----------- ---------
<S> <C> <C>
Small Business Administration
7.250%, 09/01/95 (A)............ $ 7,394 $ 7,554
Student Loan Marketing Association
5.670%, 09/06/95 (A)............ 5,000 4,983
6.080%, 07/01/96 (A)............ 5,000 5,000
---------
Total U.S. Government Agency
Obligations
(Cost $57,464,745).............. 57,465
---------
CERTIFICATES OF DEPOSIT (6.3%)
Bank of Tokyo
5.870%, 10/16/95................ 10,000 10,000
Canadian Imperial Bank
5.760%, 09/20/95................ 5,000 5,000
Mitsubishi Bank, New York
5.900%, 09/08/95................ 5,000 5,000
Sanwa Bank, New York
5.850%, 09/01/95................ 5,000 5,000
5.830%, 10/24/95................ 5,000 5,000
---------
Total Certificates of Deposit
(Cost $30,000,371).............. 30,000
---------
EURO CERTIFICATES OF DEPOSIT (2.1%)
Abbey National PLC, London
6.730%, 04/02/96................ 5,000 5,008
Abbey National Treasury Services
6.400%, 05/30/96................ 5,000 5,000
---------
Total Euro Certificates of Deposit
(Cost $10,007,857).............. 10,008
---------
BANKERS ACCEPTANCES (5.3%)
Bank of Tokyo, Los Angeles
5.900%, 11/06/95................ 5,000 4,947
Dai Ichi Kangyo Bank, New York
5.890%, 10/30/95................ 5,000 4,953
Mitsubishi International Bank, New
York
5.740%, 09/08/95................ 5,000 4,994
5.725%, 11/17/95................ 5,000 4,940
Sanwa Bank, New York
5.710%, 10/02/95................ 5,700 5,673
---------
Total Bankers Acceptances
(Cost $25,506,625).............. 25,507
---------
BANK NOTE (1.7%)
First National Bank of Chicago
6.130%, 08/26/96................ 8,000 8,000
---------
Total Bank Note
(Cost $8,000,000)............... 8,000
---------
REPURCHASE AGREEMENTS (15.7%)
First Boston, 5.875%, dated
08/31/95, matures 09/01/95,
repurchase price $45,007,344
(collateralized by U.S. Treasury
Strips, par value $67,559,769,
maturities ranging from 11/15/95
to 05/15/14, market value
$46,279,516).................... $ 45,000 $ 45,000
Merrill Lynch, 5.875%, dated
08/31/95, matures 09/01/95,
repurchase price $30,557,986
(collateralized by U.S. Treasury
Bond, par value $375,000,
7.875%, 02/15/21, market value
$422,926, Federal Home Loan
Mortgage Corporation,
Collateralized Mortgage
Obligations, par value
$29,248,520, coupons ranging
from 0.00% to 8.50%, maturities
ranging from 03/15/97 to
07/15/23, market value
$25,926,413, Federal National
Mortgage Association,
Collateralized Mortgage
Obligation, par value
$4,700,000, 7.50%, 03/25/07,
market value $4,817,649)........ 30,553 30,553
---------
Total Repurchase Agreements
(Cost $75,553,000).............. 75,553
---------
Total Investments (97.4%)
(Cost $467,478,405)............. 467,478
---------
OTHER ASSETS AND LIABILITIES (2.6%)
Other Assets and Liabilities,
Net............................. 12,548
---------
NET ASSETS:
Portfolio shares (unlimited
authorization--no par value)
based on 480,111,786 outstanding
shares of beneficial interest... 480,112
Accumulated net realized loss on
investments..................... (86)
---------
Total Net Assets: (100.0%)........ $ 480,026
=========
Net Asset Value, Offering Price
and Redemption Price Per
Share........................... $ 1.00
=========
</TABLE>
- ------------------
(A) Variable Rate Security--The rate reported on the Statement of Net Assets is
the rate in effect on August 31, 1995.
PLC--Public Limited Company
The accompanying notes are an integral part of the financial statements.
<PAGE> 250
THE COMPASS CAPITAL GROUP
- --------------------------------------------------------------------------------
U.S. TREASURY FUND
<TABLE>
<CAPTION>
FACE AMOUNT VALUE
(000) (000)
----------- ---------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS (50.4%)
U.S. Treasury Bills
5.061%, 09/14/95................ $ 30,000 $ 29,945
5.366%, 09/21/95................ 55,000 54,833
5.373%, 09/28/95................ 25,000 24,900
5.410%, 10/12/95................ 25,000 24,847
5.390%, 01/18/96................ 10,000 9,789
5.755%, 05/02/96................ 15,000 14,438
U.S. Treasury Notes
3.875%, 10/31/95................ 25,000 24,918
4.250%, 11/30/95................ 15,000 14,942
4.000%, 01/31/96................ 15,000 14,896
4.625%, 02/15/96................ 25,000 24,879
5.875%, 05/31/96................ 10,000 10,007
U.S. Treasury Strips
5.685%, 11/15/95................ 25,000 24,718
6.140%, 02/15/96................ 10,000 9,731
---------
Total U.S. Treasury Obligations
(Cost $282,843,379)............. 282,843
---------
REPURCHASE AGREEMENTS (49.5%)
First Boston, 5.80% dated
08/31/95, matures 09/01/95,
repurchase price $55,000,000
(collateralized by U.S. Treasury
Bond, par value $53,271,000,
7.25%, maturing 08/15/22, market
value $56,219,133).............. 55,000 55,000
First Boston, 5.875%, dated
08/31/95, matures 09/01/95,
repurchase price $80,000,000
(collateralized by U.S. Treasury
Coupon Strips, par value
$117,537,005, maturities ranging
from 11/15/95 to 08/15/04,
market
value $82,216,664).............. 55,000 80,000
Goldman Sachs Group, 5.75%, dated
08/31/95, matures 09/01/95,
repurchase price $15,000,000
(collateralized by U.S Treasury
Notes, par value $15,033,000,
maturities ranging from 06/30/96
to 01/15/00, rates ranging from
5.625% to 6.375%, market value
$15,300,855).................... $ 15,000 $ 15,000
Merrill Lynch, 5.75%, dated
08/31/95, matures 09/01/95,
repurchase price $127,456,000
(collateralized by U.S. Treasury
Notes, par value $126,597,000,
maturities ranging from 2/15/98
to 08/15/98, rates ranging from
5.125% to 9.00%, market value
$130,008,310)................... 127,456 127,456
---------
Total Repurchase Agreements
(Cost $277,456,000)............. 277,456
---------
Total Investments (99.9%)
(Cost $560,299,379)............. 560,299
---------
OTHER ASSETS AND LIABILITIES (0.1%)
Other Assets and Liabilities,
Net............................. 416
---------
NET ASSETS:
Portfolio shares (unlimited
authorization--no par value) based
on 560,709,434 outstanding shares
of beneficial interest............ 560,709
Accumulated net realized gain on
investments....................... 6
---------
Total Net Assets: (100.0%)......... $ 560,715
=========
Net Asset Value, Offering Price and
Redemption Price Per Share........ $ 1.00
=========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 251
STATEMENT OF NET ASSETS
-------------------------------------------------------------------------
August 31, 1995 (Unaudited)
MUNICIPAL MONEY MARKET FUND
<TABLE>
<CAPTION>
FACE AMOUNT VALUE
(000) (000)
----------- ---------
<S> <C> <C>
MUNICIPAL BONDS (99.1%)
Alabama (2.9%)
Phoenix City, Industrial
Development Board, Mead Coated
Board Project, Series A, VRDN,
RB
3.600%, 09/01/95 (A) (C)........ $ 1,000 $ 1,000
---------
Colorado (1.3%)
Jefferson County, School District,
Series C, Prerefunded @ 100, GO
8.200%, 12/15/95................ 440 445
---------
Georgia (4.3%)
Forsythe County, Industrial
Development Authority, American
BOA Incorporated Project, VRDN,
RB
3.900%, 09/07/95 (A) (C)........ 1,000 1,000
Savannah, Economic Development
Authority, Home Depot
Project-B, VRDN, RB
3.900%, 09/07/95 (A) (C)........ 500 500
---------
1,500
---------
Idaho (5.7%)
State, Housing Finance Authority,
RB
4.250%, 01/01/96 (C)............ 1,990 1,990
---------
Illinois (3.6%)
Chicago, VRDN, GO
3.650%, 09/07/95 (A) (C)........ 945 945
Southwestern, Industrial
Development Authority, Solid
Waste Disposal, Shell Oil
Company, Wood River Project,
VRDN, RB
3.650%, 09/01/95 (A)............ 300 300
---------
1,245
---------
Louisiana (1.4%)
New Orleans, Aviation Board,
Series A, VRDN, RB, (MBIA)
3.500%, 09/07/95 (A)............ 500 500
---------
Minnesota (4.5%)
Minneapolis-St. Paul, Housing
Finance Authority, Series A, RB
4.500%, 11/01/95 (B) (C)........ 625 625
Minneapolis-St. Paul, Housing
Finance Authority, Series B, RB
4.250%, 02/01/96................ $ 955 $ 955
---------
1,580
---------
Montana (2.5%)
State, Series B-2, RB, AMT
4.625%, 10/01/95 (B) (C)........ 900 900
---------
New Hampshire (2.9%)
Hillsborough County, GO, TAN
3.780%, 12/28/95................ 1,000 1,000
---------
New Jersey (3.4%)
Mercer County, TAN
4.000%, 04/15/96................ 1,000 1,003
State, Economic Development
Authority, Hoffman-La Roche
Project, VRDN, RB
3.350%, 09/01/95 (A) (C)........ 200 200
---------
1,203
---------
New Mexico (1.4%)
Eddy County, Pollution Control IMC
Fertilizer Incorporated Project,
VRDN, RB
3.600%, 09/07/95 (A) (C)........ 500 500
---------
New York (4.3%)
Nassau County, BAN
5.250%, 11/15/95................ 1,000 1,002
New York City, EDL Construction
Project, Series A, RB, (MBIA)
4.000%, 10/01/95................ 500 500
---------
1,502
---------
Oregon (5.7%)
Klamath Falls, Salt Caves
Hydroelectric Project, Series A,
RB
4.400%, 05/01/96 (B)............ 1,000 1,000
Port of Saint Helens, Pollution
Control, General Electric
Project, Series A, VRDN, RB
3.650%, 09/01/95 (A) (C)........ 600 600
State, GO
4.250%, 03/01/96................ 390 390
---------
1,990
---------
</TABLE>
Continued
<PAGE> 252
THE COMPASS CAPITAL GROUP
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMOUNT VALUE
(000) (000)
----------- ---------
<S> <C> <C>
MUNICIPAL BONDS, CONTINUED:
Pennsylvania (33.3%)
Allegheny County, Hospital
Development Authority, Allegheny
General Hospital, Series B,
VRDN, RB
3.450%, 09/01/95 (A)............ $ 2,000 $ 2,000
Berks County, Industrial
Development Authority, Sixth and
Penn Street Project, VRDN, RB
3.500%, 09/01/95 (A) (C)........ 200 200
Chester County, Industrial
Development Authority, The Woods
Project, VRDN, RB
3.700%, 09/07/95 (A) (C)........ 1,200 1,200
Delaware County, Industrial
Development Authority, Scott
Paper Company Project, Series A,
VRDN, RB
3.650%, 09/07/95 (A) (C)........ 500 500
Delaware County, Industrial
Development Authority, United
Parcel Services Project, Series
85, VRDN, RB
3.400%, 09/01/95 (A)............ 1,100 1,100
Langhorne, Hospital Revenue
Authority, Franciscan Health
Systems Project, Series C, VRDN,
RB
3.400%, 09/01/95 (A) (C)........ 600 600
Montour County, Geisinger Health
System Authority, Series 1992 B,
VRDN, RB
3.250%, 09/01/95 (A) (C)........ 1,900 1,900
Philadelphia, Series A, TRAN
4.500%, 06/27/96................ 1,000 1,004
Pottsgrove, School District,
Series A, GO (AMBAC)
3.750%, 10/15/95................ 685 685
Sayre, Health Care Facility
Authority, Capital Financing
Project, Series K, VRDN, RB,
(AMBAC)
3.500%, 09/07/95 (A)............ 800 800
Schuylkill County, Industrial
Development Authority, Westwood
Energy Project, VRDN, RB
3.600%, 09/01/95 (A) (C)........ 1,000 1,000
Venango, Industrial Development
Authority, Scrubgrass Project,
TECP
3.500%, 10/06/95................ $ 700 $ 700
---------
11,689
---------
Puerto Rico (2.8%)
Puerto Rico Government Development
Bank, TECP
3.400%, 09/08/95................ 1,000 1,000
---------
Rhode Island (1.7%)
State, Health & Education
Facilities, RB
5.000%, 09/01/95................ 600 600
---------
South Carolina (3.4%)
Charleston County, School
District, Series A, GO
4.400%, 02/01/96 (C)............ 695 697
State, Economic Development
Authority, Wellman Project, VRDN
3.700%, 09/01/95 (A) (C)........ 500 500
---------
1,197
---------
Texas (4.3%)
Houston, Water & Sewer Authority,
TECP
4.100%, 11/30/95................ 1,500 1,500
---------
Virginia (6.0%)
Hopewell, Industrial Development
Authority, Hadson Power, Series
13A, VRDN, RB, AMT
3.700%, 09/01/95 (A) (C)........ 1,100 1,100
State, Housing & Development
Authority, Series C, RB
3.700%, 10/12/95................ 1,000 1,000
---------
2,100
---------
Wyoming (3.7%)
Green River, VRDN, RB, AMT
3.700%, 09/01/95 (A) (C)........ 1,300 1,300
---------
Total Municipal Bonds
(Cost $34,741,426).............. 34,741
---------
Total Investments (99.1%)
(Cost $34,741,426).............. 34,741
---------
OTHER ASSETS AND LIABILITIES (0.9%)
Other Assets and Liabilities,
Net............................... 322
---------
</TABLE>
Continued
<PAGE> 253
STATEMENT OF NET ASSETS
-------------------------------------------------------------------------
August 31, 1995 (Unaudited)
MUNICIPAL MONEY
MARKET FUND (CONTINUED)
<TABLE>
<CAPTION>
VALUE
(000)
---------
<S> <C>
NET ASSETS:
Portfolio shares (unlimited
authorization-no par value)
based on 35,087,620 outstanding
shares of beneficial interest... 35,388
Accumulated net realized loss on
investments..................... (325)
---------
Total Net Assets: (100.0%)........ $ 35,063
=========
Net Asset Value, Offering Price
and Redemption Price Per
Share........................... $ 1.00
=========
</TABLE>
- ------------------
(A) Variable Rate Security--The rate reported on
the Statement of Net Assets is the rate in effect
on August 31, 1995.
(B) Put and Demand features exist requiring the issuer to repurchase the
instrument prior to maturity. The maturity date shown is the next demand
date.
(C) Securities are held in connection with a letter of credit or other credit
support.
AMT--Alternative Minimum Tax
BAN--Bond Anticipation Note
GO--General Obligation
RB--Revenue Bond
TAN--Tax Anticipation Note
TRAN--Tax and Revenue Anticipation Note
TECP--Tax Exempt Commercial Paper
VRDN--Variable Rate Demand Note
The following organizations have provided
underlying credit support for certain securities
as defined in the Statement of Net Assets:
AMBAC--American Municipal Bond Assurance Company
MBIA--Municipal Bond Insurance Association
NEW JERSEY MUNICIPAL
MONEY FUND
<TABLE>
<CAPTION>
FACE AMOUNT VALUE
(000) (000)
----------- ---------
<S> <C> <C>
MUNICIPAL BONDS (103.0%)
New Jersey (91.3%)
Berkeley Heights, BAN
4.750%, 11/09/95................ $ 2,765 $ 2,767
Bernards Township, Sewer
Authority, RB,
Prerefunded @ 100
5.350%, 12/15/95 (B) (C)........ 2,000 2,008
East Windsor, BAN
4.550%, 04/18/96................ 2,000 2,007
Fort Lee, TAN
4.000%, 02/02/96................ 2,000 2,004
Galloway Township, BAN
4.100%, 03/14/96................ 1,000 1,002
Hackensack, BAN, GO
5.500%, 12/20/95................ 850 852
Jersey City, BAN, GO
5.250%, 11/17/95................ 2,000 2,002
Mercer County, Improvement
Authority, BAN
4.100%, 03/15/96................ 1,000 1,002
Montgomery Township, School
District Authority, TAN
5.000%, 03/01/96................ 1,500 1,505
North Brunswick Township, BAN
3.890%, 05/22/96................ 775 776
Port Authority, Versatile
Structure Obligation, Series 1,
VRDN,
RB, AMT
3.450%, 09/01/95 (A) (B) (C).... 3,300 3,300
Port Authority, Versatile
Structure Obligation, Series 2,
VRDN, RB
3.250%, 09/01/95 (A) (B) (C).... 1,400 1,400
Port Authority, Versatile
Structure Obligation, Series 3,
VRDN, RB
3.300%, 09/01/95 (A) (B) (C).... 1,500 1,500
Salem County, Pollution Control,
VRDN, RB
3.700%, 09/01/95 (A) (B)........ 500 500
Sayreville, TAN
4.000%, 04/16/96................ 1,500 1,503
State, Economic Development
Authority, TECP
3.900%, 09/01/95 (C)............ 1,000 1,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 254
THE COMPASS CAPITAL GROUP
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMOUNT VALUE
(000) (000)
----------- ---------
<S> <C> <C>
State, Economic Development
Authority, 400 International
Drive Partners Project, VRDN, RB
3.250%, 09/01/95 (A) (B) (C).... $ 700 $ 700
State, Economic Development
Authority, Filtra Corporation
Project, VRDN, RB
3.650%, 09/07/95 (A) (B) (C).... 1,000 1,000
State, Economic Development
Authority, First Management
Fellowship Project, Series B,
VRDN, RB
3.550%, 09/06/95 (A) (B) (C).... 1,000 1,000
State, Economic Development
Authority, Franciscan Oaks
Project, Series B, VRDN, RB
3.400%, 09/06/95 (A) (B) (C).... 400 400
State, Economic Development
Authority, Hillcrest Health
Services Systems Project, VRDN,
RB
3.350%, 09/06/95 (A) (B) (C).... 600 600
State, Economic Development
Authority, Hoffman-La Roche
Project, VRDN, RB, AMT
3.350%, 09/01/95 (A) (B) (C).... 700 700
State, Economic Development
Authority, Natural Gas
Facilities, Series A, VRDN, RB,
(AMBAC)
3.050%, 09/01/95 (A) (B)........ 900 900
State, Economic Development
Authority, Pollution Control,
Exxon Project, VRDN, RB
3.350%, 09/01/95 (A) (B)........ 1,700 1,700
State, Economic Development
Authority, Russell Berrie
Project, VRDN, RB
3.350%, 09/06/95 (A) (B) (C).... 200 200
State, Economic Development
Authority, Series C-1, VRDN, RB
3.650%, 09/07/95 (A) (B) (C).... 530 530
State, Economic Development
Authority, Series J, VRDN, RB,
AMT 3.600%, 09/06/95 (A) (B)
(C)............................. 650 650
State, Health Care Facilities
Hospital, Capital Asset
Financing, Series A, VRDN, RB
3.350%, 09/07/95 (A) (B)........ $ 600 $ 600
State, Health Care Facilities
Hospital, Capital Asset
Financing, Series D, VRDN, RB
3.350%, 09/07/95 (A) (B)........ 200 200
State, Health Care Facilities
Hospital, Hospital And Nursing
Home Improvement, VRDN, RB
3.350%, 09/07/95 (A) (B)........ 200 200
State, Highway Authority, Garden
State Parkway Project, RB,
Prerefunded @ 102
7.125%, 01/01/96 (B) (C)........ 1,740 1,793
State, Transportation Trust Fund,
Series A, RB
4.500%, 12/15/95................ 1,000 999
State, Turnpike Authority, Series
D, VRDN, RB
3.050%, 09/06/95 (A) (B)........ 4,000 3,999
Union County, Industrial Pollution
Control, Exxon Project, VRDN, RB
3.250%, 09/01/95 (A) (B)........ 1,000 1,000
Woodbridge Township, BAN, GO
4.480%, 10/06/95................ 3,000 3,000
---------
45,299
---------
Oregon (1.4%)
Port of Saint Helens, Pollution
Control, General Electric
Project, Series A, VRDN, RB, AMT
3.650%, 09/01/95 (A) (B) (C).... 700 700
---------
Puerto Rico (10.3%)
Government Development Bank, TECP
3.400%, 09/08/95................ 2,000 2,000
Government Development Bank, VRDN,
RB
3.200%, 09/06/95 (A) (B) (C).... 3,100 3,100
---------
5,100
---------
</TABLE>
Continued
<PAGE> 255
STATEMENT OF NET ASSETS
-------------------------------------------------------------------------
August 31, 1995 (Unaudited)
NEW JERSEY MUNICIPAL
BOND FUND (CONTINUED)
<TABLE>
<CAPTION>
VALUE
(000)
---------
<S> <C>
MUNICIPAL BONDS, CONCLUDED:
Puerto Rico, continued:
Total Municipal Bonds (Cost
$51,098,548)...................... $ 51,099
---------
Total Investments (103.0%) (Cost
$51,098,548)...................... 51,099
---------
OTHER ASSETS AND LIABILITIES
(-3.0%)
Other Assets and Liabilities,
Net............................... (1,471)
---------
NET ASSETS:
Portfolio shares (unlimited
authorization-no par value) based
on 49,635,696 outstanding shares
of beneficial interest............ 49,636
Accumulated net realized loss on
investments....................... (8)
---------
Total Net Assets: (100.0%)......... $ 49,628
=========
Net Asset Value, Offering Price and
Redemption Price Per Share........ $ 1.00
=========
</TABLE>
- ------------------
(A) Variable Rate Security--The rate reported on
the Statement of Net Assets is the rate in effect
on August 31, 1995. The date shown is the next
reset date.
(B) Put and Demand features exist requiring the issuer to repurchase the
instrument prior to maturity. The maturity date shown is the next demand
date.
(C) Securities are held in connection with a letter of credit or other credit
support.
AMT--Alternative Minimum Tax
BAN--Bond Anticipation Note
GO--General Obligation
RB--Revenue Bond
TAN--Tax Anticipation Note
TECP--Tax Exempt Commercial Paper
VRDN--Variable Rate Demand Note
The following organizations have provided
underlying credit support for certain securities
as defined in the Statement of Net Assets:
AMBAC--American Municipal Bond Assurance Company
PENNSYLVANIA MUNICIPAL
MONEY FUND
<TABLE>
<CAPTION>
FACE AMOUNT VALUE
(000) (000)
----------- ---------
<S> <C> <C>
MUNICIPAL BONDS (98.9%)
Pennsylvania (98.0%)
Allegheny County, Mortgage Backed
Security Program, Series F, RB
4.375%, 06/01/96 (B) (C)........ $ 975 $ 975
Allegheny County, Mortgage Backed
Security Program, Series G, RB
4.600%, 06/01/96 (B) (C)........ 250 250
Beaver County, Industrial
Development Authority, Duquesne
Light Project, Series A, VRDN,
RB
3.550%, 09/06/95 (A) (B) (C).... 500 500
Beaver County, Industrial
Development Authority, Duquesne
Light Project, Series B, VRDN,
RB
3.550%, 09/06/95 (A) (B) (C).... 1,000 1,000
Berks County, Industrial
Development Authority, VRDN, RB
3.800%, 09/01/95 (A) (B) (C).... 700 700
Carbon County, TECP
3.850%, 12/18/95................ 1,000 1,000
Chartiers Valley, Industrial And
Commercial Development
Authority, William Penn Place
Project, VRDN, RB
4.300%, 09/01/95 (A) (B) (C).... 200 200
Delaware County, Industrial
Development Authority, Scott
Paper Project, Series A, VRDN,
RB
3.650%, 09/06/95 (A) (B) (C).... 500 500
Delaware County, Industrial
Development Authority, Scott
Paper Project, Series C, VRDN,
RB
3.650%, 09/06/95 (A) (B) (C).... 900 900
Delaware County, Industrial
Development Authority, United
Parcel Services Project, Series
85, VRDN, RB
3.400%, 09/01/95 (A) (B)........ 500 500
Emmaus, Subseries B-10, VRDN, RB
3.700%, 09/06/95 (A) (B) (C).... 1,800 1,800
</TABLE>
Continued
<PAGE> 256
THE COMPASS CAPITAL GROUP
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMOUNT VALUE
(000) (000)
----------- ---------
<S> <C> <C>
Franklin County, Industrial
Development Authority,
Guarriello LP Project, Series A,
VRDN, RB
3.900%, 09/06/95 (A) (B) (C).... $ 945 $ 945
Langhorne, Hospital Revenue
Authority, Franciscan Health
Systems Project, Series C, VRDN,
RB
3.400%, 09/01/95 (A) (B) (C).... 400 400
Langhorne, Hospital Revenue
Authority, Franciscan Health
Systems, Series B, VRDN, RB
3.400%, 09/01/95 (A) (B) (C).... 250 250
Lehigh County, Industrial
Development Authority, Pollution
Control, VRDN, RB
3.700%, 09/01/95 (A) (B) (C).... 900 900
Luzerne County, Industrial
Development Authority, VRDN, RB,
AMT
3.850%, 09/06/95 (A) (B) (C).... 1,495 1,495
Montgomery County, Industrial
Development Authority, Quaker
Chemical Project, VRDN, RB
3.900%, 09/01/95 (A) (B) (C).... 500 500
Montgomery County, Industrial
Development Authority, TECP
3.550%, 11/02/95 (C)............ 1,000 1,000
3.750%, 11/16/95 (C)............ 500 500
Montour County, Health System
Authority, Geisinger Project,
Series B, VRDN, RB
3.250%, 09/01/95 (A) (B) (C).... 1,000 1,000
Moon, Industrial Development
Authority, Flex-One Thorn Run
Project, VRDN, RB
3.850%, 09/01/95 (A) (B) (C).... 2,100 2,101
Northeastern, Hospital Authority,
TECP, (MBIA)
3.950%, 09/01/95................ 600 600
3.700%, 09/11/95................ 500 500
3.800%, 12/13/95................ 500 500
Philadelphia, Hospital And Higher
Education Facilities Authority,
Children's Hospital Project,
VRDN, RB
3.250%, 09/01/95 (A) (B) (C).... 1,000 1,000
Philadelphia, Hospital and Higher
Education Facilities Authority,
Frankford Hospital Project, RB
4.000%, 01/01/96 (C)............ $ 650 $ 650
Philadelphia, Industrial
Development Authority, Harbor
View Towers Project, VRDN, RB
3.750%, 09/07/95 (A) (B) (C).... 1,550 1,550
Philadelphia, Series A, TRAN, GO
4.500%, 06/27/96................ 1,000 1,004
Pittsburgh, Equipment Leasing
Authority, RB, (AMBAC)
6.400%, 10/01/95................ 500 501
Sayre, Health Care Facilities
Authority, Capital Financing
Project, Series H, VRDN, RB,
(AMBAC)
3.500%, 09/06/95 (A) (B)........ 290 290
Schuylkill County, Industrial
Development Authority, Westwood
Energy Project, VRDN, RB
3.600%, 09/01/95 (A) (B) (C).... 1,300 1,300
Schuylkill County, Industrial
Develpment Authority, Pine Grove
Landfill Project, VRDN, RB
3.750%, 09/01/95 (A) (B) (C).... 1,000 1,000
State, Economic Development
Authority, Series A1, VRDN, RB
3.900%, 09/06/95 (A) (B) (C).... 1,825 1,825
State, Energy Development
Authority, B & W Edensburg
Project, VRDN, RB, AMT
3.550%, 09/06/95 (A) (B) (C).... 510 510
3.550%, 09/06/95 (A) (B) (C).... 100 100
State, Energy Development
Authority, Piney Creek Project,
Series A, VRDN, RB, AMT
3.700%, 09/06/95 (A) (B) (C).... 100 100
State, GO
5.500%, 11/15/95................ 1,000 1,002
State, Higher Education Authority,
Series A, VRDN, RB, AMT
3.750%, 09/06/95 (A) (B) (C).... $ 500 $ 500
State, Higher Education Authority,
Series B, VRDN, RB, AMT
3.750%, 09/06/95 (A) (B) (C).... 300 300
</TABLE>
Continued
<PAGE> 257
STATEMENT OF NET ASSETS
-------------------------------------------------------------------------
August 31, 1995 (Unaudited)
PENNSYLVANIA MUNICIPAL
BOND FUND (CONTINUED)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
----------- ---------
<S> <C> <C>
MUNICIPAL BONDS, CONTINUED:
Pennsylvania, continued:
State, Higher Education Authority,
Temple University Project, VRDN,
RB
3.250%, 09/01/95 (A) (B)........ 300 $ 300
State, Housing Finance Agency,
Series O, RB, AMT
4.875%, 04/01/96................ 2,000 2,000
State, Industrial Development
Authority, RB, (AMBAC)
5.000%, 01/01/96................ 1,250 1,252
State, RB
5.250%, 04/05/96 (C)............ 1,500 1,507
Temple University, University
Funding Obligation, RB
5.000%, 05/22/96 (C)............ 1,500 1,507
Upper Allegheny, Sanitation
Authority, Series B, RB
4.500%, 01/15/96 (B)............ 1,500 1,503
Venango, Industrial Development
Authority, Scrubgrass Project,
TECP
3.500%, 10/06/95................ 1,000 1,000
Western Wayne, School District
Authority, Series AA, GO,
Prerefunded @ 100
6.650%, 10/15/95 (B)............ 1,000 1,003
---------
40,720
---------
Oregon (0.9%)
Port of Saint Helens, Pollution
Control, General Electric
Project, Series A, VRDN, RB, AMT
3.650%, 09/01/95 (A) (B) (C).... 400 400
---------
Total Municipal Bonds
(Cost $41,119,872).............. 41,120
---------
Total Investments (98.9%)
(Cost $41,119,872).............. 41,120
---------
OTHER ASSETS AND LIABILITIES (1.1%)
Other Assets and Liabilities,
Net............................... 445
---------
NET ASSETS:
Portfolio shares (unlimited
authorization-no par value)
based on 41,565,150 outstanding
shares of beneficial interest... 41,565
---------
Total Net Assets: (100.0%)........ $ 41,565
=========
Net Asset Value, Offering Price
and Redemption Price Per
Share........................... $ 1.00
=========
</TABLE>
- ------------------
(A) Variable Rate Security--The rate reported on the Statement of Net Assets is
the rate in effect on August 31, 1995. The date shown is the next reset
date.
(B) Put and Demand features exist requiring the issuer to repurchase the
instrument prior to maturity. The maturity date shown is the next demand
date.
(C) Securities are held in connection with a letter of credit or other credit
support.
AMT--Alternative Minimum Tax
GO--General Obligation
RB--Revenue Bond
TECP--Tax Exempt Commercial Paper
TRAN--Tax and Revenue Anticipation Note
VRDN--Variable Rate Demand Note
The following organizations have provided underlying credit support for certain
securities as defined in the Statement of Net Assets:
AMBAC--American Municipal Bond Assurance Company
MBIA--Municipal Bond Insurance Association
EQUITY INCOME FUND
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
----------- ---------
<S> <C> <C>
COMMON STOCKS (91.7%)
Air Conditioning (0.8%)
York International................. 63,200 $ 2,812
---------
Air Transportation (0.6%)
AMR*............................... 28,000 1,974
---------
Aircraft (4.1%)
BE Aerospace*...................... 239,800 1,799
Boeing............................. 52,500 3,347
Flightsafety International......... 51,000 2,263
Sequa, Class A*.................... 94,900 2,527
United Technologies................ 50,000 4,168
---------
14,104
---------
Aluminum (6.2%)
Aluminum of America................ 369,400 21,102
---------
Banks (1.8%)
California Federal Bank*........... 143,462 2,242
Coast Savings Financial*........... 63,600 1,773
Long Island Bancorp................ 83,800 2,126
---------
6,141
---------
Building & Construction (2.3%)
Centex Construction*............... 251,000 3,262
Ryland Group....................... 113,500 1,788
Southdown*......................... 144,300 2,742
---------
7,792
---------
Building & Construction Supplies
(0.6%)
CBI Industries..................... 82,000 2,009
---------
</TABLE>
Continued
<PAGE> 258
THE COMPASS CAPITAL GROUP
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
----------- ---------
<S> <C> <C>
COMMON STOCKS, CONTINUED:
Chemicals (2.1%)
IMC Global......................... 70,000 $ 4,428
Rhone Poulenc S.A., ADR............ 31,089 645
Technip ADS*....................... 65,700 2,105
---------
7,178
---------
Communications Equipment (0.4%)
Alcatel Alsthom, ADR............... 61,500 1,230
---------
Computers & Services (0.8%)
BMC Software*...................... 60,800 2,592
---------
Drilling Oil & Gas Wells (0.8%)
Noble Drilling*.................... 336,400 2,691
---------
Electric Utilities (5.3%)
Central Vermont Public Service..... 193,100 2,655
CMS Energy......................... 65,300 1,608
Entergy............................ 72,100 1,730
New York State Electric & Gas...... 49,100 1,185
Niagara Mohawk Power............... 462,200 5,546
SCE................................ 40,000 665
Unicom............................. 171,900 4,835
---------
18,224
---------
Electronic & Other Electrical
Equipment (0.4%)
Raychem............................ 33,700 1,479
---------
Financial Services (2.0%)
Brascan Limited, Class A........... 101,700 1,665
Lehman Brothers Holding............ 213,560 5,072
---------
6,737
---------
Food, Beverage & Tobacco (5.9%)
Chiquita Brands International...... 123,000 1,937
DiMon.............................. 201,500 3,526
Interstate Bakeries................ 253,600 4,945
Universal-Virginia................. 428,600 9,644
---------
20,052
---------
Gas/Natural Gas (2.4%)
Enserch............................ 55,100 902
Gulf Canada Resources*............. 232,600 1,090
National Fuel Gas.................. 25,000 703
Seagull Energy*.................... 247,500 4,981
Washington Energy.................. 25,000 416
---------
8,092
---------
Glass Products (1.0%)
Corning............................ 109,500 3,572
---------
Insurance (13.8%)
Ace Limited........................ 264,700 $ 8,140
American Financial Group........... 130,000 4,014
Brierley Investments, ADR*......... 62,500 926
Chubb.............................. 89,100 8,130
Cigna.............................. 184,800 17,880
Enhance Financial Services......... 26,400 535
Horace Mann Educators.............. 60,100 1,705
Loews.............................. 20,800 2,733
Old Republic International......... 110,000 3,039
Zurich Reinsurance Centre*......... 12,500 369
---------
47,471
---------
Lodging (0.1%)
Red Lion Hotels*................... 8,900 206
---------
Lumber & Wood Products (0.2%)
Georgia-Pacific.................... 9,000 810
---------
Machinery (1.2%)
Cooper Cameron*.................... 37,338 882
Cooper Industries.................. 42,505 1,615
Crane.............................. 25,000 900
Wyman-Gordan*...................... 49,700 640
---------
4,037
---------
Marine Transportation (2.0%)
Alexander & Baldwin................ 138,700 3,156
OMI*............................... 198,300 1,537
Overseas Shipholding Group......... 40,400 843
Teekay Shipping*................... 61,600 1,463
---------
6,999
---------
Metals & Mining (0.6%)
Potash of Saskatchewan............. 35,800 2,036
---------
Paper & Paper Products (6.5%)
Boise Cascade...................... 50,200 2,152
International Paper................ 150,800 12,346
Kimberly-Clark..................... 65,000 4,152
Willamette Industries.............. 53,200 3,658
---------
22,308
---------
Petroleum (12.4%)
Amerada Hess....................... 79,000 3,743
Ashland............................ 108,900 3,566
Atlantic Richfield................. 14,100 1,539
Burlington Resources............... 122,100 4,960
Imperial Oil....................... 45,500 1,632
Nordsk Hydro A.S., ADR............. 66,000 2,789
Oryx Energy*....................... 268,000 3,618
Petroleum Heat & Power,
Class A.......................... 443,700 3,661
</TABLE>
Continued
<PAGE> 259
STATEMENT OF NET ASSETS
-------------------------------------------------------------------------
August 31, 1995 (Unaudited)
EQUITY INCOME FUND (CONTINUED)
<TABLE>
<CAPTION>
SHARES/ MARKET
FACE AMOUNT VALUE
(000) (000)
----------- ---------
<S> <C> <C>
Phillips Petroleum................ 116,600 $ 3,833
Shell Transport & Trading......... 10,000 694
Sun............................... 81,832 2,179
Unocal............................ 153,000 4,456
USX-Marathon Group................ 284,500 5,867
---------
42,537
---------
Photographic Equipment & Supplies
(2.0%)
Eastman Kodak..................... 121,000 6,973
---------
Printing & Publishing (1.2%)
Jostens........................... 169,000 4,056
---------
Railroads (0.8%)
Canadian Pacific.................. 171,800 2,899
---------
Real Estate (4.2%)
American Real Estate Partners*.... 138,826 1,041
Equity Inns....................... 14,400 171
Essex Property Trust.............. 161,000 2,797
Koger Equity*..................... 230,500 $ 2,147
Newhall Land & Farming............ 204,200 2,757
RFS Hotel Investors............... 18,000 257
Starwood Lodging*................. 26,600 708
Storage Equities.................. 101,900 1,872
Sun Communities................... 104,200 2,618
---------
14,368
---------
Refuse Systems (1.0%)
WMX Technologies.................. 118,100 3,469
---------
Retail (1.5%)
Hills Department Stores*.......... 119,251 1,610
Kmart............................. 254,700 3,470
---------
5,080
---------
Rubber & Plastic (1.0%)
Goodrich B. F..................... 58,000 3,451
---------
Steel & Steel Works (0.4%)
Precision Castparts............... 45,500 1,541
---------
Telephones & Telecommunication
(5.3%)
BCE............................... 249,900 8,028
Comsat............................ 242,500 5,638
Portugal Telecom S.A., ADR*....... 60,100 1,089
Worldcom*......................... 95,614 3,221
---------
17,976
---------
Total Common Stocks
(Cost $267,087,713)............. 313,998
---------
CONVERTIBLE PREFERRED STOCKS (4.9%)
Boise Cascade, 7.48% Series G..... $ 99,800 3,555
Glendale Federal Savings Bank,
8.75% Series E.................. 211,450 8,854
Reynolds Metals Company, 7.00%
Series.......................... $ 65,600 $ 3,518
Santa Fe Energy Resources,
Series A........................ 100,000 963
---------
Total Convertible Preferred Stocks
(Cost $11,412,368).............. 16,890
---------
RIGHTS (0.0%)
California Federal Bank*.......... 14,346 95
Total Rights
(Cost $62,764).................. 95
---------
CONVERTIBLE BONDS (1.4%)
AMR
6.125%, 11/01/24................ 4,775 4,823
---------
Total Convertible Bonds
(Cost $4,485,563)............... 4,823
---------
REPURCHASE AGREEMENT (1.5%)
Paine Webber, 5.80%, dated
08/31/95, matures 09/01/95,
repurchase price $5,044,813
(collateralized by U.S. Treasury
Bond, par value $4,925,000,
11.50%, 11/15/95, market value
$5,149,703)..................... $ 5,044 $ 5,044
---------
Total Repurchase Agreement
(Cost $5,044,000)............... 5,044
---------
Total Investments (99.5%)
(Cost $288,092,408)............. 340,850
---------
OTHER ASSETS AND LIABILITIES (0.5%)
Other Assets and Liabilities,
Net............................... 1,834
---------
NET ASSETS:
Portfolio shares (unlimited
authorization-no par value)
based on 24,375,121 outstanding
shares of beneficial interest... 278,118
Accumulated net realized gain on
investments..................... 11,809
Net unrealized appreciation
investments................... 52,758
Distributions in excess of net
investment income............... (1)
---------
Total Net Assets: (100.0%)........ $ 342,684
=========
Net Asset Value and Redemption
Price Per Share................. $ 14.06
=========
Maximum Public Offering Price Per
Share ($14.06/95.50%)........... $ 14.72
=========
</TABLE>
- ------------------
*Non-income producing security
ADR--American Depository Receipt
Continued
<PAGE> 260
THE COMPASS CAPITAL GROUP
- --------------------------------------------------------------------------------
GROWTH FUND
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
----------- ---------
<S> <C> <C>
COMMON STOCKS (97.6%)
Air Conditioning (1.1%)
York International................. 38,700 $ 1,722
---------
Autoparts (1.5%)
Autozone*.......................... 90,100 2,421
---------
Banks (4.5%)
First Bank System.................. 90,400 4,124
State Street Boston................ 82,000 3,024
---------
7,148
---------
Broadcasting, Newspapers &
Advertising (3.9%)
Comcast, Special Class A........... 150,000 3,206
Viacom, Class B*................... 60,000 2,918
---------
6,124
---------
Building & Construction (1.0%)
Foster Wheeler..................... 44,900 1,656
---------
Chemical and Allied Products (6.0%)
Air Products and Chemicals......... 26,800 1,437
Engelhard.......................... 85,500 2,415
Nalco Chemical..................... 67,500 2,363
Zeneca Group PLC, ADR.............. 65,000 3,364
---------
9,579
---------
Communication Services (1.5%)
MFS Communications*................ 52,000 2,301
---------
Communications Equipment (3.2%)
Motorola........................... 37,000 2,766
Nokia, Class A, ADR................ 33,000 2,289
---------
5,055
---------
Computer Software (4.0%)
Compuware*......................... 62,000 1,403
Microsoft*......................... 27,000 2,497
Novell*............................ 138,000 2,484
---------
6,384
---------
Computer and Office Equipment (4.1%)
Computer Sciences*................. 50,000 3,013
Hewlett Packard.................... 44,000 3,520
---------
6,533
---------
Electronic Components (4.8%)
AMP.............................. 72,000 $ 2,925
General Instrument*................ 71,000 2,592
Hubbell, Class B................... 37,000 2,169
---------
7,686
---------
Financial Services (0.8%)
American Express................... 29,700 1,199
---------
Food & Beverage (4.5%)
Pepsico............................ 66,000 2,987
Sara Lee........................... 91,800 2,547
Sysco.............................. 55,300 1,590
---------
7,124
---------
Insurance (6.0%)
Ace Limited........................ 114,000 3,505
American International Group....... 39,750 3,205
American Re Insurance.............. 70,200 2,808
---------
9,518
---------
Mining (1.0%)
Minnesota Mining and
Manufacturing.................... 27,500 1,502
---------
Miscellaneous Business Services
(4.9%)
Automatic Data Processing.......... 42,000 2,730
Dun & Bradstreet................... 32,000 1,852
Policy Management Systems*......... 44,000 2,178
Sensormatic Electronics............ 51,000 1,071
---------
7,831
---------
Mortgage Bankers (2.4%)
Federal National Mortgage
Association...................... 40,000 3,815
---------
Nursing Care Facilities (1.2%)
Beverly Enterprises*............... 138,000 1,829
---------
Oil Services (1.4%)
Schlumberger....................... 34,500 2,225
---------
Paper & Paper Products (3.1%)
International Paper................ 21,900 1,793
Kimberly-Clark..................... 50,000 3,194
---------
4,987
---------
Petroleum (7.1%)
Amoco.............................. 54,000 3,443
Burlington Resources............... 54,000 2,194
</TABLE>
Continued
<PAGE> 261
STATEMENT OF NET ASSETS
-------------------------------------------------------------------------
August 31, 1995 (Unaudited)
GROWTH FUND (CONTINUED)
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
----------- ---------
<S> <C> <C>
COMMON STOCKS, CONCLUDED:
Petroleum, continued:
Noble Affiliates.................. 69,000 $ 1,906
Unocal............................ 125,000 3,640
---------
11,183
---------
Pharmaceuticals (10.4%)
Abbott Laboratories............... 70,000 2,713
Genetics Institute*............... 54,000 2,120
Hafslund Nycomed-Cl B, ADR........ 92,889 2,229
Mallinckrodt Group................ 50,700 1,908
Morton International.............. 90,500 2,941
Perrigo*.......................... 100,000 1,350
Pfizer............................ 64,000 3,159
Rhone Poulenc Rorer............... 2,200 97
---------
16,517
---------
Printing & Publishing (4.0%)
E.W. Scripps...................... 66,000 2,219
Knight-Ridder..................... 26,800 1,508
Scholastic*....................... 43,000 2,634
---------
6,361
---------
Retail (4.8%)
Home Depot........................ 33,300 1,328
May Department Stores............. 56,000 2,373
Wal-Mart Stores................... 159,000 3,915
---------
7,616
---------
Rubber & Plastic (2.4%)
Illinois Tool Works............... 63,000 3,859
---------
Telephones & Telecommunication (6.6%)
AT&T.............................. 72,500 4,095
L.M. Ericsson Telephone, ADR...... 148,000 3,164
Vodafone Group, ADR............... 75,000 3,141
---------
10,400
---------
Trucking (1.4%)
M.S. Carriers*.................... 120,200 2,254
---------
Total Common Stocks
(Cost $127,914,695)............. $ 154,829
---------
REPURCHASE AGREEMENT (2.1%)
Paine Webber, 5.80%, dated
08/31/95, matures 09/01/95,
repurchase price $3,267,526
(collateralized by United States
Treasury Note, par value
$3,345,000, 4.375%, 11/15/96,
market value $3,332,945)........ 3,267
---------
Total Repurchase Agreement
(Cost $3,267,000)............... 3,267
---------
Total Investments (99.7%)
(Cost $131,181,695)............. 158,096
---------
OTHER ASSETS AND LIABILITIES (0.3%)
Other Assets and Liabilities,
Net.............................. 450
---------
NET ASSETS:
Portfolio shares (unlimited
authorization--no par value)
based on 12,264,782 outstanding
shares of beneficial interest... 129,039
Accumulated net realized gain on
investments..................... 2,593
Net unrealized appreciation on
investments..................... 26,914
---------
Total Net Assets: (100.0%)........ $ 158,546
=========
Net Asset Value and Redemption
Price Per Share................. $ 12.93
=========
Maximum Public Offering Price Per
Share ($12.93/95.50%)........... $ 13.54
=========
</TABLE>
- ---------------
*Non-income producing security
ADR--American Depository Receipt
PLC--Public Limited Company
The accompanying notes are an integral part of the financial statements.
<PAGE> 262
THE COMPASS CAPITAL GROUP
- --------------------------------------------------------------------------------
SMALL COMPANY FUND
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
----------- ---------
<S> <C> <C>
COMMON STOCKS (91.4%)
Aircraft (0.1%)
Simula*............................ 1,300 $ 35
---------
Apparel/Textiles (3.0%)
Ashworth*.......................... 4,200 29
Nautica Enterprises*............... 10,400 329
Tommy Hilfiger*.................... 13,200 443
---------
801
---------
Autoparts (0.2%)
Edelbrock*......................... 2,700 42
---------
Bicycles (0.1%)
Cannondale*........................ 2,100 34
---------
Biotechnology (1.3%)
Northfield Laboratories*........... 2,000 34
Ostex International*............... 1,200 20
Watson Pharmaceuticals*............ 6,800 282
---------
336
---------
Casinos (1.5%)
Players International*............. 10,600 223
Station Casinos*................... 8,800 171
---------
394
---------
Computer Hardware (13.6%)
Alantec*........................... 7,100 284
Auspex Systems*.................... 2,500 39
Chips & Technologies*.............. 3,200 44
Cognex*............................ 6,200 309
Cybex Computer Products*........... 2,800 64
Digital Link*...................... 1,300 31
Hutchinson Technology*............. 5,000 391
Key Tronic*........................ 4,800 73
Komag*............................. 9,100 566
Quantum*........................... 19,900 478
Read-Rite*......................... 14,900 610
Stormedia*......................... 7,200 299
Western Digital*................... 19,200 396
---------
3,584
---------
Computer Software (12.7%)
Altera*............................ 7,100 445
Applix*............................ 1,200 34
Aspen Technology*.................. 2,200 59
Diamond Multimedia Systems*........ 2,000 54
Discreet Logic*.................... 3,500 142
Electronic Arts*................... 6,000 228
Integrated Silicon Systems*........ 8,700 248
Intersolv*......................... 2,200 43
Minnesota Educational
Computing*....................... 1,800 $ 52
National Instruments*.............. 2,600 56
Number Nine Visual Technology*..... 2,600 47
Oak Technology*.................... 10,900 478
Parametric Technology*............. 7,200 398
Phamis*............................ 1,600 43
Pinnacle Systems*.................. 1,300 35
Platinum Software*................. 13,400 157
Project Software & Development*.... 1,000 29
Softdesk*.......................... 2,300 56
Summit Medical Systems*............ 1,900 29
Synopsys*.......................... 7,500 435
System Software Associates......... 7,900 249
Wind River Systems*................ 1,900 35
---------
3,352
---------
Cosmetics (0.1%)
Thermolase*........................ 1,400 28
---------
Electrical Equipment (1.8%)
Brooks Automation*................. 2,400 43
Gasonics International*............ 3,300 115
Level One Communications*.......... 1,600 40
Microchip Technology*.............. 7,500 284
---------
482
---------
Electronics (8.5%)
Brooktree*......................... 4,000 80
Cincinnati Microwave*.............. 13,500 243
GTI*............................... 15,400 337
Harman International*.............. 5,565 248
Mackie Designs*.................... 3,300 50
Silicon Valley Group*.............. 3,500 151
Tencor Instrument*................. 9,400 407
Teradyne*.......................... 9,600 364
Ultratech Stepper*................. 9,100 359
---------
2,239
---------
Environmental Services (0.2%)
U.S. Filter*....................... 2,200 48
---------
Financial Services (0.2%)
Credit Acceptance*................. 1,400 30
Sirrom Capital..................... 1,700 28
---------
58
---------
Food Processing (0.1%)
Opta Food Ingredients*............. 1,700 27
---------
Health & Allied Services (2.8%)
Community Health Systems*.......... 4,600 177
</TABLE>
Continued
<PAGE> 263
STATEMENT OF NET ASSETS
-------------------------------------------------------------------------
August 31, 1995 (Unaudited)
SMALL COMPANY FUND (CONTINUED)
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
----------- ---------
<S> <C> <C>
COMMON STOCKS, CONTINUED:
Health & Allied Services, continued:
Healthsouth Rehabilitation*........ 8,400 $ 198
Horizon Mental Health
Management*...................... 1,400 21
Horizon/CMS Healthcare*............ 9,500 209
Integrated Health Services*........ 4,500 134
---------
739
---------
Health Maintenance Organizations (2.1%)
Healthsource*...................... 6,800 272
Inphynet Medical Management*....... 1,400 31
Mid Atlantic Medical Services*..... 8,600 160
Physicians Health Services*........ 2,500 70
United American Healthcare*........ 1,800 20
---------
553
---------
Insurance (0.2%)
Compdent*.......................... 1,600 44
---------
Lodging (1.8%)
Doubletree*........................ 2,600 50
Laquinta Inns...................... 14,300 429
---------
479
---------
Machinery (4.1%)
Computational Systems*............. 900 14
Duracraft*......................... 7,800 311
FSI International*................. 12,700 448
Novellus Systems*.................. 4,300 317
---------
1,090
---------
Medical Supplies (1.2%)
Avecor Cardiovascular*............. 2,700 36
Resmed*............................ 2,200 33
Tecnol Medical Products*........... 10,300 187
Thermedics*........................ 2,700 52
---------
308
---------
Miscellaneous Business Services
(0.9%)
ABR Information Services*.......... 2,800 63
Accustaff*......................... 1,500 42
Career Horizons*................... 1,600 40
Healthplan Services*............... 1,600 30
National Wireless Holdings*........ 2,600 34
Transaction Systems Architects*.... 1,300 32
---------
241
---------
Miscellaneous Manufacturing (0.2%)
Chicago Miniature Lamp*............ 2,600 44
---------
Oil & Gas Field Services (0.5%)
Weatherford International*......... 10,600 139
---------
Oil and Gas Exploration (1.5%)
Barrett Resources*................. 8,700 $ 188
Belden & Blake*.................... 2,100 34
Reading & Bates*................... 13,800 167
---------
389
---------
Printing & Publishing (0.4%)
Mecklermedia*...................... 2,600 110
---------
Radio and Broadcasting Stations
(0.9%)
American Radio Systems*............ 8,200 234
---------
Real Estate (0.4%)
Felcor Suite Hotels................ 2,000 54
NHP*............................... 1,200 16
Winston Hotels..................... 3,000 33
---------
103
---------
Restaurants (7.0%)
Apple South........................ 9,600 235
Applebees International............ 7,600 228
Daka International*................ 400 11
Dave & Buster's*................... 1,800 31
Lone Star Steakhouse & Saloon*..... 13,100 524
Longhorn Steak*.................... 1,500 27
O'Charleys*........................ 3,900 65
Outback Steakhouse*................ 8,400 271
Papa John's International*......... 2,100 84
Rock Bottom Restaurants*........... 2,300 59
Starbucks*......................... 7,700 308
---------
1,843
---------
Retail (8.9%)
Baby Superstore*................... 6,000 281
Borders Group*..................... 11,800 239
Corporate Express*................. 9,600 224
Dollar Tree Stores*................ 2,400 71
Friedman's, Class A*............... 11,900 277
Garden Ridge*...................... 1,700 53
Gymboree*.......................... 5,500 164
Hollywood Entertainment*........... 10,100 287
Just For Feet*..................... 3,600 105
Moovies*........................... 1,900 36
Movie Gallery*..................... 1,600 76
Orchard Supply Hardware*........... 1,100 17
Proffitts*......................... 10,900 287
Sports & Recreation*............... 8,500 101
U.S. Office Products*.............. 2,500 43
West Marine*....................... 3,300 87
---------
2,348
---------
</TABLE>
Continued
<PAGE> 264
THE COMPASS CAPITAL GROUP
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES/
FACE MARKET
AMOUNT VALUE
(000) (000)
----------- ---------
<S> <C> <C>
COMMON STOCKS, CONTINUED:
Health & Allied Services, continued:
Semiconductors & Related Devices
(12.4%)
ACT Manufacturing*............... 1,900 $ 37
Actel*........................... 1,800 30
Alliance Semiconductor*.......... 11,500 450
Atmel*........................... 11,800 373
Cirrus Logic*.................... 9,800 534
Dallas Semiconductor*............ 3,600 86
KLA Instruments*................. 5,400 462
Lattice Semiconductor*........... 13,300 437
Micro Linear*.................... 3,700 58
S3*.............................. 11,700 459
Tower Semiconductor*............. 2,000 62
Tylan General*................... 1,800 30
VLSI Technology*................. 7,300 241
---------
3,259
---------
Telecommunication Equipment (1.4%)
Applied Digital Access*.......... 2,000 24
Colonial Data Technologies*...... 9,400 170
Inter-Tel*....................... 1,400 23
Spectrian*....................... 2,700 125
Symmetricom*..................... 1,700 38
---------
380
---------
Telecommunications (1.2%)
Mobile Telecommunication
Technology*.................... 3,300 101
Mobilemedia*..................... 9,000 218
---------
319
---------
Trucking (0.1%)
Trism*........................... 3,700 31
---------
Total Common Stocks
(Cost $21,921,699)............. 24,113
---------
REPURCHASE AGREEMENT (8.2%)
Lehman Mortgage Repurchase
Agreement, 5.80%, dated 08/31/95,
matures 09/01/95, repurchase
price $2,152,952 (collateralized
by Federal Home Loan Bank
Discount Note, par value
$2,240,000, 0.00%, maturing
12/28/95, market value
$2,198,560)...................... $ 2,153 $ 2,153
---------
Total Repurchase Agreement
(Cost $2,152,925).............. 2,153
---------
Total Investments (99.6%)
(Cost $24,074,624)............. 26,266
---------
OTHER ASSETS AND LIABILITIES
(0.4%)
Other Assets and Liabilities,
Net.............................. 109
---------
NET ASSETS:
Portfolio shares (unlimited
authorization-no par value)
based on 2,051,961 outstanding
shares of beneficial
interest....................... 21,984
Accumulated net realized gain on
investments.................... 2,223
Net unrealized appreciation on
investments.................... 2,191
Distributions in excess of net
investment income.............. (23)
---------
Total Net Assets: (100.0%)....... $ 26,375
=========
Net Asset Value and Redemption
Price Per Share................ $ 12.85
=========
Maximum Public Offering Price Per
Share ($12.85/95.50%).......... $ 13.46
=========
</TABLE>
- ------------------
*Non-income producing security
The accompanying notes are an integral part of the financial statements.
<PAGE> 265
STATEMENT OF NET ASSETS
-------------------------------------------------------------------------
August 31, 1995 (Unaudited)
BALANCED FUND
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
----------- ---------
<S> <C> <C>
COMMON STOCKS (52.2%)
Aerospace & Defense (1.1%)
Raytheon........................... 4,500 $ 364
---------
Aircraft (1.1%)
United Technologies................ 4,000 334
---------
Automotive (2.0%)
Dana............................... 10,000 299
Ford Motor......................... 11,000 337
---------
636
---------
Banks (3.3%)
Comerica........................... 6,500 231
JP Morgan.......................... 3,000 219
Keycorp............................ 7,400 229
Mellon Bank........................ 4,000 190
PNC Financial...................... 7,000 184
---------
1,053
---------
Chemicals (2.6%)
E.I. Dupont de Nemours............. 4,000 262
Loctite............................ 4,500 216
Witco.............................. 10,000 332
---------
810
---------
Communications Equipment (0.6%)
Harris............................. 3,500 202
---------
Computers & Services (2.1%)
Apple Computer..................... 4,000 172
Novell*............................ 13,200 238
Pitney Bowes....................... 6,500 264
---------
674
---------
Drugs (3.5%)
Bristol Myers Squibb............... 5,800 398
Merck.............................. 3,300 165
Schering Plough.................... 5,200 242
Warner Lambert..................... 3,500 316
---------
1,121
---------
Electrical Machinery Equipment
(1.1%)
Grainger (W.W.).................... 6,000 357
---------
Environmental Services (1.1%)
WMX Technologies................... 11,800 347
---------
Financial Services (1.1%)
Federal National Mortgage
Association...................... 3,500 334
---------
Food, Beverage & Tobacco (4.3%)
American Brands.................... 8,000 $ 335
Anheuser Busch..................... 2,800 160
Archer Daniels Midland............. 15,750 262
Pepsico............................ 4,000 181
Philip Morris Companies............ 3,000 224
Sysco.............................. 7,000 201
---------
1,363
---------
Glass Products (1.0%)
Corning............................ 10,000 326
---------
Holding Company, Diversified (0.8%)
Hanson PLC, ADR.................... 15,000 257
---------
Household Furniture & Fixtures
(0.9%)
Masco.............................. 10,000 280
---------
Insurance (2.8%)
Chubb.............................. 3,700 338
Lincoln National................... 4,700 202
Loews.............................. 1,700 223
US Healthcare...................... 4,500 144
---------
907
---------
Machinery (2.6%)
BW/IP, Inc......................... 7,000 125
General Electric................... 7,000 412
Ingersoll Rand..................... 8,000 303
---------
840
---------
Miscellaneous Manufacturing (1.5%)
Minnesota Mining And
Manufacturing.................... 8,500 464
---------
Oil Services (1.0%)
Schlumberger....................... 5,000 323
---------
Paper & Paper Products (1.6%)
Kimberly-Clark..................... 5,000 319
Weyerhaeuser....................... 4,000 184
---------
503
---------
Petroleum (3.1%)
Atlantic Richfield................. 2,500 273
Burlington Resources............... 7,000 285
Chevron............................ 4,800 232
Texaco............................. 3,000 194
---------
984
---------
</TABLE>
Continued
<PAGE> 266
THE COMPASS CAPITAL GROUP
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES/
FACE MARKET
AMOUNT VALUE
(000) (000)
----------- ---------
<S> <C> <C>
COMMON STOCKS, CONCLUDED:
Photographic Equipment & Supplies
(1.1%)
Eastman Kodak..................... 6,200 $ 357
---------
Professional Services (0.8%)
Dun & Bradstreet.................. 4,500 260
---------
Railroads (1.6%)
Norfolk Southern.................. 4,000 283
Union Pacific..................... 3,500 229
---------
512
---------
Retail (2.2%)
J. C. Penney...................... 4,000 181
May Department Stores............. 8,000 339
Toys R US*........................ 7,500 195
---------
715
---------
Semiconductors/Intstruments (0.8%)
Avnet............................. 5,000 258
---------
Telephones & Telecommunication (4.1%)
Airtouch Communications*.......... 8,500 276
AT&T.............................. 9,000 509
Bell Atlantic..................... 5,000 299
GTE............................... 5,800 212
---------
1,296
---------
Utilities (2.4%)
Dominion Resources of Virginia.... 8,500 307
General Public Utilities.......... 7,000 200
Pacific Gas and Electric.......... 9,000 259
---------
766
---------
Total Common Stocks
(Cost $14,809,331).............. 16,643
---------
CORPORATE BONDS (7.2%)
ABN/AMRO, New York
8.250%, 08/01/09................ $ 500 535
Anheuser Busch
7.500%, 12/01/97................ 300 308
Associates Corporation of North
America
7.250%, 05/15/98................ 200 205
Ford Motor Credit
7.500%, 06/15/04................ 250 259
General Electric Capital
8.000%, 01/15/98................ 200 208
Pepsico
6.250%, 09/01/99................ $ 200 $ 198
Wal-Mart Stores
8.000%, 09/15/06................ 300 330
WMX Technologies
8.250%, 11/15/99................ 250 265
---------
Total Corporate Bonds
(Cost $2,208,984)............... 2,308
---------
CONVERTIBLE BONDS (0.8%)
Time Warner
8.750%, 01/10/15................ 250 260
---------
Total Convertible Bonds
(Cost $250,469)
ASSET BACKED SECURITIES (0.8%)
American Express Master Trust
7.150%, 08/15/99................ 250 256
---------
Total Asset Backed Securities
(Cost $244,922)................. 256
---------
U. S. TREASURY OBLIGATIONS (28.4%)
United States Treasury Bonds
7.250%, 05/15/16................ 500 528
7.500%, 11/15/16................ 500 542
8.125%, 08/15/19................ 500 579
7.500%, 11/15/24................ 250 274
United States Treasury Notes
6.125%, 07/31/96................ 150 151
7.250%, 08/31/96................ 500 507
7.500%, 01/31/97................ 300 307
6.750%, 02/28/97................ 250 253
6.750%, 05/31/97................ 250 254
7.375%, 11/15/97................ 500 515
7.250%, 02/15/98................ 400 412
6.375%, 01/15/99................ 500 505
7.500%, 10/31/99................ 500 526
6.375%, 01/15/00................ 250 253
7.125%, 02/29/00................ 650 676
7.500%, 11/15/01................ 650 696
7.500%, 05/15/02................ 500 536
6.375%, 08/15/02................ 500 505
7.250%, 05/15/04................ 500 530
7.250%, 08/15/04................ 250 265
7.875%, 11/15/04................ 250 276
Total U. S. Treasury Obligations
(Cost $8,650,121)............... 9,090
---------
</TABLE>
Continued
<PAGE> 267
STATEMENT OF NET ASSETS
-------------------------------------------------------------------------
August 31, 1995 (Unaudited)
BALANCED FUND (CONTINUED)
<TABLE>
<CAPTION>
FACE MARKET
AMOUNT VALUE
(000) (000)
----------- ---------
<S> <C> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS
(1.0%)
Federal Home Loan Mortgage
Corporation
7.125%, 07/21/99................ $ 300 $ 310
---------
Total U.S. Government Agency
Obligations
(Cost $296,344)................. 310
---------
REPURCHASE AGREEMENT (7.1%)
Chemical Bank Repurchase
Agreement, 5.75%, dated
08/31/95, matures 09/01/95,
repurchase price $2,256,000
(collateralized by U.S. Treasury
Note, par value $2,190,000,
8.125%, maturing 02/15/98,
market value
$2,305,177)..................... 2,256 2,256
---------
Total Repurchase Agreement
(Cost $2,256,000)............... 2,256
---------
SHORT-TERM INVESTMENTS (1.2%)
Temp Cash Fund.................... 380 380
---------
Total Short-Term Investments
(Cost $380,000)................. 380
---------
Total Investments (98.7%)
(Cost $29,096,171).............. 31,503
---------
OTHER ASSETS AND LIABILITIES (1.3%)
Other Assets and Liabilities,
Net............................... 404
---------
NET ASSETS:
Portfolio shares (unlimited
authorization--no par value)
based on 2,872,437 shares of
beneficial interest............. 29,063
Accumulated net realized gain on
investments..................... 437
Net unrealized appreciation on
investments..................... 2,407
---------
Total Net Assets: (100.0%)........ $ 31,907
=========
Net Asset Value and Redemption
Price Per Share................. $ 11.11
=========
Maximum Public Offering Price Per
Share ($11.11/95.50%)........... $ 11.63
=========
</TABLE>
- ------------------
*Non-income producing security.
ADR--American Depository Receipt
PLC--Public Limited Company
SHORT/INTERMEDIATE FUND
<TABLE>
<CAPTION>
MARKET
FACE AMOUNT VALUE
(000) (000)
----------- ---------
<S> <C> <C>
CORPORATE BONDS (36.7%)
Automobile Finance (4.4%)
Ford Capital BV
9.000%, 08/15/98................ $ 1,000 $ 1,066
Ford Motor Credit
8.000%, 01/15/99................ 1,000 1,043
8.400%, 03/26/99................ 5,000 5,287
8.000%, 06/15/02................ 1,000 1,063
---------
8,459
---------
Beverages (8.8%)
Anheuser Busch
7.500%, 12/01/97................ 2,500 2,566
8.750%, 12/01/99................ 1,895 2,054
Coca-Cola
7.875%, 09/15/98................ 7,100 7,417
Pepsico
7.000%, 11/15/96................ 3,000 3,034
6.125%, 01/15/98................ 2,000 1,998
---------
17,069
---------
Business Credit Institutions (1.1%)
General Electric Capital
8.125%, 02/01/99................ 2,000 2,108
---------
Chemicals (1.8%)
E.I. Dupont de Nemours
8.450%, 10/15/96................ 3,500 3,592
---------
Electric Utility (3.7%)
Duke Power
7.500%, 04/01/99................ 4,000 4,140
Wisconsin Electric Power
5.875%, 10/01/97................ 3,000 2,985
---------
7,125
---------
Financial Services (7.4%)
Associates Corporation of North
America
5.300%, 09/04/95................ 1,000 1,000
7.625%, 04/15/98................ 2,400 2,421
7.875%, 09/30/01................ 1,000 1,058
Goldman Sachs
4.770%, 10/16/95................ 3,000 2,997
Household Finance
7.800%, 11/01/96................ 2,000 2,033
8.875%, 07/05/99................ 2,000 2,040
7.625%, 01/15/03................ 2,750 2,877
---------
14,426
---------
</TABLE>
Continued
<PAGE> 268
THE COMPASS CAPITAL GROUP
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
FACE AMOUNT VALUE
(000) (000)
----------- ---------
<S> <C> <C>
CORPORATE BONDS, CONCLUDED:
Petroleum Refining (3.7%)
Texaco Capital
9.000%, 11/15/96................ $ 1,500 $ 1,551
8.530%, 08/15/97................ 1,350 1,406
8.260%, 09/15/98................ 1,000 1,053
9.000%, 12/15/99................ 3,000 3,276
---------
7,286
---------
Retail-Eating Places (4.2%)
Bass America
6.750%, 08/01/99................ 5,000 5,037
8.125%, 03/31/02................ 1,000 1,074
McDonald's
6.750%, 02/15/03................ 2,000 2,000
---------
8,111
---------
Retail-Variety Stores (1.6%)
Wal-Mart Stores
8.000%, 05/01/96................ 3,000 3,038
---------
Total Corporate Bonds
(Cost $70,861,179).............. 71,214
---------
COLLATERALIZED MORTGAGE OBLIGATIONS
(2.1%)
Federal Home Loan Mortgage
Corporation
6.750%, 09/15/16................ 4,000 4,028
---------
Total Collateralized Mortgage
Obligations (Cost $4,033,750)... 4,028
---------
ASSET BACKED SECURITIES (14.9%)
American Express Master Trust
7.150%, 08/15/99................ 4,750 4,860
Chase Manhattan Master Trust
8.750%, 08/15/99................ 2,000 2,039
General Motors Acceptance
Corporation Grantor Trust
4.150%, 03/15/98................ 1,314 1,298
Merrill Lynch Asset Backed
5.500%, 05/15/98................ 1,096 1,092
5.125%, 07/15/98................ 1,030 1,025
Premier Auto Trust
4.900%, 10/15/98................ 736 728
4.650%, 11/02/99................ 4,344 4,272
Prime Credit Card Master Trust
6.750%, 10/31/05................ 2,000 2,014
Standard Credit Card Master Trust
8.875%, 09/07/99................ 5,000 5,331
7.875%, 01/07/00................ 6,000 6,261
---------
ASSET BACKED SECURITIES, CONCLUDED:
Total Asset Backed Securities
(Cost $28,578,921).............. $ 28,920
---------
U.S. GOVERNMENT AGENCY OBLIGATIONS
(2.2%)
Federal Home Loan Mortgage
Corporation
7.860%, 01/21/97................ $ 2,000 2,052
Tennessee Valley Authority
8.375%, 10/01/99................ 2,000 2,140
---------
Total U.S. Government Agency
Obligations
(Cost $4,004,410)............... 4,192
---------
U.S. TREASURY OBLIGATIONS (40.4%)
United States Treasury Notes
8.500%, 11/15/95................ 2,000 2,012
7.500%, 01/31/96................ 8,000 8,061
7.375%, 05/15/96................ 2,000 2,022
7.250%, 08/31/96................ 1,000 1,015
7.250%, 11/30/96................ 2,000 2,035
6.750%, 02/28/97................ 2,000 2,028
6.625%, 03/31/97................ 2,000 2,025
6.875%, 04/30/97................ 10,000 10,167
6.500%, 05/15/97................ 5,000 5,054
6.750%, 05/31/97................ 8,000 8,120
5.625%, 08/31/97................ 5,000 4,980
5.750%, 10/31/97................ 3,000 2,993
6.000%, 11/30/97................ 9,000 9,025
7.875%, 01/15/98................ 4,000 4,174
7.250%, 02/15/98................ 5,000 5,151
6.375%, 07/15/99................ 2,000 2,025
8.000%, 08/15/99................ 3,000 3,204
7.125%, 09/30/99................ 2,000 2,075
7.125%, 02/29/00................ 2,000 2,080
---------
Total U.S. Treasury Obligations
(Cost $78,013,927).............. 78,246
---------
SHORT-TERM INVESTMENTS (2.6%)
Temp Cash Fund.................... 5,108 5,108
---------
Total Short-Term Investments
(Cost $5,108,488)............... 5,108
---------
Total Investments (98.9%)
(Cost $190,600,675)............. 191,708
---------
</TABLE>
Continued
<PAGE> 269
STATEMENT OF NET ASSETS
-------------------------------------------------------------------------
August 31, 1995 (Unaudited)
SHORT/INTERMEDIATE FUND (CONTINUED)
<TABLE>
<CAPTION>
MARKET
FACE AMOUNT VALUE
(000) (000)
----------- ---------
<S> <C> <C>
OTHER ASSETS AND LIABILITIES (1.1%)
Other Assets and Liabilities,
Net............................. $ 2,111
---------
NET ASSETS:
Portfolio shares (unlimited
authorization-no par value)
based on 18,830,186 outstanding
shares of beneficial interest... 196,432
Accumulated net realized loss on
investments..................... (3,714)
Net unrealized appreciation on
investments..................... 1,107
Distributions in excess of net
investment income............... (6)
---------
Total Net Assets: (100.0%)........ $ 193,819
=========
Net Asset Value and Redemption
Price Per Share................. $ 10.29
=========
Maximum Public Offering Price Per
Share (10.29/96.00%)............ $ 10.72
=========
</TABLE>
FIXED INCOME FUND
<TABLE>
<S> <C> <C>
CORPORATE BONDS (44.5%)
Automobile Finance (3.4%)
Ford Capital BV
9.000%, 08/15/98................ $ 1,000 $ 1,066
Ford Motor Credit
8.000%, 01/15/99................ 2,000 2,085
8.000%, 06/15/02................ 1,000 1,063
7.750%, 03/15/05................ 3,000 3,154
6.750%, 08/15/08................ 1,000 971
---------
8,339
---------
Banks (5.2%)
ABN-AMRO Bank, New York, Callable
08/01/04 @ 100
8.250%, 08/01/09................ 5,000 5,356
Banque Nationale de Paris
9.875%, 05/25/98................ 1,000 1,084
National Westminster Bank, New
York
9.450%, 05/01/01................ 4,000 4,490
Toronto Dominion Bank, New York
7.875%, 08/15/04................ 2,000 2,083
---------
13,013
---------
Beverages (3.8%)
Anheuser Busch
9.000%, 12/01/09................ 4,500 5,377
Coca-Cola
7.875%, 09/15/98................ 1,955 2,043
Pepsico
6.125%, 01/15/98................ 2,000 1,998
---------
9,418
---------
Business Credit Institutions (0.4%)
General Electric Capital
8.125%, 02/01/99................ 1,000 1,054
---------
Commercial Printing (4.2%)
R.R. Donnelley & Sons
7.000%, 01/01/03................ 2,000 2,048
8.875%, 04/15/21................ 7,000 8,321
---------
10,369
---------
Electric Utility (0.4%)
Teco Energy
9.250%, 06/19/97................ 1,000 1,051
---------
Paper & Paper Products (3.3%)
Kimberly-Clark, Callable
02/01/13 @ 100
7.875%, 02/01/23................ 3,750 3,909
Weyerhaeuser
8.840%, 04/12/99................ $ 4,000 $ 4,295
---------
8,204
---------
Personal Credit Institutions (3.1%)
Associates Corporation of North
America
8.625%, 06/15/97................ 3,000 3,123
7.875%, 09/30/01................ 1,000 1,058
Associates Corporation of North
America, Callable 04/15/96 @ 100
7.625%, 04/15/98................ 1,000 1,009
Household Finance
7.625%, 01/15/03................ 2,500 2,616
---------
7,806
---------
Petroleum Refining (3.2%)
Texaco Capital
9.000%, 11/15/96................ 1,000 1,034
8.260%, 09/15/98................ 1,250 1,316
8.500%, 02/15/03................ 5,000 5,512
---------
7,862
---------
</TABLE>
<PAGE> 270
THE COMPASS CAPITAL GROUP
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
FACE AMOUNT VALUE
(000) (000)
----------- ---------
<S> <C> <C>
CORPORATE BONDS, CONCLUDED:
Railroads (1.9%)
Norfolk Southern
9.000%, 03/01/21................ $ 4,000 $ 4,795
---------
Retail-Department Stores (1.3%)
J.C. Penney, Callable 7/12/00 @
100
9.450%, 07/15/02................ 3,000 3,345
---------
Retail-Eating Places (6.6%)
Bass America
6.750%, 08/01/99................ 4,000 4,029
8.125%, 03/31/02................ 2,000 2,148
Grand Metropolitan Investment
7.125%, 09/15/04................ 5,000 5,122
McDonald's
7.375%, 07/15/02................ 2,000 2,118
6.750%, 02/15/03................ 3,000 3,000
---------
16,417
---------
Retail-Grocery Stores (2.0%)
Albertsons
4.820%, 03/25/96................ 5,000 4,963
---------
Retail-Variety Stores (0.8%)
Wal-Mart Stores
8.000%, 05/01/96................ 2,000 2,025
---------
Soap (0.8%)
Procter and Gamble
7.375%, 03/01/23................ 2,000 2,003
---------
Trucking (4.1%)
United Parcel Service
8.375%, 04/01/20................ 9,000 10,260
---------
Total Corporate Bonds
(Cost $107,054,724)............. 110,924
---------
COLLATERALIZED MORTGAGE OBLIGATIONS
(3.2%)
Federal Home Loan Mortgage
Corporation
8.000%, 03/15/05................ 1,345 1,353
6.750%, 09/15/16................ 6,000 6,042
Federal National Mortgage
Association
9.500%, 09/25/18................ 627 639
---------
Total Collateralized Mortgage
Obligations
(Cost $7,941,153)............... 8,034
---------
ASSET BACKED SECURITIES (4.9%)
American Express Master Trust
7.150%, 08/15/99................ $ 2,000 $ 2,046
Chase Manhattan Master Credit Card
Trust
8.750%, 08/15/99................ 3,000 3,060
General Motor Acceptance
Corporation Grantor Trust
4.150%, 03/15/98................ 434 429
Merrill Lynch Asset Backed
5.500%, 05/15/98................ 658 655
5.125%, 07/15/98................ 1,030 1,025
Premier Auto Trust
4.900%, 10/15/98................ 2,942 2,912
Standard Credit Card Master Trust
7.875%, 01/07/00................ 2,000 2,086
---------
Total Asset Backed Securities
(Cost $12,255,593).............. 12,213
---------
GOVERNMENT POOLED MORTGAGES (1.2%)
Government National Mortgage
Association
9.000%, 09/15/16................ 518 544
9.000%, 10/15/19................ 293 307
9.000%, 11/15/19................ 317 333
9.000%, 11/15/19................ 189 199
9.000%, 12/15/19................ 271 285
8.500%, 03/15/20................ 206 214
8.500%, 04/15/20................ 208 217
8.500%, 04/15/20................ 586 608
8.500%, 04/15/20................ 328 342
---------
Total Government Pooled Mortgages
(Cost $2,799,959)............... 3,049
---------
U. S. TREASURY OBLIGATIONS (37.7%)
United States Treasury Bonds
7.250%, 05/15/16................ 10,000 10,556
8.750%, 05/15/17................ 2,000 2,448
8.125%, 08/15/19................ 7,000 8,112
7.875%, 02/15/21................ 3,000 3,398
7.125%, 02/15/23................ 3,000 3,138
United States Treasury Notes
7.375%, 05/15/96................ 1,000 1,011
4.375%, 11/15/96................ 3,000 2,953
6.500%, 11/30/96................ 2,000 2,018
6.625%, 03/31/97................ 2,000 2,025
</TABLE>
Continued
<PAGE> 271
STATEMENT OF NET ASSETS
-------------------------------------------------------------------------
August 31, 1995 (Unaudited)
FIXED INCOME FUND (CONTINUED)
<TABLE>
<CAPTION>
MARKET
FACE AMOUNT VALUE
(000) (000)
----------- ---------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS, CONCLUDED:
6.500%, 05/15/97................ 2,000 2,022
6.750%, 05/31/97................ 3,000 3,045
6.500%, 08/15/97................ 1,000 1,012
5.625%, 08/31/97................ 2,000 1,992
5.750%, 10/31/97................ 2,000 1,995
6.000%, 11/30/97................ 6,000 6,017
7.250%, 02/15/98................ 4,000 4,121
5.125%, 02/28/98................ 2,000 1,965
5.125%, 03/31/98................ 5,000 4,907
8.250%, 07/15/98................ 2,000 2,120
7.125%, 10/15/98................ 2,000 2,066
5.125%, 11/30/98................ 2,000 1,949
7.000%, 04/15/99................ 2,000 2,063
6.375%, 07/15/99................ 2,000 2,025
7.125%, 09/30/99................ 2,000 2,075
7.125%, 02/29/00................ 4,000 4,160
6.250%, 05/31/00................ 2,000 2,012
8.500%, 11/15/00................ 6,000 6,638
7.500%, 11/15/01................ 1,000 1,067
6.375%, 08/15/02................ 2,000 2,018
7.250%, 08/15/04................ 2,850 3,025
---------
Total U. S. Treasury Obligations
(Cost $92,364,948).............. 93,953
---------
U.S. GOVERNMENT AGENCY OBLIGATIONS
(1.2%)
Federal Home Loan Mortgage
Corporation
7.125%, 07/21/99................ $ 3,000 $ 3,103
---------
Total U.S. Government Agency
Obligations
(Cost $2,989,800)............... 3,103
---------
YANKEE BONDS (4.0%)
Hydro Quebec
9.400%, 02/01/21................ 4,000 4,695
Province of Ontario
8.000%, 10/17/01................ 5,000 5,338
---------
Total Yankee Bonds
(Cost $9,357,210)............... 10,033
---------
SHORT TERM INVESTMENTS (1.6%)
Temp Cash Fund 3,948 3,948
---------
Total Short Term Investments
(Cost $3,947,569)............... 3,948
---------
Total Investments (98.3%)
(Cost $238,710,956)............. 245,257
---------
OTHER ASSETS AND LIABILITIES (1.7%)
Other Assets and Liabilities,
Net............................. $ 4,123
---------
NET ASSETS:
Portfolio shares (unlimited
authorization--no par value)
based on 23,725,957 outstanding
shares of beneficial interest... 246,818
Accumulated net realized loss on
investments..................... (3,988)
Net unrealized appreciation on
investments..................... 6,546
Undistributed net investment
income.......................... 4
---------
Total Net Assets: (100.0%)........ $ 249,380
=========
Net Asset Value and Redemption
Price Per Share................. $ 10.51
=========
Maximum Public Offering Price Per
Share ($10.51/96.00%)........... $ 10.95
=========
</TABLE>
MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
MARKET
FACE AMOUNT VALUE
(000) (000)
----------- ---------
<S> <C> <C>
MUNICIPAL BONDS (99.0%)
Arizona (3.6%)
Salt River Project, Series A, RB
5.300%, 01/01/03................ $ 500 $ 518
Scottsdale, Municipal Property
Corporation, RB, (FGIC),
Callable 11/01/02 @ 100
6.250%, 11/01/10................ 500 516
---------
1,034
---------
California (6.2%)
Azusa, Unified School District,
GO, (AMBAC)
5.100%, 05/01/07................ 830 812
State, Public Power Authority, San
Juan Power Project, Series A,
RB, (MBIA),
Callable 01/01/05 @ 100
5.375%, 01/01/10................ 1,000 974
---------
1,786
---------
Florida (1.9%)
Palm Beach County, Solid Waste
Authority, RB, Callable
07/01/97 @ 103
8.625%, 07/01/04................ 500 548
---------
</TABLE>
Continued
<PAGE> 272
THE COMPASS CAPITAL GROUP
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
FACE AMOUNT VALUE
(000) (000)
----------- ---------
<S> <C> <C>
MUNICIPAL BONDS, CONTINUED:
Georgia (1.8%)
Atlanta, Series A, GO
6.125%, 12/01/23................ $ 500 $ 505
---------
Hawaii (7.8%)
Honolulu, Series C, GO,
Prerefunded @ 101
7.150%, 06/01/00 (A)............ 1,000 1,129
State, Series BR, GO,
Prerefunded @ 100
7.000%, 06/01/00 (A)............ 1,000 1,115
---------
2,244
---------
Oregon (1.9%)
Washington County, School District
No. 15, Forest Grove, GO,
(FGIC), Callable 06/01/04 @ 101
6.000%, 06/01/05................ 500 538
---------
Pennsylvania (5.9%)
Methacton School District, GO,
(FGIC)
5.600%, 10/01/13................ 500 488
Seneca Valley School District,
Series A, GO, (FGIC), Callable
07/01/02 @ 100
5.750%, 07/01/10................ 500 502
State, Higher Education Facilities
Authority, Thomas Jefferson
University Hospital, RB,
Callable 11/01/95 @ 102
9.100%, 07/01/01................ 200 205
Wayne Highlands School District,
GO, (FGIC), Callable
10/01/99 @ 100
6.000%, 04/01/12................ 500 503
---------
1,698
---------
South Carolina (3.7%)
Piedmont, Municipal Power Agency,
RB, (FGIC)
6.250%, 01/01/18................ 500 511
Piedmont, Municipal Power Agency,
RB, (MBIA)
6.250%, 01/01/09................ 500 538
---------
1,049
---------
South Dakota (1.9%)
State, Building Lease Authority,
Series A, RB, (CGIC)
6.375%, 09/01/05................ 500 545
---------
Tennessee (7.6%)
Memphis-Shelby County, Airport
Authority Revenue, Series B, RB,
AMT, (MBIA)
6.500%, 02/15/08 (A)............ $ 1,000 $ 1,079
State, Series B, GO, Callable
06/01/01 @ 101.5
6.850%, 06/01/10................ 1,000 1,101
---------
2,180
---------
Texas (3.8%)
Harris County, GO, Callable
08/01/01 @ 102
7.000%, 08/01/09................ 500 547
University of Texas, Series A, RB,
Callable 08/15/01 @ 102
7.000%, 08/15/07................ 500 554
---------
1,101
---------
Utah (1.8%)
Salt Lake City, Motor Fuel Excise
Tax, Series A, RB
5.400%, 02/01/03................ 500 506
---------
Vermont (7.5%)
Burlington, Waterworks Systems,
Series A, RB, (FGIC), Callable
07/01/97 @ 102
6.875%, 07/01/12................ 1,000 1,049
State, Series A, GO,
Prerefunded @ 102
6.750%, 02/01/00 (A)............ 1,000 1,110
---------
2,159
---------
Virginia (1.8%)
State, Housing Development
Authority, Series A, RB, AMT
6.700%, 07/01/05 (B)............ 500 527
---------
Washington (5.1%)
Port of Seattle, Series A, RB,
Callable 11/01/02 @ 102
6.250%, 11/01/10................ 500 518
State, Public Power Supply,
Nuclear Project No. 1, Series B,
RB, (MBIA)
5.600%, 07/01/15................ 1,000 941
---------
1,459
---------
Washington, D.C. (1.7%)
District of Columbia, Series C,
GO, (AMBAC), Prerefunded @ 102
7.600%, 06/01/98 (A)............ 450 496
---------
</TABLE>
Continued
<PAGE> 273
STATEMENT OF NET ASSETS
-------------------------------------------------------------------------
August 31, 1995 (Unaudited)
MUNICIPAL BOND
FUND (CONTINUED)
<TABLE>
<CAPTION>
MARKET
FACE AMOUNT VALUE
(000) (000)
----------- ---------
<S> <C> <C>
MUNICIPAL BONDS, CONCLUDED:
Wisconsin (.9%)
Milwaukee, Sewer District, GO
6.125%, 10/01/03................ $ 250 $ 273
---------
Total Municipal Bonds
(Cost $28,151,230).............. 28,460
---------
Total Investments (99.0%)
(Cost $28,151,230).............. 28,460
---------
OTHER ASSETS AND LIABILITIES (1.0%)
Other Assets and Liabilities,
Net............................. $ 277
---------
NET ASSETS:
Portfolio shares (unlimited
authorization-no par value)
based on 2,720,728 outstanding
shares of beneficial interest... 29,343
Accumulated net realized loss on
investments..................... (915)
Net unrealized appreciation on
investments..................... 309
---------
Total Net Assets: (100.0%)........ $ 28,737
=========
Net Asset Value and Redemption
Price Per Share................. $ 10.56
=========
Maximum Public Offering Price Per
Share ($10.56/96.00%)........... $ 11.00
=========
</TABLE>
- ------------------
(A) Put and Demand features exist requiring the issuer to repurchase the
instrument prior to maturity. The maturity date shown is the next demand
date.
(B) Securities are held in connection with a letter of credit or other credit
support.
AMT--Alternative Minimum Tax
GO--General Obligation
RB--Revenue Bond
The following organizations have provided underlying credit support for certain
securities as defined in the Statement of Net Assets:
AMBAC--American Municipal Bond Assurance Company
CGIC--Capital Guaranty Insurance Company
FGIC--Financial Guaranty Insurance Company
MBIA--Municipal Bond Insurance Association
NEW JERSEY MUNICIPAL
BOND FUND
<TABLE>
<CAPTION>
MARKET
FACE AMOUNT VALUE
(000) (000)
----------- ---------
<S> <C> <C>
MUNICIPAL BONDS (99.0%)
New Jersey (92.3%)
Absecon, Board of Education, COP,
(MBIA)
5.625%, 12/15/02................ $ 770 $ 795
Bergen County, General
Improvement, GO
4.700%, 07/15/97................ 1,000 1,015
Bergen County, Utility Authority,
Series A, RB, (FGIC), Callable
06/15/02 @ 100
5.500%, 06/15/13................ 1,000 978
Borough of Roselle, Fiscal Year
Adjustment, Series 1993, GO,
(MBIA)
4.850%, 10/15/05................ 1,000 975
Brick Township, Municipal
Utilities Authority, RB
6.750%, 12/01/16................ 1,000 1,120
Brigantine, GO, (MBIA), Callable
08/01/02 @ 101
6.250%, 08/01/03................ 730 794
Camden County, Improvement
Authority Lease, RB
5.700%, 12/01/05 (C)............ 500 513
Camden County, Improvement
Authority Lease, RB, Callable
12/01/02 @ 101
6.000%, 12/01/12 (C)............ 500 508
Camden County, Improvement
Authority, Health Services
Center Project, Series B, RB,
(AMBAC)
4.900%, 12/01/05................ 1,000 988
Cape May County, Municipal
Utilities Authority, Series B,
RB, (FGIC), Callable 01/01/03 @
102
4.900%, 01/01/09................ 1,000 934
Carteret, GO, (FGIC), Callable
10/01/00 @ 101
5.250%, 10/01/07................ 980 975
5.450%, 10/01/09................ 500 498
Cherry Hill Township, GO, Callable
06/01/02 @ 102
6.000%, 06/01/06................ 500 528
Dover Township, GO, (AMBAC),
Callable 10/15/02 @ 102
6.000%, 10/15/03................ 1,000 1,075
</TABLE>
Continued
<PAGE> 274
THE COMPASS CAPITAL GROUP
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
FACE AMOUNT VALUE
(000) (000)
----------- ---------
<S> <C> <C>
MUNICIPAL BONDS, CONTINUED:
New Jersey, continued:
Edison Township, GO
6.500%, 06/01/04................ $ 500 $ 551
Edison Township, GO, (AMBAC),
Callable 01/01/04 @ 102
5.000%, 01/01/07................ 1,000 985
Edison Township, School Authority,
GO
6.500%, 06/01/03................ 1,000 1,098
Essex County, Correctional
Facility Improvement, RB,
(AMBAC), Callable 12/01/06 @100
6.900%, 12/01/14................ 500 543
Essex County, Series A, GO,
(MBIA), Callable 10/01/01 @ 102
4.600%, 10/01/03................ 1,500 1,467
Evesham Township, Municipal
Utilities Authority, Series B,
RB, (MBIA), Callable 07/01/97 @
100
6.800%, 07/01/01................ 1,010 1,052
6.850%, 07/01/02................ 1,080 1,118
Flemington-Raritan, GO, Callable
02/01/05 @ 102
6.250%, 02/01/12 (C)............ 500 526
Irvington Township, School
District Refunding Bonds, Series
1993, GO, (FSA), Callable
10/01/02 @ 102
5.000%, 10/01/11................ 1,000 928
Knowlton Township, Board of
Education, GO
6.600%, 08/15/10................ 170 188
6.600%, 08/15/11................ 169 185
Lacey Township, Municipal
Utilities Authority, RB, (MBIA),
Callable 12/01/03 @ 102
6.000%, 12/01/12................ 1,000 1,020
Landis, Sewer Authority, RB,
(FGIC)
5.400%, 10/01/06................ 500 504
Manchester Township, Board of
Education, COP, (MBIA), Callable
12/15/03 @ 102
5.300%, 12/15/07................ 500 489
Medford Township, Board of
Education, GO, (FGIC), Callable
02/01/05 @ 100
5.950%, 02/01/11................ $ 500 $ 508
Mercer County, Hamilton Board of
Education Lease Project, RB,
(MBIA), Callable 12/15/03 @ 102
5.250%, 12/15/14................ 1,000 936
Mercer County, Improvement
Authority, Hamilton Township
Board of Education Project, RB,
(MBIA), Callable 06/01/01 @ 102
5.900%, 06/01/03................ 500 524
Mercer County, Improvement Revenue
Government Lease Program, RB,
Prerefunded @ 101
7.250%, 12/01/98 (B)............ 985 1,084
Middletown Township, Sewer
Authority, Series A, RB, (FGIC),
Callable 01/01/03 @ 101
5.050%, 01/01/07................ 1,095 1,081
Millburn Township, School
District, GO
5.350%, 07/15/10 (C)............ 1,150 1,156
Monroe Township, Board of
Education, GO, (FGIC)
5.200%, 08/01/15................ 500 471
Moorestown, School District, GO,
(AMBAC)
6.600%, 06/01/05................ 450 499
Morris County, GO, Callable
07/15/05 @ 100
5.000%, 07/15/13................ 1,000 926
Morris Township, GO
6.550%, 07/01/01................ 500 553
Morristown, GO, (FSA), Callable
08/01/05 @ 102
6.400%, 08/01/14................ 500 528
Newark, Board of Education, GO,
(MBIA), Callable 12/15/04 @ 102
5.875%, 12/15/13................ 1,000 1,004
North Arlington, GO, (AMBAC)
4.800%, 02/01/12................ 600 540
4.800%, 02/01/13................ 441 395
North Bergen Township, GO, (FSA)
5.900%, 08/15/01................ 500 529
Northwest Bergen County, Utilities
Authority, RB, (MBIA)
5.900%, 07/15/06................ 755 798
Continued
</TABLE>
<PAGE> 275
STATEMENT OF NET ASSETS
-------------------------------------------------------------------------
August 31, 1995 (Unaudited)
NEW JERSEY MUNICIPAL
BOND FUND (CONTINUED)
<TABLE>
<CAPTION>
MARKET
FACE AMOUNT VALUE
(000) (000)
----------- ---------
<S> <C> <C>
MUNICIPAL BONDS, CONTINUED:
New Jersey, continued:
Nutley, GO
7.000%, 08/01/98................ $ 400 $ 408
Ocean County, General Improvement,
GO
6.300%, 04/15/97................ 1,000 1,036
5.150%, 07/01/09................ 1,000 964
5.150%, 07/01/10................ 1,250 1,191
Ocean County, Series A, GO
6.250%, 10/01/01................ 1,280 1,397
Ocean County, Series A, GO,
Callable 10/01/01 @ 102
6.250%, 10/01/05................ 500 537
Ocean County, Utility Authority,
Series A, RB, Callable
01/01/07 @ 100
6.300%, 01/01/12 (C)............ 1,005 1,051
Parsippany Troy Hills Township, GO
4.700%, 12/01/04................ 1,000 965
Passaic Valley, Water Commission,
Series A, RB, (FGIC)
5.950%, 12/15/02................ 500 536
Point Pleasant, GO, (MBIA)
5.700%, 12/01/03................ 500 524
Port Authority, Marine Terminal,
Series G, RB
5.500%, 01/01/15................ 2,280 2,120
Port Authority, RB
5.200%, 09/01/13 (C)............ 1,000 941
South Plainfield, GO, (AMBAC)
4.750%, 09/01/08................ 1,030 972
State, Building Authority, RB
7.150%, 06/15/99................ 200 220
State, Building Authority, RB,
Prerefunded @ 102
7.200%, 06/15/99 (B)............ 1,200 1,341
State, Economic Development
Authority, 89 Kiva L.P. Project,
RB
5.550%, 08/01/04 (C)............ 565 573
State, Economic Development
Authority, RB, AMT, Callable
07/01/05 @ 101
6.000%, 07/01/06 (C)............ 300 306
6.100%, 07/01/07 (C)............ 200 204
State, Economic Development
Authority, Trenton Office
Complex Project, RB, Callable
06/15/2000 @ 102
6.625%, 06/15/01................ $ 1,050 $ 1,158
State, Economic Development
Authority, W.Y. Urban Holding
Project, RB, AMT
5.950%, 06/01/05 (C)............ 865 865
State, GO
7.000%, 04/01/97................ 1,350 1,412
6.250%, 09/15/01................ 1,000 1,094
State, GO, Callable
04/01/01 @ 100.50
7.000%, 04/01/03................ 500 556
State, GO, Prerefunded @ 101.50
7.400%, 04/15/97 (B)............ 820 874
State, Health Care Facility,
Cathedral Health Care, Series A,
RB, (FHA), Callable
02/15/01 @ 102
7.250%, 02/15/21................ 1,000 1,071
State, Health Care Facility, Dover
General Hospital And Medical
Center, RB, (MBIA), Callable
07/01/04 @ 102
5.875%, 07/01/12................ 500 504
State, Health Care Facility,
Jersey Shore Medical Center, RB,
(AMBAC), Callable
07/01/04 @ 102
6.250%, 07/01/16................ 500 519
State, Health Care Facility, St.
Clares-Riverside Medical Center,
RB, (MBIA), Callable
07/01/04 @ 102
5.750%, 07/01/14................ 500 495
State, Highway Authority, Garden
State Parkway Project, RB
4.900%, 01/01/05 (C)............ 1,000 1,001
6.200%, 01/01/10................ 750 794
State, Highway Authority, Garden
State Parkway Project, RB,
Callable 01/01/02 @ 102
6.000%, 01/01/05................ 1,350 1,446
6.250%, 01/01/14................ 500 513
</TABLE>
Continued
<PAGE> 276
THE COMPASS CAPITAL GROUP
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
FACE AMOUNT VALUE
(000) (000)
----------- ---------
<S> <C> <C>
MUNICIPAL BONDS, CONTINUED:
New Jersey, continued:
State, Refunding Bond, Series C,
RB, Callable 01/15/99 @ 101.25
6.500%, 01/15/04................ 1,000 1,078
State, Refunding Bond, Series C,
RB, Callable 01/15/99 @ 101.50
6.500%, 01/15/05................ 500 539
State, Series C, RB, Callable
01/15/99 @ 101.5
6.500%, 01/15/08................ 1,000 1,078
State, Series D, GO
6.000%, 02/15/11................ 2,000 2,092
State, Sports & Exposition
Authority, Contract Bonds,
Series A, RB, Callable 09/01/05
@ 100
5.300%, 09/01/09................ 955 922
State, Sports & Exposition
Authority, Convention Center
Project, Series A, RB, (MBIA),
Callable 07/01/04 @ 100
6.000%, 07/01/12................ 1,000 1,013
State, Transportation Authority,
Series A, RB
5.400%, 06/15/97................ 500 512
6.000%, 06/15/00................ 1,030 1,101
State, Turnpike Authority, RB
6.400%, 01/01/02................ 250 273
6.500%, 01/01/16................ 500 541
State, Turnpike Authority, RB,
(AMBAC), Callable
01/01/03 @ 100
6.250%, 01/01/10................ 1,350 1,396
State, Turnpike Authority, Series
A, RB, Callable 01/01/96 @ 100
6.900%, 01/01/14................ 970 975
State, Wastewater Authority,
Series B, RB, Callable 05/15/99
@ 101.25
7.000%, 05/15/04................ 950 1,030
State, Wastewater Authority,
Treatment Trust, RB, (AMBAC),
Callable 03/01/05 @ 100
4.600%, 03/01/06................ 1,500 1,406
4.800%, 03/01/13................ 1,590 1,391
State, Water Supply District
Authority, Wanaque North
Project, Series A, RB, (MBIA)
6.500%, 11/15/06................ $ 510 $ 553
Tinton Falls, Board of Education,
GO, (MBIA), Callable
10/15/04 @ 100
5.875%, 10/15/09................ 1,010 1,029
Union City, GO, (FSA)
6.375%, 11/01/07................ 485 529
Wanaque Valley, Regional Sewer
Authority, Series B, RB, (AMBAC)
5.650%, 09/01/08................ 585 596
Warren County, GO, (AMBAC),
Callable 09/15/05 @ 100
4.650%, 09/15/06................ 500 485
Warren County, Pollution Control
Finance Authority, Resource
Recovery, RB, (MBIA) Callable
12/01/02 @ 102
6.350%, 12/01/04................ 500 547
Warren County, Pollution Control
Finance Authority, Series B, RB,
(MBIA)
5.700%, 12/01/03................ 500 526
Warren Township, Sewer Authority,
RB, Callable 12/01/04 @ 100
6.450%, 12/01/05................ 275 302
Weehawken, GO, (FSA), Callable
07/01/03 @ 100
6.150%, 07/01/04................ 350 378
West Long Branch, Board of
Education, COP, (MBIA)
5.000%, 12/15/09................ 1,380 1,282
West Windsor Plainsboro, Regional
Board of Education, Series 1993,
COP, (MBIA), Callable
03/15/05 @ 100
5.800%, 03/15/06................ 1,000 1,045
Winslow Township, GO, (FGIC),
Callable 10/01/02 @ 102
6.400%, 10/01/05................ 870 934
Woodbridge Township, GO, Callable
08/15/02 @ 102
5.800%, 08/15/03................ 500 528
</TABLE>
Continued
<PAGE> 277
STATEMENT OF NET ASSETS
-------------------------------------------------------------------------
August 31, 1995 (Unaudited)
NEW JERSEY MUNICIPAL
BOND FUND (CONTINUED)
<TABLE>
<CAPTION>
MARKET
FACE AMOUNT VALUE
(000) (000)
----------- ---------
<S> <C> <C>
MUNICIPAL BONDS, CONCLUDED:
New Jersey, continued:
Woodbridge Township, GO, Callable
08/15/04 @ 100
6.050%, 08/15/05................ $ 500 $ 534
Woodbridge Township, Series C, GO,
Callable 09/15/06 @ 100
5.000%, 09/15/11................ 1,000 916
Woodbridge Township, Sewer
Utility, Series B, GO
5.000%, 09/15/10................ 965 896
---------
90,245
---------
New York (1.6%)
Port Authority, Callable
04/01/96 @ 102
7.250%, 04/01/14 (C)............ 1,500 1,551
---------
Pennsylvania (1.5%)
Delaware River Joint Toll Bridge
Commission, RB, (FGIC), Callable
07/01/02 @100
6.250%, 07/01/12................ 1,400 1,460
---------
Puerto Rico (3.0%)
Puerto Rico, Electric Power
Authority, RB, (CGIC)
6.125%, 07/01/08................ 1,000 1,090
Puerto Rico, Telecommunication
Revenue, RB, (MBIA)
5.250%, 01/01/05................ 500 506
University of Puerto Rico, Series
L, RB, Prerefunded @ 102
7.750%, 06/01/96 (B) (C)........ 1,015 1,064
University of Puerto Rico, Series
M, RB, (MBIA), Callable
06/01/07 @ 100
5.500%, 06/01/15................ 250 243
---------
2,903
---------
Virginia (0.6%)
Richmond, Industrial Development
Authority, Cogentrix-A, VRDN,
AMT
3.750%, 09/01/95 (A) (C)........ 600 600
---------
Total Municipal Bonds
(Cost $96,058,358).............. 96,759
---------
Total Investments (99.0%)
(Cost $96,058,358).............. 96,759
---------
OTHER ASSETS AND LIABILITIES (1.0%)
Other Assets and Liabilities,
Net............................... $ 993
---------
NET ASSETS:
Portfolio shares (unlimited
authorization-no par value)
based on 8,708,827 outstanding
shares of beneficial interest... 97,309
Accumulated net realized loss on
investments..................... (261)
Net unrealized appreciation on
investments..................... 700
Undistributed net investment
income.......................... 4
---------
Total Net Assets: (100.0%)........ $ 97,752
=========
Net Asset Value and Redemption
Price Per Share................. $ 11.22
=========
Maximum Public Offering Price Per
Share ($11.22/96.00%)........... $ 11.69
=========
</TABLE>
- ------------------
(A) Variable Rate Security--The rate reported on
the Statement of Net Assets is the rate in effect
on August 31, 1995.
(B) Put and Demand features exist requiring the issuer to repurchase the
instrument prior to maturity. The maturity date shown is the next demand
date.
(C) Securities are held in connection with a letter of credit or other credit
support.
AMT--Alternative Minimum Tax
COP--Certificate of Participation
GO--General Obligation
RB--Revenue Bond
VRDN--Variable Rate Demand Note
The following organizations have provided
underlying credit support for certain securities
as defined in the Statement of Net Assets:
AMBAC--American Municipal Bond Assurance Company
FGIC--Financial Guaranty Insurance Company
FHA--Federal Housing Authority
FSA--Financial Security Assurance
MBIA--Municipal Bond Insurance Association
The accompanying notes are an integral part of the financial statements.
<PAGE> 278
STATEMENT OF NET ASSETS/SCHEDULE OF INVESTMENTS
-------------------------------------------------------------------------
August 31, 1995 (Unaudited)
PENNSYLVANIA MUNICIPAL
BOND FUND
<TABLE>
<CAPTION>
MARKET
FACE AMOUNT VALUE
(000) (000)
----------- ---------
<S> <C> <C>
MUNICIPAL BONDS (96.3%)
Pennsylvania (96.3%)
Allegheny County, Childrens
Hospital, Series A, RB, (MBIA),
Callable 07/01/98 @ 102
7.000%, 07/01/06................ $ 500 $ 538
Allegheny County, Series C-42, GO
5.000%, 10/01/10................ 500 464
Berks County, Second Series, GO,
(FGIC)
5.000%, 05/15/10................ 500 470
Center City District, Business
Improvement, RB, (AMBAC)
5.500%, 12/01/15................ 500 476
Central Bucks, School District,
Series A, GO, (MBIA)
5.300%, 05/15/11................ 300 288
Commodore Perry, School District,
GO, (MBIA)
5.500%, 02/01/12 (A)............ 1,170 1,125
Deer Lakes, School District, GO,
(MBIA), Callable 01/15/04 @ 100
6.450%, 01/15/19................ 500 514
Lackawanna County, GO, (AMBAC)
5.100%, 12/01/08................ 250 244
Lancaster, Parking Authority, RB,
Callable 01/01/96 @ 100
9.375%, 01/01/05................ 450 457
North Penn, School District,
Series AA, GO, (STAID)
5.100%, 09/01/09................ 500 479
Pennsylvania Convention Center,
Series A, RB, Escrowed to
Maturity
6.700%, 09/01/16................ 750 840
Philadelphia, Industrial
Development Authority, National
Board of Medical Examiners
Project, RB, Callable 05/01/02 @
102
6.750%, 05/01/12................ 500 531
Philadelphia, Water and Wastewater
Treatment, RB, (MBIA)
6.750%, 08/01/03................ 500 563
5.600%, 08/01/18................ 500 476
Pittsburgh, Series D, GO, (AMBAC)
6.125%, 09/01/17................ 500 508
Pittsburgh, Urban Redevelopment
Authority, Series A, RB
5.500%, 10/01/10................ $ 500 $ 468
Pocono Mountain, School District,
Series AA, GO, (AMBAC), Callable
04/01/02 @ 100
5.750%, 10/01/09................ 500 503
Ringgold, School District, RB,
(FSA), Callable 02/01/08 @ 100
6.200%, 02/01/19................ 500 506
State, Financing Authority, RB,
Callable 11/01/03 @ 102
6.600%, 11/01/09................ 500 526
State, Higher Education Authority,
Drexel University Project, RB,
(MBIA), Callable 05/01/00 @ 100
7.250%, 05/01/10................ 500 551
State, Higher Education Authority,
Susquehanna University Project,
RB, (AMBAC), Callable 03/01/98 @
101
6.900%, 03/01/02................ 750 793
State, Higher Education Authority,
Thomas Jefferson University
Project, RB, Prerefunded @ 102
7.550%, 11/01/00 (A)............ 500 580
State, Housing Finance Agency,
Rental Housing Projects, Series
C, RB, Callable 07/01/04 @ 100
6.400%, 07/01/12................ 500 502
State, Industrial Development
Authority, Economic Development,
RB, (AMBAC)
5.800%, 07/01/09................ 700 716
State, Intergovernmental
Cooperation Authority, City of
Philadelphia Funding Program,
RB, (MBIA)
5.600%, 06/15/15................ 500 483
State, Public School Authority,
Midvalley School District
Project, Series D, RB, (FGIC),
Callable 07/01/02 @ 102
6.250%, 01/01/07................ 500 531
State, Turnpike Commission, Oil
Franchise Tax Project, Series A,
RB, (AMBAC)
5.875%, 12/01/08................ 500 509
</TABLE>
Continued
<PAGE> 279
THE COMPASS CAPITAL GROUP
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
FACE AMOUNT VALUE
(000) (000)
----------- ---------
<S> <C> <C>
MUNICIPAL BONDS, CONCLUDED:
Pennsylvania, continued:
State, Turnpike Commission, Series
P, RB, (AMBAC)
6.000%, 12/01/09................ $ 500 $ 518
West Chester, School District, GO,
(STAID)
6.200%, 09/01/14................ 1,000 1,016
West View, Municipal Authority, GO
Escrowed to Maturity
9.000%, 05/15/99................ 400 464
---------
16,639
---------
Total Municipal Bonds
(Cost $16,712,585).............. 16,639
---------
SHORT TERM INVESTMENTS (1.9%)
SEI Institutional Tax-Free
Portfolio....................... 319 319
---------
Total Short Term Investments (Cost
$319,000)....................... 319
---------
Total Investments (98.2%)
(Cost $17,031,585).............. 16,958
---------
OTHER ASSETS AND LIABILITIES (1.8%)
Other Assets and Liabilities,
Net............................... 311
---------
NET ASSETS:
Portfolio shares (unlimited
authorization-no par value)
based on 1,752,088 outstanding
shares of beneficial interest... 17,816
Accumulated net realized loss on
investments..................... (474)
Net unrealized depreciation on
investments..................... (73)
---------
Total Net Assets: (100.0%)........ $ 17,269
=========
Net Asset Value and Redemption
Price Per Share................. $ 9.86
=========
Maximum Public Offering Price Per
Share ($9.86/96.00%)............ $ 10.27
=========
</TABLE>
- ------------------
(A) Put and Demand features exist requiring the issuer to repurchase the
instrument prior to maturity. The maturity date shown is the next demand
date.
GO--General Obligation
RB--Revenue Bond
The following organizations have provided
underlying credit support for certain securities
as defined in the Statement of Net Assets:
AMBAC--American Municipal Bond Assurance Company
FGIC--Financial Guaranty Insurance Company
FSA--Financial Security Assurance
MBIA--Municipal Bond Insurance Association
STAID--State Aid Withholding
INTERNATIONAL EQUITY
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
----------- ---------
<S> <C> <C>
FOREIGN COMMON STOCKS (93.5%)
Argentina (0.5%)
YPF Sociedad Anonima ADR........... 14,000 $ 247
---------
Australia (3.1%)
Broken Hill Proprietary............ 51,221 743
MIM Holdings....................... 204,000 291
News Corporation................... 72,294 415
---------
1,449
---------
Chile (0.7%)
Five Arrow Chile Fund PC........... 100,000 293
Five Arrow Chile Fund Warrants,
Expire 05/31/99*................. 20,000 12
---------
305
---------
Denmark (1.0%)
Tele Danmark A/S "B"............... 8,779 461
---------
France (8.1%)
AXA SA............................. 9,229 511
Carrefour.......................... 930 519
Eaux Generale...................... 5,122 542
Groupe Danone...................... 2,856 469
L'Oreal............................ 352 89
Lafarge-Coppee..................... 6,920 517
Societe Generale................... 5,305 555
Societe Nationale Elf Aquitaine.... 6,979 511
---------
3,713
---------
Germany (4.0%)
Bayer AG........................... 1,989 514
Commerzbank AG..................... 2,015 456
Karstadt AG........................ 851 379
Lufthansa AG....................... 3,341 492
---------
1,841
---------
</TABLE>
Continued
<PAGE> 280
SCHEDULE OF INVESTMENTS
-------------------------------------------------------------------------
August 31, 1995 (Unaudited)
INTERNATIONAL EQUITY (CONTINUED)
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
----------- ---------
<S> <C> <C>
FOREIGN COMMON STOCKS, CONTINUED:
Hong Kong (2.7%)
Hong Kong Telecommunications....... 328,800 595
Swire Pacific 'A'.................. 88,000 659
---------
1,254
---------
India (0.8%)
Hindalco Industries GDR*........... 10,000 350
---------
Indonesia (1.4%)
Gadjah Tungal...................... 887,000 $ 646
---------
Italy (1.1%)
Assicurazioni Generali SPA......... 20,782 500
---------
Japan (30.2%)
Aoyama Trading..................... 8,300 221
CSK................................ 27,000 807
Denny's Japan...................... 8,000 221
East Japan Railway................. 273 1,299
Fuji Bank.......................... 1,000 21
Joshin Denki....................... 16,000 205
KAO................................ 33,000 382
Mitsubishi Materials............... 146,000 726
Mitsui Marine & Fire Insurance..... 91,000 610
Mitsui O.S.K. Lines*............... 233,000 737
Nippon Telegraph & Telephone....... 160 1,447
Nippon Television Network.......... 1,660 391
Nomura Securities.................. 35,000 688
Pioneer Electronics................ 70,000 1,340
Sumitomo Metal Industries.......... 242,000 676
Sumitomo Sitix..................... 20,000 303
Sumitomo Trust & Banking........... 53,000 721
Tokyo Steel Manufacturing.......... 11,000 212
Toshiba Corporation................ 205,000 1,481
Toyo Ink Manufacturing............. 35,000 198
Yamaha Corporation................. 97,000 1,290
---------
13,976
---------
Malaysia (1.6%)
Malayan Banking.................... 43,500 357
Perusahaan Otomobil................ 96,000 368
---------
725
---------
Mexico (0.7%)
Grupo Carso SA ADR*................ 25,000 309
---------
Netherlands (3.4%)
Akzo Nobel......................... 3,989 471
Elsevier NV........................ 41,997 531
International Nederlanden Group.... 9,918 551
---------
1,553
---------
Norway (1.9%)
Kvaerner AS Series B............... 10,649 $ 395
Norsk Hydro........................ 11,415 484
---------
879
---------
Singapore (2.9%)
Jurong Shipyard.................... 104,000 725
United Overseas Bank............... 68,930 597
---------
1,322
---------
South Korea (1.0%)
Samsung Electronics GDR*........... 86 5
Samsung Electronics New GDR*....... 7,000 441
---------
446
---------
Spain (1.9%)
Banco de Santander................. 12,168 498
Uralita*........................... 33,946 376
---------
874
---------
Sweden (2.3%)
Ericsson........................... 27,333 585
Stora Kopparberg 'B'............... 37,639 470
---------
1,055
---------
</TABLE>
Continued
<PAGE> 281
THE COMPASS CAPITAL GROUP
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (000)
----------- ---------
<S> <C> <C>
FOREIGN COMMON STOCKS, CONCLUDED:
Switzerland (4.8%)
BBC Brown Boveri AG................ 509 $ 537
Nestle SA.......................... 553 560
Roche Holding AG................... 79 529
Zurich Versicherung................ 2,300 588
---------
2,214
---------
Taiwan (0.3%)
Hocheng GDR........................ 18,750 145
---------
Thailand (1.8%)
Siam Cement........................ 6,000 409
Siam Commercial Bank............... 41,000 443
---------
852
---------
United Kingdom (17.3%)
B.A.T. Industries.................. 87,545 685
British Petroleum.................. 85,000 638
BTR................................ 141,830 750
BTR Warrants, Expire 11/26/98*..... 1,146 1
Caradon............................ 125,000 477
Delta Group........................ 49,000 364
Farnell Electronic................. 51,000 530
FKI................................ 190,000 528
Granada Group...................... 69,000 666
Reuters Holdings................... 82,000 712
Royal Bank of Scotland Group....... 80,000 576
Tesco.............................. 150,000 760
Unilever........................... 33,000 622
WPP Group.......................... 270,000 687
---------
7,996
---------
Total Foreign Common Stocks
(Cost $39,304,897)............... 43,112
---------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT MARKET
(000)(1) VALUE (000)
--------- -----------
<S> <C> <C>
CONVERTIBLE PREFERRED STOCKS (0.0%)
Netherlands (0.0%)
ABN-Amro Holdings.................. $ 349 13
---------
Total Convertible Preferred Stocks
(Cost $11,554)................... 13
---------
FOREIGN BONDS (1.0%)
India (0.4%)
Gujarat Ambuja Cementos
3.500%, 06/30/99................. 150 207
---------
Taiwan (0.6%)
Tecom Electronics & Machinery
2.750%, 04/15/04................. 310 248
---------
Total Foreign Bonds
(Cost $492,700).................. 455
---------
Total Investments (94.5% of Net
Assets)
(Cost $39,809,151)............... $ 43,580
=========
</TABLE>
- ------------------
*Non-income producing security
ADR--American Depository Receipts
GDR--Global Depository Receipts
PC--Participating Certificates
(1) In local currency unless otherwise indicated
Continued
<PAGE> 282
SCHEDULE OF INVESTMENTS
-------------------------------------------------------------------------
August 31, 1995 (Unaudited)
INTERNATIONAL FIXED INCOME
<TABLE>
<CAPTION>
FACE
AMOUNT MARKET
(000)(1) VALUE (000)
--------- -----------
<S> <C> <C>
FOREIGN BONDS (87.3%)
Austria (3.3%)
Austria Republic
6.250%, 10/16/03................ 120,000 $ 1,484
-----------
Canada (3.9%)
Canadian Government
8.500%, 04/01/02................ 2,300 1,778
-----------
Denmark (7.5%)
Kingdom of Denmark
9.000%, 11/15/00................ 11,000 2,072
7.000%, 12/15/04................ 8,000 1,314
-----------
3,386
-----------
France (9.3%)
Credit Foncier
5.500%, 11/15/99................ 6,000 1,134
Government of France
7.000%, 11/12/99................ 12,000 2,420
8.500%, 04/25/03................ 3,000 642
-----------
4,196
-----------
Germany (29.8%)
African Development Bank
7.250%, 10/21/99................ 2,000 1,431
Deutsche Ausgleichsbank
6.500%, 09/25/00................ 2,000 1,384
Deutschland Republic
8.250%, 09/20/01................ 750 561
6.250%, 01/04/24................ 1,600 944
German Unity Fund
8.000%, 01/21/02................ 1,400 1,033
KFW International Finance
7.250%, 12/03/97................ 3,000 2,138
LKB Baden Wurt
6.000%, 05/10/99................ 3,000 2,080
Norddeutsche Landesbank
6.000%, 01/05/04................ 3,000 1,920
Westdeutsche Landesbank
6.250%, 09/15/03................ 3,000 1,980
-----------
13,471
-----------
Japan (13.8%)
Interamerican Development Bank
6.000%, 10/30/01................ 180,000 $ 2,152
Japanese Development Bank
6.500%, 09/20/01................ 170,000 2,083
World Bank
4.500%, 03/20/03................ 180,000 2,004
-----------
6,239
-----------
New Zealand (2.9%)
Government of New Zealand
6.500%, 02/15/00................ 1,050 642
8.000%, 04/15/04................ 1,050 686
-----------
1,328
-----------
Sweden (4.3%)
Kingdom of Sweden
13.000%, 06/15/01............... 12,500 1,929
-----------
United Kingdom (8.0%)
Abbey National Treasury
8.000%, 04/02/03................ 600 907
National Power
10.625%, 03/26/01............... 600 1,025
United Kingdom Treasury
9.500%, 04/18/05................ 1,000 1,690
-----------
3,622
-----------
UNITED STATES (4.5%)
Federal National Mortgage
Association
6.000%, 08/23/00................ 3,000 2,043
Total Foreign Bonds
(Cost $37,811,504).............. 39,476
-----------
TIME DEPOSIT (3.2%)
Italy (3.2%)
Bank of Scotland
9.813%, 09/06/95................ 2,360,717 1,453
-----------
Total Time Deposit
(Cost $1,451,320)............... 1,453
-----------
Total Investments (90.5% of Net
Assets)
(Cost $39,262,824).............. $ 40,929
===========
</TABLE>
- ------------------
(1) In local currency
Continued
<PAGE> 283
STATEMENT OF ASSETS AND LIABILITIES
-------------------------------------------------------------------------
August 31, 1995 (Unaudited)
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
MARKET
VALUE
(000)
---------
<S> <C>
ASSETS:
Investment Securities (Cost $39,809,151)........................................................ $ 43,580
Cash............................................................................................ 2,418
Receivable -- Portfolio Secuities Sold.......................................................... 827
Other Assets.................................................................................... 674
---------
Total Assets.................................................................................. 47,499
---------
LIABILITIES:
Payable -- Portfolio Securities Purchased....................................................... (1,291)
Other Liabilities............................................................................... (104)
---------
Total Liabilities............................................................................. (1,395)
---------
NET ASSETS:
Portfolio shares (unlimited authorization -- no par value) based on 3,429,072 outstanding shares
of beneficial interest......................................................................... 40,943
Accumulated net realized gain on investments.................................................... 1,230
Accumulated net realized loss on foreign currency transactions.................................. (508)
Net unrealized appreciation on forward foreign currency contracts, foreign currency and
translation of other assets and liabilities in foreign currency................................ 413
Net unrealized appreciation on investments...................................................... 3,749*
Undistributed net investment income............................................................. 277
---------
Total Net Assets.............................................................................. $ 46,104
=========
Net Asset Value and Redemption Price Per Share....................................................... $ 13.44
=========
Maximum Public Offering Price Per Share ($13.44/95.50%).............................................. $ 14.07
=========
</TABLE>
- ---------------------------
* Net of $22,000 accrued foreign withholding taxes.
The accompanying notes are an integral part of the financial statements.
<PAGE> 284
THE COMPASS CAPITAL GROUP
- --------------------------------------------------------------------------------
INTERNATIONAL FIXED INCOME FUND
<TABLE>
<CAPTION>
MARKET
VALUE
(000)
---------
<S> <C>
ASSETS:
Investment Securities (Cost $39,262,824).......................................................... $ 40,929
Cash.............................................................................................. 1,460
Receivable--Accrued Income........................................................................ 1,686
Receivable--Portfolio Securities Sold............................................................. 1,888
Unrealized Gain on Forward Contracts.............................................................. 1,373
Other Assets...................................................................................... 8
---------
Total Assets................................................................................. 47,344
---------
LIABILITIES:
Payable--Portfolio Securities Purchased........................................................... (2,043)
Other Liabilities................................................................................. (59)
---------
Total Liabilities............................................................................ (2,102)
---------
NET ASSETS:
Portfolio shares (unlimited authorization--no par value) based on 3,962,011 outstanding shares of
beneficial interest.............................................................................. 40,912
Accumulated net realized loss on investments...................................................... (132)
Accumulated net realized loss on foreign currency transactions.................................... (203)
Net unrealized appreciation on forward foreign currency contracts, foreign currency and
translation of other assets and liabilities in foreign currency.................................. 1,320
Net unrealized appreciation on investments........................................................ 1,666
Undistributed net investment income............................................................... 1,679
---------
Total Net Assets............................................................................. $ 45,242
=========
Net Asset Value and Redemption Price Per Share......................................................... $ 11.42
=========
Maximum Public Offering Price Per Share ($11.42/96.00%)................................................ $ 11.90
=========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 285
STATEMENT OF OPERATIONS (000)
-------------------------------------------------------------------------
For the Six-Month Period Ended August 31, 1995 (Unaudited)
<TABLE>
<CAPTION>
NEW JERSEY
CASH U.S. MUNICIPAL MUNICIPAL PENNSYLVANIA EQUITY
RESERVE TREASURY MONEY MONEY MUNICIPAL INCOME
FUND FUND FUND FUND MONEY FUND FUND
----------- ----------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Investment income:
Interest income.............................. $ 14,409 $ 11,845 $ 797 $ 893 $ 900 $ 522
Dividend income.............................. -- -- -- -- -- 4,246
Less: foreign taxes withheld................. -- -- -- -- -- --
----------- ----------- ----- ----- ----- ---------
Total investment income.................. 14,409 11,845 797 893 900 4,768
----------- ----------- ----- ----- ----- ---------
Expenses:
Administration fees.......................... 422 356 35 40 40 286
Waiver of administrative fees................ -- -- -- -- -- --
Investment advisory fees..................... 820 692 78 90 89 1,113
Waiver of investment advisory fees........... -- -- -- -- -- --
Custodian/Transfer agent fees................ 32 34 14 12 12 53
Pricing fees................................. 3 2 1 1 1 9
Professional fees............................ 33 27 4 3 3 22
Registration fees............................ 10 9 1 1 1 8
Trustee fees................................. 9 8 1 1 1 6
Printing expenses............................ 16 14 2 2 2 11
Amortization of deferred organizational
costs...................................... -- -- -- 7 2 --
Insurance and other fees..................... 8 21 1 (4) 1 7
----------- ----------- ----- ----- ----- ---------
Total expenses........................... 1,353 1,163 137 153 152 1,515
----------- ----------- ----- ----- ----- ---------
Net investment income............................ 13,056 10,682 660 740 748 3,253
----------- ----------- ----- ----- ----- ---------
Net realized gain (loss) on securities sold...... 62 -- 15 -- 2 14,167
----------- ----------- ----- ----- ----- ---------
Net realized loss on forward foreign currency
contracts and foreign currency transactions.... -- -- -- -- -- --
----------- ----------- ----- ----- ----- ---------
Change in unrealized appreciation on forward
foreign currency contracts, foreign currency
and translation of other assets and liabilities
in foreign currency............................ -- -- -- -- -- --
----------- ----------- ----- ----- ----- ---------
Change in unrealized appreciation on
investment securities.......................... -- -- -- -- -- 39,473
----------- ----------- ----- ----- ----- ---------
Net gain on investments.......................... 62 -- 15 -- 2 53,640
----------- ----------- ----- ----- ----- ---------
Increase in net assets resulting
from operations................................ $ 13,118 $ 10,682 $ 675 $ 740 $ 750 $ 56,893
=========== =========== ===== ===== ===== =========
</TABLE>
- -------------------------
* Net of $22,000 change in accrued foreign withholding taxes.
The accompanying notes are an integral part of the financial statements.
<PAGE> 286
THE COMPASS CAPITAL GROUP
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NEW JERSEY
SMALL SHORT/ FIXED MUNICIPAL PENNSYLVANIA
COMPANY BALANCED INTERMEDIATE INCOME MUNICIPAL BOND MUNICIPAL BOND
GROWTH FUND FUND FUND FUND FUND BOND FUND FUND FUND
----------- ----------- ----------- --------------- --------- ----------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 155 $ 32 $ 498 $6,884 $ 8,764 $ 789 $2,633 $ 476
1,217 189 252 -- -- -- -- --
-- -- -- -- -- -- -- --
----------- ----------- ----------- ------ --------- ----------- ------ -----
1,372 221 750 6,884 8,764 789 2,633 476
----------- ----------- ----------- ------ --------- ----------- ------ -----
135 22 26 181 226 26 88 16
-- -- -- -- -- -- -- --
526 112 102 603 751 87 293 52
-- -- -- -- -- -- -- --
26 18 20 25 26 13 24 12
3 1 1 8 12 3 7 1
11 2 2 16 20 3 8 1
3 1 1 6 6 1 3 1
4 1 1 4 5 1 2 --
5 1 1 9 10 1 4 1
-- 2 -- -- -- -- 2 3
2 -- -- 2 -- (1) (2) --
----------- ----------- ----------- ------ --------- ----------- ------ -----
715 160 154 854 1,056 134 429 87
----------- ----------- ----------- ------ --------- ----------- ------ -----
657 61 596 6,030 7,708 655 2,204 389
----------- ----------- ----------- ------ --------- ----------- ------ -----
4,805 1,713 293 (483) (848) 176 155 24
----------- ----------- ----------- ------ --------- ----------- ------ -----
-- -- -- -- -- -- -- --
----------- ----------- ----------- ------ --------- ----------- ------ -----
-- -- -- -- -- -- -- --
----------- ----------- ----------- ------ --------- ----------- ------ -----
15,656 2,038 1,820 3,928 11,715 591 2,357 430
----------- ----------- ----------- ------ --------- ----------- ------ -----
20,461 3,751 2,113 3,445 10,867 767 2,512 454
----------- ----------- ----------- ------ --------- ----------- ------ -----
$ 21,118 $ 3,812 $ 2,709 $ 9,475 $ 18,575 $ 1,422 $ 4,716 $ 843
=========== =========== =========== ====== ========= =========== ====== =====
<CAPTION>
INTERNATIONAL INTERNATIONAL
EQUITY FIXED INCOME
FUND FUND
--------------- ---------------
<S> <C>
$ 54 $1,626
561 --
(51) --
------ ------
564 1,626
------ ------
41 47
-- --
178 182
-- --
54 49
(1) (5)
6 4
1 1
1 1
2 --
2 3
3 (6)
------ ------
287 276
------ ------
277 1,350
------ ------
1,230 695
------ ------
(440) (203)
------ ------
495 1,937
------ ------
3,156* 257
------ ------
4,441 2,686
------ ------
$4,718 $4,036
====== ======
</TABLE>
<PAGE> 287
STATEMENT OF CHANGES IN NET ASSETS (000)
-------------------------------------------------------------------------
For the Six Month Period Ended August 31, 1995 (Unaudited) and the Year
Ended February 28, 1995
<TABLE>
<CAPTION>
CASH RESERVE FUND U.S. TREASURY FUND
------------------------- ------------------------
03/01/95 03/01/94 03/01/95 03/01/94
TO 08/31/95 TO 02/28/95 TO 08/31/95 TO 02/28/95
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INVESTMENT OPERATIONS:
Net investment income.................................. $ 13,056 $ 17,854 $ 10,682 $ 14,172
Net realized gain (loss) on securities sold............ 62 (1,037) -- 2
----------- ----------- ----------- -----------
Increase in net assets resulting from investment
operations........................................ 13,118 16,817 10,682 14,174
----------- ----------- ----------- -----------
DISTRIBUTIONS:
Net investment income.................................. (13,054) (17,854) (10,682) (14,172)
----------- ----------- ----------- -----------
Total distributions.................................. (13,054) (17,854) (10,682) (14,172)
----------- ----------- ----------- -----------
SHARE TRANSACTIONS:
Proceeds from shares issued............................ 470,044 749,041 693,307 904,680
Reinvestment of cash distributions..................... 440 440 192 203
Cost of shares redeemed................................ (425,845) (742,657) (498,300) (916,643)
----------- ----------- ----------- -----------
Increase (decrease) in net assets from capital share
transactions...................................... 44,639 6,824 195,199 (11,762)
----------- ----------- ----------- -----------
Contribution of capital from affiliate............... -- 887 -- --
----------- ----------- ----------- -----------
Total increase (decrease) in net assets.............. 44,703 6,674 195,199 (11,760)
----------- ----------- ----------- -----------
NET ASSETS:
Beginning of period.................................... 435,323 428,649 365,516 377,276
----------- ----------- ----------- -----------
End of period.......................................... $ 480,026 $ 435,323 $ 560,715 $ 365,516
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 288
THE PNC(R) FUND
(SERVICE SHARES OF THE CORE FIXED INCOME PORTFOLIO)
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A ITEM LOCATION
- -------------- --------
PART A PROSPECTUS
<S> <C> <C>
1. Cover page . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expense Table
3. Condensed Financial Information . . . . . . . . . . . . . . . . . Financial Highlights
4. General Description of Registrant . . . . . . . . . . . . . . . . Cover Page; Investment
Policies;
Description of
Shares
5. Management of the Fund . . . . . . . . . . . . . . . . . . . . . . Management
5A. Management's Discussion of Fund Performance . . . . . . . . . . . Inapplicable
6. Capital Stock and Other Securities . . . . . . . . . . . . . . . . Cover Page; Dividends
and Distributions;
Description of
Shares
7. Purchase of Securities Being Offered . . . . . . . . . . . . . . . Purchase and Redemption
of Shares;
Dividends and Distributions
Net Asset Value
8. Redemption or Repurchase . . . . . . . . . . . . . . . . . . . . . Purchase and Redemption
of Shares
Redemption of
Shares
9. Pending Legal Proceedings . . . . . . . . . . . . . . . . . . . . Inapplicable
</TABLE>
<PAGE> 289
THE CORE FIXED INCOME PORTFOLIO
SERVICE CLASS
The PNC(R) Fund (the "Fund") consists of 30 investment portfolios.
This Prospectus relates to shares ("Service Shares" or "Shares") representing
interests in the Core Fixed Income Portfolio (the "Portfolio"). The Portfolio
seeks to realize a total rate of return that exceeds the total return of the
Lehman Brothers Aggregate Index consistent with preservation of capital and
prudent investment management. It pursues this objective by investing all of
its assets in a broad range of investment grade fixed income securities,
including U.S. Government, Mortgage-Backed, Asset-Backed and Corporate debt
securities.
Service Shares are sold by the Fund's distributor to institutional
investors ("Institutions") acting on behalf of their customers ("Customers").
These Customers, which may include individuals, trusts, partnerships and
corporations, must maintain accounts (such as custody, trust or escrow
accounts) with the Institutions. Service Shares are sold and redeemed at net
asset value without any purchase or redemption charge imposed by the Fund,
although the Institutions may receive compensation from the Fund for providing
various shareholder services and may charge their customer accounts for
services provided in connection with the purchase or redemption of Shares.
This Prospectus contains information that a prospective investor needs
to know before investing. Please keep it for future reference. A Statement of
Additional Information currently dated ____________, 1995 has been filed with
the Securities and Exchange Commission (the "SEC"). The current Statement of
Additional Information may be obtained free of charge from the Fund by calling
(800) 422-6538. The Statement of Additional Information, as it may be
supplemented from time to time, is incorporated by reference in this
Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION OR ANY OTHER BANK AND SHARES OF
THE FUND ARE NOT INSURED BY, GUARANTEED BY, OBLIGATIONS OF OR OTHERWISE
SUPPORTED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE
<PAGE> 290
BOARD, OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENTS IN SHARES OF THE FUND
INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL AMOUNT
INVESTED.
PROSPECTUS , 1995
-----------
-2-
<PAGE> 291
INTRODUCTION
- --------------------------------------------------------------------------------
The Fund is an open-end management investment company which has
registered shares in 30 investment portfolios, of which only the Portfolio is
described in this Prospectus.
PORTFOLIO MANAGEMENT
PNC Asset Management Group, Inc. ("PAMG") serves as the Fund's
investment adviser. BlackRock Financial Management Inc. ("BlackRock") serves
as sub-adviser to the Portfolio. The investment adviser and sub-adviser are
indirect wholly-owned subsidiaries of PNC Bank Corp.
THE ADMINISTRATORS
PNC Mutual Fund Company ("PMFCO"), PFPC Inc. ("PFPC") and Provident
Distributors, Inc. ("PDI") serve as the Fund's administrators (collectively,
the "Administrators").
THE DISTRIBUTOR
Provident Distributors, Inc. (the "Distributor") serves as the Fund's
distributor.
-3-
<PAGE> 292
EXPENSE TABLE
ANNUAL OPERATING EXPENSES FOR SERVICE SHARES AFTER FEE WAIVERS AND EXPENSE
REIMBURSEMENTS AS A PERCENTAGE OF DAILY NET ASSETS
<TABLE>
<S> <C>
Advisory fees(1) . . . . . . . . . . . . . . . . . . 0.30%
Other operating
expenses(1) . . . . . . . . . . . . . . . . . . . . 0.55%
-----
Total operating expenses . . . . . . . . . . . . . . 0.85%
=====
</TABLE>
- ---------------
(1) Advisory fees are net of waivers of .20% for the Portfolio. In
addition, the expense table reflects reimbursements made to the
Portfolio by the Adviser. PAMG and the Administrators are under no
obligation to waive or continue waiving such fees or reimbursing such
expenses, but have informed the Fund that they expect to waive or
continue waiving such fees and reimbursing such expenses during the
current fiscal year as necessary to maintain the Portfolio's total
operating expenses at the level set forth in the table. The expenses
noted above under "Other expenses" are estimated based on the level of
such expenses for the Portfolio's current fiscal year.
EXAMPLE
An investor in Service Shares would pay the following expenses on a
$1,000 investment in Shares of the Portfolio, assuming (1) 5% annual return,
and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
FIVE TEN
ONE YEAR THREE YEARS YEARS YEARS
-------- ----------- ----- -----
<S> <C> <C> <C> <C>
Core Fixed Income Portfolio . . . . . . . . . . . $9 $27 $47 $105
</TABLE>
The foregoing Expense Table and Example are intended to assist
investors in understanding the Portfolio's estimated annual operating expenses.
Investors bear these expenses indirectly. The information in the table for the
Portfolio has been restated based on the advisory and administration fees and
other expenses payable after fee waivers for the current fiscal year ending
September 30, 1996. Total operating expenses would have been 1.10% for the
Portfolio's Service Shares without such fee waivers and reimbursements. See
Footnote 1 to the Expense Table, "Financial Highlights--Background,"
"Management," "Purchase and Redemption of Shares" and "Description of Shares"
for a more complete description of shareholder transaction expenses and
operating expenses.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
INVESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND
OPERATING EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
-4-
<PAGE> 293
CERTAIN RISK FACTORS TO CONSIDER
An investment in the Portfolio is subject to certain investment
considerations, as set forth in detail under "Investment Policies." As with
other mutual funds, there can be no assurance that the Portfolio will achieve
its investment objective. The following are some of these risks. As with all
fixed income securities, the market values of the Portfolio's assets, and as
such the net asset value of the Portfolio's shares, will fluctuate with changes
in prevailing interest rates. While principal and interest payments on some
securities may be guaranteed by the U.S. Government, government agencies or
other guarantors, the market value of the securities is not guaranteed. Events
such as prepayments on underlying mortgage loans may adversely affect the
return from Mortgage-Backed securities. The Portfolio may invest in repurchase
agreements which entail a risk of loss should the seller default on its
obligation to repurchase the security which is the subject of the transaction.
The Portfolio may use futures, options, and options on futures for hedging or
duration management purposes. Use of these instruments involves certain costs
and risks including the risk that the Portfolio could not close out an option
or futures position when it would be most advantageous to do so and the risk of
an imperfect correlation between the value of the security being hedged and the
value of the particular derivative instrument. High portfolio turnover may
involve correspondingly greater brokerage and other transaction costs. The
Portfolio may borrow from banks and enter into reverse repurchase agreements or
dollar rolls up to 33-1/3% of the value of its total assets. This technique,
called "leverage," may cause the Portfolio's Shares net asset value to rise or
decrease faster than would otherwise be the case. These and the other
investment practices set forth below and their associated risks deserve careful
consideration by investors.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
BACKGROUND
The Fund currently offers four classes of shares in the Portfolio --
Service, Series A Investor, Series B Investor and Institutional Shares.
Service, Series A Investor, Series B Investor and Institutional Shares in the
Portfolio represent equal pro-rata interests in the Portfolio, except that they
bear different expenses which reflect the difference in the range of services
provided to them. Under the Fund's Amended and Restated Distribution and
Service Plan (the "Plan"), Service Shares bear the expense of fees at an annual
rate not to exceed .15% of the average daily net asset value of the Portfolio's
outstanding Service Shares. Service Shares also bear the expense of a
-5-
<PAGE> 294
service fee at an annual rate not to exceed .15% of the average daily net asset
value of the Portfolio's outstanding Service Shares for other shareholder
support activities provided by service organizations. See "Description of
Shares" for a description of the Plan and shareholder support activities.
Series A Investor Shares bear expenses under the Plan at an annual rate not to
exceed .50% of the average daily net asset value of the Portfolio's outstanding
Series A Investor Shares. Series B Investor Shares bear the expenses under the
Plan at annual rates not to exceed 1.15% of the average daily net asset value
of the Portfolio's outstanding Series B Investor Shares. See "Description of
Shares" for a description of the Plan. Institutional Shares do not bear the
fees stated above applicable to the other share classes under the Plan.
The Portfolio commenced investment operations on December 9, 1992 as a
separate investment portfolio (the "Predecessor Portfolio") of The BFM
Institutional Trust Inc., which was organized as a Maryland corporation. On
__________, 1996, the assets and liabilities of the Predecessor Portfolio were
transferred to the Portfolio, which had no prior operating history. The
Predecessor Portfolio also received investment advisory services from
BlackRock.
The financial highlights set forth certain information concerning the
investment results of the Predecessor Portfolio for the fiscal years or period
ended June 30, 1995, 1994 and 1993. The financial statements and notes thereto
for the Predecessor Portfolio were audited by the Predecessor Portfolio's
former independent accountants, whose report thereon is incorporated by
reference into the Statement of Additional Information. Additional information
about the performance of the Predecessor Portfolio is contained in the
Predecessor Portfolio's annual report. Both the Statement of Additional
Information and the Predecessor Portfolio's annual report may be obtained from
the Fund free of charge by calling the number on the front cover of this
Prospectus. During the years or period shown, the Predecessor Portfolio
offered only one class of shares to institutional investors.
-6-
<PAGE> 295
<TABLE>
<CAPTION>
THE CORE FIXED INCOME PORTFOLIO
-------------------------------
YEAR YEAR DECEMBER 9, 1992(A)
ENDED ENDED THROUGH
JUNE 30, 1995 JUNE 30, 1994 JUNE 30, 1993
------------------- ------------- ----------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period . . . . . . . . . $ 9.36 $ 10.37 $ 10.00
-------- --------
Net investment income (net of $.004, $.003 and
$.001, respectively, of interest expense)(b) . . . 0.62 0.55 0.32
Net realized and unrealized gains
on investments . . . . . . . . . . . . . . . . . . 0.50 (0.60) 0.37
-------- ------- --------
Net (decrease) increase
from investment operations . . . . . . . . . . . . 1.12 (0.05) 0.69
-------- ------ --------
Dividends from net investment income . . . . . . . . . (0.62) (0.55) (0.32)
Distributions from net realized capital gains . . . . . (0.01) (0.41)
-------- ------
Total dividends and distributions . . . . . . . . (0.63) (0.96) (0.32)
-------- ------ -------
Net asset value, end of period . . . . . . . . . . . . $ 9.85 $ 9.36 $ 10.37
========= ======= ========
TOTAL INVESTMENT RETURN (c) . . . . . . . . . . . . . . 11.79% (0.69)% 6.88%
RATIOS TO AVERAGE NET ASSETS:
Expenses (b) . . . . . . . . . . . . . . . . . . . . . 0.55% 0.55% 0.55%(d)
Net investment income (b) . . . . . . . . . . . . . . . 6.62% 5.61% 5.57% (d)
SUPPLEMENTAL DATA:
Average net assets (in thousands) . . . . . . . . . . . . $16,247 $9,702 $6,622
Portfolio turnover . . . . . . . . . . . . . . . . . . . 435% 722% 354%
Net assets, end of period (in thousands) . . . . . . . . $32,191 $12,507 $7,803
</TABLE>
- -------------------------------------------------------------------------------
(a) Commencement of investment operations.
(b) BlackRock waived fees amounting to $56,894, $34,010 and $24,761 and
reimbursed expenses amounting to $137,364, $137,179 and $0 for the
periods ended June 30, 1995, June 30, 1994 and June 30, 1993,
respectively. The Predecessor Portfolio's administrator waived fees
amounting to $32,500 and $3,701 for the periods ended June 30, 1994
and June 30, 1993, respectively. For the period ended June 30, 1993,
the Predecessor Portfolio's custodian and the Portfolio's transfer
agent waived fees amounting to $24,272 and $17,283, respectively. If
the Predecessor Portfolio had borne all expenses for the periods ended
June 30, 1995, 1994 and 1993: the expense ratios would have been
1.75%, 2.65% and 2.44%, respectively; the net investment income ratios
would have been 5.43%, 3.51% and 3.68%, respectively; and the net
investment income on a per share basis would have been $0.51, $0.34
and $0.22, respectively.
(c) Total investment return is calculated assuming a purchase of common
stock at net asset value per share on the first day and a sale at net
asset value per share on the last day of the period reported.
Dividends are assumed, for purposes of this calculation, to be
reinvested at the net asset value per share on the payment date.
-7-
<PAGE> 296
(d) Annualized.
The information above represents audited operating performance based
on an average share of common stock outstanding, total investment
return, ratios to average net assets and other supplemental data, for
each of the periods indicated. This information has been determined
based upon financial information provided in the financial statements.
-8-
<PAGE> 297
INVESTMENT POLICIES
- -------------------------------------------------------------------------------
The Portfolio seeks to maximize total return, consistent with
preservation of capital and prudent investment management. Duration is one of
the fundamental tools used by BlackRock in the selection of securities for the
Portfolio. Duration is a measure of the expected life of a fixed income
security on a present value basis and is indicative of a security's price
"volatility" or "risk" associated with changes in interest rates. The concept
of duration was developed to incorporate a bond's yield, coupons, final
maturity and call features into one measure. There is no assurance that the
Portfolio will achieve its targeted duration at all times. A more detailed
discussion of duration is provided under "Duration" below.
The total return that the Portfolio seeks to maximize will consist of
interest from underlying securities and capital appreciation from the purchase
and sale of securities, and from use of futures and options. The change in
market value of fixed income securities (and therefore their capital
appreciation) is largely a function of changes in the current level of interest
rates. When interest rates are falling, a portfolio with a shorter duration
generally will not generate as high a level of total return as a portfolio with
a longer duration. Conversely, when interest rates are rising, a portfolio
with a shorter duration will generally outperform longer duration portfolios.
When interest rates are stable, shorter duration portfolios generally will not
generate as high a level of total return as longer duration portfolios
(assuming that long-term interest rates are higher than short-term rates, which
is commonly the case).
The Portfolio is structured to seek to realize a total rate of return
that exceeds that total return of the Lehman Brothers Aggregate Index. The
duration of the Lehman Brothers Aggregate Index as of December 31, 1994 was
4.67 years. The Portfolio will invest all of its assets in a broad range of
investment grade fixed income securities, including U.S. Government,
Mortgage-Backed, Asset-Backed and Corporate debt securities. The duration of
the Portfolio will be targeted to be in the range of plus or minus 20% around
the current duration of the Lehman Brothers Aggregate Index. The Portfolio's
assets (i) will be issued by the U.S. Government or its agencies or
instrumentalities, (ii) will be rated BBB- or better by Standard & Poor's
Rating Group, Division of McGraw Hill ("S&P") or Baa3 or better by Moody's
Investor Service, Inc. ("Moody's") or (iii) will have been determined by
BlackRock to be of comparable quality at the time of investment.
For a description of the index mentioned above, see "Portfolio
Benchmark" in Appendix A to this Prospectus. For
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purposes of enhancing liquidity and/or preserving capital, on a temporary
basis, the Portfolio may invest, without limit, in money market instruments,
including instruments described as follows: obligations issued by the U.S.
Government, its agencies or instrumentalities; high quality commercial paper
and corporate obligations, certificates of deposit, fixed time deposits and
bankers' acceptances of banks that are members of the Federal Deposit Insurance
Corporation and have assets greater than $1 billion; variable and floating rate
debt securities and repurchase agreements. Investments in money market
instruments will be limited to U.S. dollar denominated instruments that are (i)
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, (ii) rated at least A-1 or AAA by S&P and Prime-1 or Aaa by
Moody's or (iii) determined by BlackRock to be of comparable quality at the
time of investment. See "Corporate Bond, Mortgage-Backed Security and
Commercial Paper Ratings" in Appendix B to this Prospectus.
DURATION
Duration is a measure of the expected life of a fixed income security
that was developed as a more precise alternative to the concept of "term to
maturity." Duration incorporates a bond's yield, coupon interest payments,
final maturity and call or prepayment features into one measure. Duration is
one of the fundamental tools used by BlackRock in security selection for the
Portfolio.
Most debt obligations provide interest ("coupon") payments in addition
to a final ("par") payment at maturity. Some obligations also have call or
prepayment provisions. Depending on the relative magnitude of these payments,
the market values of debt obligations may respond differently to changes in the
level and structure of interest rates.
Traditionally, a debt security's "term to maturity" has been used as a
proxy for the sensitivity of the security's price to changes in interest rates
(which is the "interest rate risk" or "volatility" of the security). However,
"term to maturity" measures only the time until a debt security provides its
final payment, taking no account of the pattern of the security's payments
prior to maturity. Duration is a measure of the expected life of a fixed
income security on a present value basis. Duration takes the length of the
time intervals between the present time and the time that the interest and
principal payments are scheduled or, in the case of a bond subject to call or
prepayment, expected to be received, and weights them by the present values of
the cash to be received at each future point in time. For any fixed income
security with interest payments occurring prior to the payment of principal,
duration is always less than maturity. In general, all other things being the
same, the lower the stated or coupon rate of interest of a fixed income
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security, the longer the duration of the security; conversely, the higher the
stated or coupon rate of interest of a fixed income security, the shorter the
duration of the security.
Futures, options and options on futures have durations which, in
general, are closely related to the duration of the securities which underlie
them. Holding long futures or call option positions (backed by a segregated
account of cash and cash equivalents) will lengthen the portfolio duration by
approximately the same amount that holding an equivalent amount of the
underlying securities would. Short futures or put option positions have
durations roughly equal to the negative duration of the securities that
underlie those positions, and have the effect of reducing portfolio duration by
approximately the same amount that selling an equivalent amount of the
underlying securities would.
There are some situations where even the standard duration calculation
does not properly reflect the interest rate exposure of a security. For
example, floating and variable rate securities often have final maturities of
ten or more years; however, their interest rate exposure corresponds to the
frequency of the coupon reset. Another example where the interest rate
exposure is not properly captured by duration is the case of mortgage
pass-through securities. The stated final maturity of such securities is
generally 30 years, but current prepayment rates are more critical in
determining the securities' interest rate exposure. In these and other similar
situations, BlackRock will use more sophisticated analytical techniques that
incorporate the economic life of a security into the determination of its
interest rate exposure.
There is no assurance that the Portfolio will achieve its targeted
duration at all times. This is because the computation of duration is based on
a number of estimated rather than known factors, including expected prepayment
rates.
DESCRIPTION OF SECURITIES
The following describes certain types of securities in which the Portfolio may
invest.
U.S. GOVERNMENT SECURITIES
U.S. TREASURY SECURITIES. The Portfolio will invest in U.S. Treasury
securities, including bills, notes, bonds and other debt securities issued by
the U.S. Treasury. These instruments are direct obligations of the U.S.
Government and, as such, are backed by the "full faith and credit" of the
United States. They differ primarily in their interest rates, the lengths of
their maturities and the dates of their issuances.
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The Portfolio may also invest in "zero coupon" securities, including
U.S. Treasury bills, notes and bonds which have been stripped of their
unmatured interest coupons or which are certificates representing interests in
such stripped debt obligations. Such securities are purchased at a discount
from their face amount, giving the purchaser the right to receive their full
value at maturity. A zero coupon security pays no interest to its holder
during its life. In addition to those issued by the U.S. Government, such zero
coupon securities may be issued by private issuers representing an interest in
securities issued by the U.S. Government. Such privately issued zero coupon
securities are not considered U.S. Government securities and will be deemed
illiquid for purposes of the 15% limitation on illiquid securities. See
"Investment Policies--U.S. Government Securities" in the Statement of
Additional Information and "Illiquid Securities" below.
SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The Portfolio will invest in securities issued by agencies
of the U.S. Government or instrumentalities of the U.S. Government, including,
but not limited to, GNMA, FNMA and FHLMC securities. Obligations of GNMA, the
Farmers Home Administration and the Export-Import Bank are backed by the "full
faith and credit" of the United States. In the case of securities not backed
by the "full faith and credit" of the United States, the Portfolio must look
principally to the agency issuing or guaranteeing the obligation for ultimate
repayment. Such securities include obligations issued by FNMA and FHLMC, each
of which may borrow from the U.S. Treasury to meet its obligations, although
the U.S. Treasury is under no obligation to lend to FNMA or FHLMC. GNMA, FNMA
and FHLMC investments by the Portfolio may also include pass-through
securities, CMOs and certain other Mortgage-Backed securities. See
"Mortgage-Backed Securities" below.
MORTGAGE-BACKED SECURITIES
Mortgage-Backed securities directly or indirectly represent a
participation in, or are secured by and payable from, mortgage loans secured by
real property. The term Mortgage-Backed securities, as used herein, includes
adjustable rate mortgage securities and derivative mortgage products such as
collateralized mortgage obligations, stripped Mortgage-Backed securities and
other products described below.
There are currently three basic types of Mortgage-Backed securities:
(i) those issued or guaranteed by the U.S. Government or one of its agencies or
instrumentalities, such as GNMA, FNMA and FHLMC; (ii) those issued by private
issuers that represent an interest in or are collateralized by Mortgage-Backed
securities issued or guaranteed by the U.S. Government or one of its agencies
or instrumentalities; and (iii) those issued by
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private issuers that represent an interest in or are collateralized by whole
mortgage loans or Mortgage-Backed securities without a government guarantee but
usually having some form of private credit enhancement.
MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The Portfolio will invest in Mortgage-Backed securities,
including those representing an undivided ownership interest in a pool of
mortgages, e.g, GNMA, FNMA and FHLMC certificates. The U.S. Government or the
issuing agency guarantees the payment of interest and principal on these
securities. However, the guarantees do not extend to the securities' yield or
value, nor do the guarantees extend to the yield or value of the Portfolio's
shares. These certificates are in most cases "pass-through" instruments,
through which the holder receives a share of all interest and principal
payments from the mortgages underlying the certificate, net of certain fees.
See "Investment Policies -- Mortgage-Backed Securities" in the Statement of
Additional Information.
PRIVATE MORTGAGE PASS-THROUGH SECURITIES. Private mortgage
pass-through securities are structured similarly to GNMA, FNMA and FHLMC
mortgage pass-through securities and are issued by originators of and investors
in mortgage loans, including depository institutions, mortgage banks,
investment banks and special purpose subsidiaries of the foregoing. These
securities usually are backed either by GNMA, FNMA or FHLMC certificates or by
a pool of fixed rate or adjustable rate mortgage loans. Securities which are
backed by a pool of fixed rate or adjustable rate mortgage loans generally are
structured with one or more types of credit enhancement. See "Types of Credit
Enhancement" below.
ADJUSTABLE RATE MORTGAGE SECURITIES. Adjustable rate mortgage
securities are pass-through mortgage securities collateralized by mortgages
with adjustable rather than fixed rates ("ARMs"). ARMs eligible for inclusion
in a mortgage pool generally provide for a fixed initial mortgage interest rate
for either the first three, six, twelve, thirteen, thirty-six or sixty
scheduled monthly payments. Thereafter, the interest rates are subject to
periodic adjustment based on changes to a designated benchmark index.
ARMs contain maximum and minimum rates beyond which the mortgage
interest rate may not vary over the lifetime of the mortgage. In addition,
certain ARMs provide for additional limitations on the maximum amount by which
the mortgage interest rate may adjust for any single adjustment period.
Alternatively, certain ARMs contain limitations on changes in the required
monthly payment. In the event that a monthly payment is not sufficient to pay
the interest accruing on an ARM, any such excess interest is added to the
principal balance of the mortgage
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loan, which is repaid through future monthly payments. If the monthly payment
for such an instrument exceeds the sum of the interest accrued at the
applicable mortgage interest rate and the principal payment required at such
point to amortize the outstanding principal balance over the remaining term of
the loan, the excess is utilized to reduce the then outstanding principal
balance of the ARM.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS PASS-THROUGH
SECURITIES. Collateralized mortgage obligations or "CMOs" are debt obligations
collateralized by mortgage loans or mortgage pass-through securities.
Typically, CMOs are collateralized by GNMA, FNMA or FHLMC certificates, but
also may be collateralized by whole loans or private mortgage pass-through
securities (collectively, "Mortgage Assets"). Multi-class pass-through
securities are equity interests in a trust composed of Mortgage Assets. Unless
the context indicates otherwise, all references herein to CMOs include
multi-class pass-through certificates. Payments of principal of and interest
on the Mortgage Assets, and any reinvestment income thereon, provide the funds
to pay debt service on the CMOs or make scheduled distributions on the
multi-class pass-through securities. CMOs may be issued by agencies or
instrumentalities of the U.S Government, or by private originators of, or
investors in, mortgage loans, including depository institutions, mortgage
banks, investment banks and special purpose subsidiaries of the foregoing. The
issuer of CMOs or multi-class pass-through securities may elect to be treated
as a Real Estate Mortgage Investment Conduit ("REMIC").
In a CMO, a series of bonds or certificates is issued in multiple
classes. Each class of CMOs, often referred to as a "tranche," is issued at a
specific fixed or floating coupon rate and has a stated maturity or final
distribution date. Principal prepayments on the Mortgage Assets may cause the
CMOs to be retired substantially earlier than their stated maturities or final
distribution dates. Interest is paid or accrued on all classes of the CMOs on
a monthly, quarterly or semi-annual basis. The principal of and interest on
the Mortgage Assets may be allocated among the several classes of a CMO series
in a number of different ways. Generally, the purpose of the allocation of the
cash flow of a CMO to the various classes is to obtain a more predictable cash
flow to the individual trenches than exists with the underlying collateral of
the CMO. As a general rule, the more predictable the cash flow is on a CMO
tranche, the lower the anticipated yield will be on that tranche at the time of
issuance relative to prevailing market yields on Mortgage-Backed securities.
The Portfolio also may invest in, among other things, parallel-pay
CMOs and Planned Amortization Class CMOs ("PAC Bonds"). Parallel-pay CMOs are
structured to provide payments of
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principal on each payment date to more than one class. These simultaneous
payments are taken into account in calculating the stated maturity date or
final distribution date of each class, which, as with other CMO structures,
must be retired by its stated maturity date or final distribution date but may
be retired earlier. PAC Bonds generally require payments of a specified amount
of principal on each payment date. PAC Bonds are parallel-pay CMOs with the
required principal payment on such securities having the highest priority after
interest has been paid to all classes.
The Portfolio does not intend to invest in CMO residuals. The
residual in a CMO structure generally represents the interest in any excess
cash flow remaining after making required payments of principal of and interest
on the CMOs and related administrative expenses of the issuer.
STRIPPED MORTGAGE-BACKED SECURITIES. The Portfolio may also invest in
mortgage pass-through securities where all or a substantial portion of the
interest payments go to one class of holders ("Interest Only Securities" or
"Ios") and all or a substantial portion of the principal payments go to a
second class of holders ("Principal Only Securities" or "Pos"). These
securities are commonly referred to as Stripped Mortgage-Backed securities or
SMBS. The yields to maturity on Ios and Pos are very sensitive to the rate of
principal payments (including prepayments) on the related underlying Mortgage
Assets, and such rate may have a material effect on yield to maturity. If the
underlying Mortgage Assets experience greater than anticipated prepayments of
principal, the Portfolio may not fully recoup its initial investment in Ios.
Conversely, if the underlying Mortgage Assets experience less than anticipated
prepayments of principal, the yield on Pos could be materially adversely
affected.
In addition to SMBS issued by agencies or instrumentalities of the
U.S. Government, the Portfolio may purchase SMBS issued by private originators
of, or investors in, mortgage loans, including depository institutions,
mortgage banks, investment banks and special purpose subsidiaries of the
foregoing. Privately issued SMBS will be deemed illiquid for purposes of the
15% limitation on illiquid securities. See "Illiquid Securities" below. The
determination whether a particular U.S. Government issued SMBS is liquid will
be made by BlackRock under guidelines established by the Board of Trustees.
ASSET-BACKED SECURITIES
The securitization techniques used to develop Mortgage-Backed
securities are also applied to a broad range of other assets. Through the use
of trusts and special purpose corporations, various types of assets, primarily
automobile and
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credit card receivables and home equity loans, are being securitized in
pass-through structures similar to the mortgage pass-through structures
described above or in a pay-through structure similar to the CMO structure.
Other types of assets being securitized include loans to finance boats,
recreational vehicles, mobile homes and manufactured housing; computer, copier,
railcar and medical equipment leases; student and commercial loans; and trade,
health care and franchise receivables. In general, the collateral supporting
Asset-Backed securities is of shorter maturity than mortgage loans and is less
likely to experience substantial prepayments. As with MortgageBacked
securities, Asset-Backed securities are often backed by a pool of assets
representing the obligations of a number of different parties and use similar
credit enhancement techniques. See "Types of Credit Enhancement" below.
The market for certain types of Asset-Backed securities is relatively
new and untested. Certain Asset-Backed securities may have a limited secondary
market and may be subject to restrictions on transferability. Any Asset-Backed
security that cannot be disposed of within seven days and in the usual course
of business without taking a reduced price will be deemed illiquid for purposes
of the 15% limitation on illiquid securities. See "Illiquid Securities" below.
The determination whether a particular Asset-Backed security is liquid will be
made by BlackRock under guidelines established by the Board of Trustees.
New instruments and variations of existing Mortgage-Backed securities
and Asset-Backed securities continue to be developed. The Portfolio may invest
in any such instruments or variations as may be developed to the extent
consistent with their investment objective and policies and applicable
regulatory requirements.
Different types of Asset-Backed Securities and the assets supporting
such securities may be subject to additional restrictions, and may be affected
by economic, legal and other changes, unique to such securities and assets.
For example, a recent legislative proposal to limit credit card interest rates
had a significant adverse effect on the market for credit card receivables.
TYPES OF CREDIT ENHANCEMENT
Mortgage-Backed securities and Asset-Backed securities are often
backed by a pool of assets representing the obligations of a number of
different parties. To lessen the effect of failures by obligors on underlying
assets to make payments, those securities may contain elements of credit
support, which fall into two categories: (i) liquidity protection and (ii)
protection against losses resulting from ultimate default by an obligor on the
underlying assets. Liquidity protection refers to
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the provision of advances, generally by the entity administering the pool of
assets, to ensure that the receipt of payments on the underlying pool occurs in
a timely fashion. Protection against losses resulting from default ensures
ultimate payment of the obligations on at least a portion of the assets in the
pool. This protection may be provided through guarantees, insurance policies
or letters of credit obtained by the issuer or sponsor from third parties,
through various means of structuring the transaction or through a combination
of such approaches. The Portfolio will not pay any additional fees for credit
support, although the existence of credit support may increase the price of a
security.
Examples of credit support arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class securities
with one or more classes subordinate to other classes as to the payment of
principal thereof and interest thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class),
creation of "reserve funds" (where cash or investments, sometimes funded from a
portion of the payments on the underlying assets, are held in reserve against
future losses) and "overcollateralization" (where the scheduled payments on, or
the principal amount of, the underlying assets exceeds that required to make
payment of the securities and pay any servicing or other fees). The degree of
credit support provided for each issue is generally based on historical
information respecting the level of credit risk associated with the underling
assets. Delinquencies or losses in excess of those anticipated could adversely
affect the return on an investment in such issue.
RISK FACTORS RELATING TO MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
The yield characteristics of Mortgage-Backed and Asset-Backed
securities differ from traditional debt securities. Among the major
differences are that interest and principal payments are made more frequently,
usually monthly, and that principal may be prepaid at any time because the
underlying mortgage loans or other assets generally may be prepaid at any time.
As a result, if the Portfolio purchases such a security at a premium, a
prepayment rate that is faster than expected will reduce yield to maturity,
while a prepayment rate that is slower than expected will have the opposite
effect of increasing yield to maturity. Alternatively, if the Portfolio
purchases these securities at a discount, faster than expected prepayments will
increase, while slower than expected prepayments will reduce, yield to
maturity. The Portfolio may invest a portion of its assets in derivative
Mortgage-Backed securities such as Stripped Mortgage-Backed securities, which
are highly sensitive to changes in prepayment and interest rates. BlackRock
will seek to manage these risks
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(and potential benefits) by diversifying its investments in such securities and
through hedging techniques.
Although the extent of prepayments on a pool of mortgage loans depends
on various economic and other factors, as a general rule prepayments on fixed
rate mortgage loans will increase during a period of falling interest rates and
decrease during a period of rising interest rates. Accordingly, amounts
available for reinvestment by the Portfolio are likely to be greater during a
period of declining interest rates and, as a result, likely to be reinvested at
lower interest rates than during a period of rising interest rates.
Asset-Backed securities, although less likely to experience the same prepayment
rates as Mortgage-Backed securities, may respond to certain of the same factors
influencing prepayments, while at other times different factors will
predominate. Mortgage-Backed securities and Asset-Backed securities may
decrease in value as a result of increases in interest rates and may benefit
less than other fixed income securities from declining interest rates because
of the risk of prepayment.
Asset-Backed securities present certain risks that are not presented
by Mortgage-Backed securities. Primarily, Asset-Backed securities do not have
the benefit of the same security interest in the related collateral. Credit
card receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to set off certain amounts owed on the credit
cards, thereby reducing the balance due. Most issuers of Asset-Backed
securities backed by automobile receivables permit the servicers of such
receivables to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would require an interest superior to that of the holders of the
related Asset-Backed securities. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of Asset-Backed securities backed by
automobile receivables may not have a proper security interest in all of the
obligations backing such receivables. Therefore, there is the possibility that
recoveries on repossessed collateral may not, in some cases, be available to
support payments on these securities.
Different types of Asset-Backed securities and the assets supporting
such securities may be subject to additional restrictions, and may be affected
by economic, legal and other changes, unique to such securities and assets.
For example, a recent legislative proposal to limit credit card interest rates
had a significant adverse effect on the market for credit card receivables.
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CORPORATE DEBT SECURITIES
Corporate debt securities include securities issued by corporations
and other entities, including bonds and debentures (which are long-term), notes
(which may be short- or long-term), certificates of deposit (unsecured
borrowings by banks), bankers' acceptances (indirectly secured borrowings to
facilitate commercial transactions) and commercial paper (short-term unsecured
notes). These securities may have adjustable or fixed rates of interest and
may be secured or unsecured by assets of the issuer or another party.
Adjustable rate corporate debt securities may have interest rate caps and
floors but such corporate debt securities are not subject to prepayment risk
other than through contractual call provisions, which generally impose a
penalty for prepayment during all or a portion of the period such securities
are outstanding. Fixed rate debt securities may also be subject to call
provisions. Corporate debt securities are subject to the bankruptcy risk of
the issuer. The Portfolio believes that the high quality securities it
purchases will tend to reduce such risks. The Portfolio may purchase corporate
debt securities rated at the time of investment no lower than BBB- by S&P or
Baa3 by Moody's. The rating of a corporate debt security may change over time,
as S&P and Moody's monitor and evaluate the ratings assigned to corporate debt
securities on an ongoing basis. As a result, corporate debt securities held by
the Portfolio could receive a higher rating (which would tend to increase their
value) or a lower rating (which would tend to decrease their value) during the
time that they are owned by the Portfolio. If a security owned by the
Portfolio is downgraded below either BBB- by S&P or Baa3 by Moody's, BlackRock
will monitor such security and determine whether to sell it based on the
factors it considers relevant such as size of the investment, whether a loss or
gain will result, relative risk to the Portfolio, depth of the trading market
or any other relevant factors. The Portfolio expects that under normal market
conditions no more than 5%, if any, of the Portfolio's assets will consist of
securities whose ratings have been downgraded below BBB- by S&P or Baa3 by
Moody's. The Portfolio will consider whether to retain or dispose of a bond
whose rating drops below the minimum ratings applicable to the Portfolio. The
Portfolio is not restricted in the amount it may invest in any of the
securities described in this section.
FLOATING RATE, INVERSE FLOATING RATE AND INDEX OBLIGATIONS
The Portfolio may invest in debt securities with interest payments or
maturity values that are not fixed, but float in conjunction with (or inversely
to) an underlying index or price. These securities may be backed by U.S.
Government or corporate issuers, or by collateral such as mortgages. In
certain cases, a change in the underlying index or price may have a leveraging
effect on the periodic coupon payments, creating larger possible
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swings in the prices of such securities than would be expected when taking into
account their maturities alone. The indices and prices upon which such
securities can be based include interest rates, currency rates and commodities
prices.
Floating rate securities pay interest according to a coupon which is
reset periodically. This reset mechanism may be formula based, or reflect the
passing through of floating interest payments on an underlying collateral pool.
The coupon is usually reset daily, weekly, monthly, quarterly or semi-annually,
but other schedules are possible. Floating rate obligations generally exhibit
a low price volatility for a given stated maturity or average life because
their coupons adjust with changes in interest rates. If their underlying index
is not an interest rate, or the reset mechanism lags the movement of rates in
the current market, greater price volatility may be experienced.
Inverse floating rate securities are similar to floating rate
securities except that their coupon payments vary inversely with an underlying
index by use of a formula. Inverse floating rate securities tend to exhibit
greater price volatility than other floating rate securities. Because the
changes in the coupon are usually negatively correlated with changes in overall
interest rates, interest rate risk and price volatility on inverse floating
rate obligations can be high, especially if leverage is used in the formula.
The Portfolio does not intend to invest more than 10% of its total assets in
inverse floating rate securities.
Index securities pay a fixed rate of interest, but have a maturity
value that varies by formula, so that when the obligation matures a gain or
loss is realized. The risk of index obligations depends on the volatility of
the underlying index, the coupon payment and the maturity of the obligation.
ILLIQUID SECURITIES
The Portfolio may invest up to 15% of its net assets in securities for
which there are legal or contractual restrictions on resale or for which there
is no readily available market or other illiquid securities. Illiquid
securities include restricted securities of corporate and other issuers,
privately stripped securities, repurchase agreements having maturities of more
than seven days, and certain hedging instruments. Such securities may
experience limitations on resale that may have an adverse effect on the
marketability of portfolio securities. A mutual fund may not be able to
dispose of illiquid securities promptly or at reasonable prices. The Board of
Trustees has adopted procedures pursuant to the guidelines of the SEC that
permits BlackRock to determine whether restricted securities issued pursuant to
Rule 144A under the Securities Act of 1933 are
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liquid for purposes of this limitation. Nevertheless, Rule 144A securities may
be subject to a greater possibility of becoming illiquid than registered
securities due to changing market or other factors. Portfolio purchases may
increase the level of illiquidity and institutional buyers may become
disinterested in purchasing such securities. See "Investment Policies-Illiquid
Securities" in the Statement of Additional Information.
OTHER INVESTMENT STRATEGIES
HEDGING
The Portfolio may enter into various interest rate transactions,
purchase and sell futures contracts and purchase and sell (or write)
exchange-listed and over-the-counter put and call options on securities and
futures contracts (collectively "Hedging Transactions"). Hedging Transactions
may be used to attempt to protect against possible changes in the market value
of the Portfolio's securities resulting from trends in the debt securities
markets, to protect the Portfolio's unrealized gains on its securities, to
facilitate the sale of such securities, to manage the duration of the
Portfolio, to establish a position in the securities markets as a temporary
substitute for purchasing particular securities. Any or all of these
techniques may be used at any time, and there is no particular strategy that
requires use of one technique rather than another. Use of any Hedging
Transaction is a function of market conditions. The ability of the Portfolio
to hedge successfully will depend on BlackRock's ability to predict pertinent
market movements, which cannot be assured. The Hedging Transactions that the
Portfolios may use are described below.
INTEREST RATE TRANSACTIONS. Among the Hedging Transactions into which
the Portfolio may enter are interest rate swaps and the purchase or sale of
interest rate caps and floors. The Portfolio expects to enter into these
transactions primarily to preserve a return or spread on a particular
investment or portion of the portfolio, as a duration management technique or
to protect against an increase in the price of securities the Portfolio
anticipates purchasing at a later date. The Portfolio intends to use these
transactions as a hedge and not as a speculative investment.
Interest rate swaps involve the exchange by the Portfolio with another
party of their respective commitments to pay or receive interest, e.g., an
exchange of floating rate payments for fixed rate payments. The purchase of an
interest rate cap entitles the purchaser, to the extent that a specified index
exceeds a predetermined interest rate, to receive payments of interest on a
notional principal amount from the party selling such interest rate cap. The
purchase of an interest rate floor entitles the purchaser, to the extent that a
specified index
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falls below a predetermined interest rate, to receive payments of interest on a
notional principal amount from the party selling such interest rate floor. See
"Investment Policies--Other Investment Strategies--Interest Rate Transactions"
in the Statement of Additional Information.
FUTURES CONTRACTS. In connection with hedging and other risk
management strategies, the Portfolio may enter into contracts for the purchase
or sale for future delivery ("futures contracts") of debt securities,
aggregates of debt securities or indices or prices thereof, and other financial
indices, to hedge the value of its portfolio securities that might result from
a change in interest rates. The Portfolio will engage in such transactions
only for bona fide hedging, risk management, duration management and other
portfolio management purposes, in each case, in accordance with the rules and
regulations of the Commodity Futures Trading Commission.
CALLS ON SECURITIES AND FUTURES CONTRACTS. In order to reduce
fluctuations in net asset value, the Portfolio may sell or purchase call
options (calls) on U.S. Government securities, Mortgage-Backed securities,
Corporate debt securities and Eurodollar instruments and related futures on
such securities. A call option gives the purchaser of the option the right to
buy, and obligates the seller to sell, the underlying security or futures
contract at the exercise price at any time or at a specified time during the
option period. The purchase of a call gives the Portfolio the right to buy a
security at a fixed price. A call sold by the Portfolio exposes the Portfolio
during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security and may require the
Portfolio to hold a security, which it might otherwise have sold. All such
calls sold by the Portfolio must be "covered" as long as the call is
outstanding (i.e., the Portfolio must segregate the securities or futures
contract subject to the call or other liquid assets).
PUTS ON SECURITIES AND FUTURES CONTRACTS. The Portfolio may purchase
put options (puts) that relate to U.S. Government securities, Mortgage-Backed
securities, Corporate debt securities and Eurodollar instruments (whether or
not it holds such securities in its portfolio) or futures on such securities.
The Portfolio may also sell puts on U.S. Government securities, Mortgage-Backed
securities, Corporate debt securities and Eurodollar instruments and related
futures on such securities if the Portfolio's contingent obligations on such
puts are covered by segregated assets consisting of cash or liquid debt
securities having a value not less than the exercise price. The Portfolio will
not sell puts if, as a result, more than 50% of the Portfolio's assets would be
required to be segregated to cover its potential obligations under its hedging
and other investment transactions. In selling puts, there is a risk that the
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Portfolio may be required to buy the underlying security, at a disadvantageous
price.
EURODOLLAR INSTRUMENTS. The Portfolio may make investments in
Eurodollar instruments. Eurodollar instruments are U.S dollar-denominated
futures contracts or options thereon which are linked to the London Interbank
Offered Rate ("LIBOR"), although foreign currency denominated instruments are
available from time to time. Eurodollar futures contracts enable purchasers to
obtain a fixed rate for the lending of funds and sellers to obtain a fixed rate
for borrowings. The Portfolio intends to use Eurodollar futures contracts and
options thereon to hedge against changes in LIBOR, to which many interest rate
swaps are linked. The use of these instruments is subject to the same
limitations and risks as those applicable to the use of the interest rate
futures contracts and options thereon described under "Futures Contracts,"
"Calls on Securities and Futures Contracts" and "Puts on Securities and Futures
Contracts" above.
FURTHER INFORMATION ON HEDGING TRANSACTIONS. Appendix C and the
Statement of Additional Information under "Investment Objectives and
Policies-Other Investment Strategies-Options and Futures Transactions" contains
further information about the characteristics, risks and possible benefits of
Hedging Transactions and the Portfolio's other policies and limitations
relating to investments in futures and options. The principal risks relating
to the use of futures, options and other Hedging Transactions are: (a) less
than perfect correlation between the prices of the instrument and the market
value of the securities in the Portfolio; (b) possible lack of a liquid
secondary market for closing out a position, (c) losses resulting from interest
rate or currency exchange movements not anticipated by BlackRock; and (d) the
obligation to meet additional variation margin or other payment requirements.
BORROWING
The Portfolio may borrow from banks and enter into reverse repurchase
agreements or dollar rolls up to 33 1/3% of the value of its total assets
(computed at the time the loan is made) to take advantage of investment
opportunities. See "Reverse Repurchase Agreements and Dollar Rolls" below.
The Portfolio may pledge up to 33 1/3% of its total assets to secure these
borrowings. If the Portfolio's asset coverage for borrowings falls below 300%,
the Portfolio will take prompt action to reduce its borrowings. If the
Portfolio borrows to invest in securities, any investment gains made on the
securities in excess of interest paid on the borrowing will cause the net asset
value of the shares to rise faster than would otherwise be the case. On the
other hand, if the investment performance of the additional securities
purchased fails to cover their cost (including any interest paid on the money
borrowed) to the
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Portfolio, the net asset value of the Portfolio's shares will decrease faster
than would otherwise be the case. This is a speculative characteristic known
as "leverage." The Portfolio is also authorized to borrow an additional 5% of
its total assets without regard to the foregoing limitations for temporary
purposes such as clearance of portfolio transactions and share redemptions.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
The Portfolio may use reverse repurchase agreements and dollar rolls
as part of its investment strategy. Reverse repurchase agreements involve
sales by the Portfolio of assets concurrently with an agreement by the
Portfolio to repurchase the same assets at a later date at a fixed price.
During the reverse repurchase agreement period, the Portfolio continues to
receive principal and interest payments on these assets.
The Portfolio may also enter into dollar rolls in which the Portfolio
sells securities for delivery in the current month and simultaneously contracts
to repurchase substantially similar (same type and coupon) securities on a
specified future date from the same party. During the roll period, the
Portfolio forgoes principal and interest paid on the securities. The Portfolio
is compensated by the difference between the current sales price and the
forward price for the future purchase (often referred to as the "drop") as well
as by the interest earned on the cash proceeds of the initial sale.
The Portfolio will establish a segregated account with the custodian
in which it will maintain cash, U.S. Government securities or other liquid
high-grade debt obligations at least equal in value to its obligations in
respect to reverse repurchase agreements and dollar rolls. Reverse repurchase
agreements and dollar rolls involve the risk that the market value of the
securities retained by the Portfolio may decline below the price of the
securities the Portfolio has sold but is obligated to repurchase under the
agreement. In addition, in the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, the Portfolio's
use of the proceeds of the agreement may be restricted pending a determination
by the other party, or its trustee or receiver, whether to enforce the
Portfolio's obligation to repurchase the securities.
Reverse repurchase agreements and dollar rolls are speculative
techniques involving leverage and are considered borrowings by the Portfolio
for purposes of the percentage limitations applicable to borrowings. See
"Borrowing" above.
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WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS
From time to time, the Portfolio may purchase securities on a
when-issued or delayed delivery basis or may purchase or sell securities on a
forward commitment basis. When such transactions are negotiated, the price is
fixed at the time of the commitment, but delivery and payment can take place a
month or more after the date of the commitment. The securities purchased are
subject to market fluctuation and no interest accrues to the Portfolio during
this period. While the Portfolio will only purchase securities on a
when-issued, delayed delivery or forward commitment basis with the intention of
acquiring the securities, the Portfolio may sell the securities before the
settlement date, if it is deemed advisable. At the time the Portfolio makes
the commitment to purchase securities on a when-issued or delayed delivery
basis, it will record the transaction and thereafter reflect the value, each
day, of such security in determining the net asset value of the Portfolio. At
the time of delivery, the value of the securities may be more or less than the
purchase price. An increase in the percentage of a Portfolio's assets
committed to the purchase of securities on a when-issued, delayed delivery or
forward commitment basis may increase the volatility of a Portfolio's net asset
value. At the time the Portfolio enters into a transaction on a when-issued or
forward commitment basis, a segregated account consisting of cash, U.S.
Government securities or other liquid high-grade debt securities equal to at
least 102% of the value of the when-issued or forward commitment securities
will be established and maintained with the custodian. Subject to this
requirement, the Portfolio may purchase securities on such basis without limit.
SHORT SALES
The Portfolio may only make short sales of securities
"against-the-box." A short sale is a transaction in which the Portfolio sells
a security it does not own in anticipation that the market price of that
security will decline. The Portfolio expects to make short sales both as a
form of hedging to offset potential declines in long positions in similar
securities and in order to maintain portfolio flexibility. In a short sale
"against-the-box," at the time of the sale, the Portfolio owns or has the
immediate and unconditional right to acquire the identical security at no
additional cost. When selling short "against-the-box," the Portfolio foregoes
an opportunity for capital appreciation in the security.
REPURCHASE AGREEMENTS
The Portfolio may enter into repurchase agreements, which may be
viewed as a type of secured lending, and which typically involve the
acquisition of debt securities from a selling
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financial institution such as a bank, savings and loan association or
broker-dealer. The repurchase agreement provides that the Portfolio will sell
back to the institution, and that the institution will repurchase, the
underlying security at a specified price and at a fixed time in the future,
usually not more than seven days from the date of purchase. The repurchase
agreement will at all times be fully collateralized by the institution in an
amount at least equal to the repurchase price, including accrued interest
earned on the underlying securities. The collateral will be maintained in a
segregated account and will be valued daily. As the value of the collateral
declines, the seller will deposit additional collateral. If the seller
defaults and the value of the collateral securing the repurchase agreement
declines or, in some cases, if the seller fails financially, the Portfolio may
incur a loss. See "Investment Policies-Other Investment Strategies-Repurchase
Agreements" in the Statement of Additional Information.
LENDING OF PORTFOLIO SECURITIES
Consistent with applicable regulatory requirements, the Portfolio may
lend up to 33 1/3% of its portfolio securities to brokers, dealers and other
financial institutions, provided that such loans are callable at any time by
the Portfolio (subject to certain notice provisions), and are at all times
secured by cash or U.S. Government securities which are at least equal to the
market value, determined daily, of the loaned securities. The Portfolio
continues to receive the income on the loaned securities while at the same time
earning interest on the loan or on the cash amounts deposited as collateral,
which will be invested in short-term obligations. The Portfolio may incur a
loss, however, if the seller defaults and the value of the loaned securities
exceeds the value of the collateral or, in some cases, if the borrower fails
financially. See "Investment Policies-Other Investment Strategies-Securities
Lending" in the Statement of Additional Information.
INVESTMENT RESTRICTIONS
The Statement of Additional Information contains, under the heading
"Additional Investment Limitations," specific enumerated investment
restrictions which govern the investments of the Portfolio. The investment
objective and all investment policies and practices described in this
Prospectus and in the Statement of Additional Information are not fundamental,
meaning that the Board of Trustees may change them without stockholder
approval.
The fundamental restrictions applicable to the Portfolio include (i) a
prohibition on purchasing any security (other than a U.S. Government security)
if as a result (a) with respect to 75% of its total assets, more than 5% of the
Portfolio's total assets would be invested in the securities of a single issuer
or
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(b) 25% or more of the Portfolio's total assets would be invested in the
securities of issuers in a particular industry, and (ii) a prohibition on
purchasing more than 10% of all outstanding voting securities of any one
issuer.
PORTFOLIO TURNOVER
The Portfolio has no fixed policy with respect to portfolio turnover.
The Portfolio does not expect to trade in securities for short-term gain. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the
Portfolio's securities, excluding securities having a maturity at the date of
purchase of one year or less. While the Portfolio will pay commissions in
connection with its options and futures transactions, the other securities in
which the Portfolio invests are generally traded on a "net" basis with dealers
acting as principals for their own account without a stated commission.
Nevertheless, high portfolio turnover may involve correspondingly greater
brokerage commissions and other transaction costs which will be borne directly
by the Portfolio. BlackRock will monitor the tax status of the Portfolio under
the Internal Revenue Code during any period in which the annual turnover rate
of the Portfolio exceeds 100%. To the extent that increased portfolio turnover
results in sales at a profit of securities held less than three months, the
Portfolio's ability to qualify as a "regulated investment company" under the
Internal Revenue Code may be affected. See "Portfolio Transactions" in the
Statement of Additional Information.
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MANAGEMENT
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BOARD OF TRUSTEES
The business and affairs of the Fund are managed under the direction
of the Fund's Board of Trustees. The Statement of Additional Information
contains the name of each trustee and certain background information.
ADVISER AND SUB-ADVISER
PAMG was organized in 1995 to perform advisory services for investment
companies. BlackRock (formerly BlackRock Financial Management L.P.) was
organized in 1988. On February 28, 1995, BlackRock Financial Management L.P.
sold its business to PNC Bank, National Association ("PNC Bank"). The
principal business address of PAMG is 1835 Market Street, 15th Floor,
Philadelphia, Pennsylvania 19103. The principal business address of BlackRock
is 345 Park Avenue, New York, New York 10154.
As adviser, PAMG is responsible for the overall investment management
of the Portfolio. The sub-adviser, BlackRock, is responsible for the
day-to-day management of the Portfolio, and generally makes all purchase and
sale decisions regarding the investments made by the Portfolio. BlackRock also
provides research and credit analysis as well as certain other services.
Scott Amero is the person primarily responsible for the day-to-day
management of the Portfolio's investments. Mr. Amero has managed the Portfolio
and the Predecessor Portfolio since their inception and has been employed by
BlackRock as a portfolio manager since 1990. Prior to joining BlackRock in
1990, Mr. Amero was a Vice-President in Fixed Income Research at The First
Boston Corporation.
For the services provided and expenses assumed by it, PAMG is entitled
to receive from the Portfolio a fee, computed daily and payable monthly, at an
annual rate of 0.50% of the first $1 billion of the average daily net assets of
the Portfolio, plus 0.45% of the next $1 billion of the Portfolio's average
daily net assets, plus 0.425% of the next $1 billion of the Portfolio's average
daily net assets, plus 0.40% of the Portfolio's average daily net assets in
excess of $3 billion. The Predecessor Portfolio bore advisory fees during its
most recent fiscal year pursuant to the investment advisory agreement then in
effect with BlackRock at the effective annual rate of .30% of its average daily
net assets. From time to time, PAMG may waive all or any portion of its
advisory fee for and may reimburse expenses of the Portfolio. See
"Introduction--Expense Table."
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For its sub-advisory services, BlackRock is entitled to receive from
PAMG a fee, computed daily and payable monthly, at an annual rate of .35% of
the Portfolio's first $1 billion of average daily net assets, .30% of its next
$1 billion of average daily net assets, .275% of its next $1 billion of average
daily net assets, and .25% of its average daily net assets in excess of $3
billion. Such sub-advisory fee has no effect on the advisory fee payable by
the Portfolio to PAMG. BlackRock may, from time to time, waive all or any
portion of its sub-advisory fee for the Portfolio.
ADMINISTRATORS
PMFCO, whose principal business address is 345 Park Avenue, New York,
New York 10154, PFPC, whose principal business address is 400 Bellevue Parkway,
Wilmington, Delaware 19809 and PDI, whose principal business address is 259
Radnor-Chester Road, Suite 120, Radnor, Pennsylvania 19087, serve as the Fund's
co-administrators. PMFCO and PFPC are indirect wholly-owned subsidiaries of
PNC Bank Corp. A majority of the outstanding stock of PDI is owned by its
officers and the remaining outstanding stock is owned by Pennsylvania Merchant
Group Ltd.
The Administrators generally assist the Fund in all aspects of its
administration and operation, including matters relating to the maintenance of
financial records and fund accounting. As compensation for their services,
PMFCO is entitled to receive a fee, computed daily and payable monthly, at an
annual rate of .03% of the Portfolio's average daily net assets, and PFPC and
PDI are entitled to receive a combined fee, computed daily and payable monthly,
at an annual rate of .20% of the first $500 million of the Portfolio's average
daily net assets, .18% of the next $500 million of the Portfolio's average
daily net assets, .16% of the next $1 billion of the Portfolio's average daily
net assets and .15% of the Portfolio's average daily net assets in excess of $2
billion. From time to time, the Administrators may waive all or any portion of
the administration fees for the Portfolio.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND CUSTODIAN
PNC Bank serves as the Fund's custodian and PFPC serves as the Fund's
transfer agent and dividend disbursing agent.
-------------------------
SHAREHOLDER SERVICING
The Fund intends to enter into service agreements with Institutions
(including PNC Bank, PNC Bank Ohio and their affiliates) pursuant to which
Institutions will render certain
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support services to Customers who are the beneficial owners of Service Shares.
Such services will be provided to Customers who are the beneficial owners of
Service Shares and are intended to supplement the services provided by the
Fund's Administrators and transfer agent to the Fund's shareholders of record.
In consideration for payment of up to .15% (on an annualized basis) of the
average daily net asset value of Service Shares owned beneficially by their
Customers, Institutions may provide one or more of the following services to
such Customers: processing purchase and redemption requests from Customers and
placing orders with the Fund's transfer agent or the Distributor; processing
dividend payments from the Fund on behalf of Customers; providing
sub-accounting with respect to Service Shares beneficially owned by Customers
or the information necessary for sub-accounting; and other similar services.
In consideration for payment of up to a separate .15% (on an annualized basis)
of the average daily net asset value of Service Shares owned beneficially by
their Customers, Institutions may provide one or more of these additional
services to such Customers: responding to Customer inquiries relating to the
services performed by the Institution and to Customer inquiries concerning
their investments in Service Shares; providing information periodically to
Customers showing their positions in Service Shares; and other similar
shareholder liaison services. Customers who are beneficial owners of Service
Shares should read this Prospectus in light of the terms and fees governing
their accounts with Institutions. These fees are not paid to Institutions with
respect to other classes of shares of the Portfolio ("Series A Investor
Shares," "Series B Investor Shares" and "Institutional Shares"). See
"Description of Shares."
-------------------------
EXPENSES
Expenses are deducted from the total income of the Portfolio before
dividends and distributions are paid. These expenses include, but are not
limited to, fees paid to PAMG and the Administrators, transfer agency fees,
fees and expenses of officers and trustees who are not affiliated with PAMG or
the Distributor or any of their affiliates, taxes, interest, legal fees,
custodian fees, auditing fees, servicing fees, certain fees and expenses in
registering and qualifying the Portfolio and its Shares for distribution under
Federal and state securities laws, expenses of preparing prospectuses and
statements of additional information and of printing and distributing
prospectuses and statements of additional information to existing shareholders,
the expense of reports to shareholders, shareholders' meetings and proxy
solicitations, fidelity bond and trustees and officers liability insurance
premiums, the expense of using independent pricing services and other expenses
which are not expressly
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assumed by PIMC or the Administrators under their respective agreements with
the Fund. Any general expenses of the Fund that are not readily identifiable
as belonging to a particular investment portfolio will be allocated among all
investment portfolios by or under the direction of the Board of Trustees in a
manner the Board determines to be fair and equitable. Any expenses relating
only to a particular class of shares within the Portfolio will be borne solely
by such Shares.
If the total expenses borne by the Portfolio in any fiscal year exceed
the expense limitations imposed by applicable state securities regulations,
PAMG, BlackRock and the Administrators will bear the amount of such excess to
the extent required by such regulations in proportion to the fees otherwise
payable to them for such year. Such amount, if any, will be estimated and
accrued daily and paid on a monthly basis. See "Introduction--Example,"
"Management--Adviser and Sub-Adviser" and "Management--Administrators" for
discussions of expense reimbursements and fee waivers.
PORTFOLIO TRANSACTIONS
The Portfolio's sub-adviser will seek the best price and execution in
placing brokerage transactions. In this regard, the sub-adviser may consider a
number of factors in determining which brokers to use in purchasing or selling
portfolio securities. These factors, which are more fully discussed in the
Statement of Additional Information, include, but are not limited to, research
services, sales of shares of the Fund, the reasonableness of commissions and
quality of services and execution. Brokerage transactions for the Portfolio
may be directed through registered broker/dealers ("Authorized Dealers") who
have entered into dealer agreements with the Distributor, subject to the
requirements of best execution.
BANKING LAWS
Banking laws and regulations currently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks
generally from underwriting securities, but such banking laws and regulations
do not prohibit such a holding company or affiliate or banks generally from
acting as investment adviser, administrator, transfer agent or custodian to
such an investment company, or from purchasing shares of such company as agent
for and upon the order of customers. PNC Bank, PAMG, BlackRock, PMFCO, PFPC
and Institutions that are banks or bank affiliates, are subject to such banking
laws and regulations. In addition, state securities laws on this issue may
differ from the interpretations of Federal
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law expressed herein and banks and financial institutions may be required to
register as dealers pursuant to state law.
Should future legislative, judicial or administrative action prohibit
or restrict the activities of such companies in connection with the provision
of services on behalf of the Fund and the holders of Service Shares, the Fund
might be required to alter materially or discontinue its arrangements with such
companies and change its method of operations with respect to the Service
Shares. It is not anticipated, however, that any change in the Fund's method
of operations would affect its net asset value per share or result in a
financial loss to any investor.
PURCHASE AND REDEMPTION OF SHARES
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DISTRIBUTOR
Shares of the Portfolio are offered on a continuous basis for the Fund
by the distributor, Provident Distributors, Inc. (the "Distributor"). The
Distributor is a registered broker/dealer with principal offices at 259
Radnor-Chester Road, Suite 120, Radnor, Pennsylvania 19087.
The Fund has adopted an Amended and Restated Distribution and Service
Plan (the "Plan") pursuant to Rule 12b-1 under the 1940 Act. The Plan permits
the Adviser to pay a fee to the Distributor, which in turn is authorized to
make payments to securities dealers with which the Distributor may enter into
solicitation fee agreements. The Distributor may also use a portion of the fee
it receives under the Plan to compensate institutions who perform support
services that would otherwise be performed by an Administrator or its agents.
The purpose of the Plan is to promote distribution of the Fund's shares and to
enhance the provision of shareholder services. The Fund is not required or
permitted under the Plan to make distribution payments with respect to Service
Shares over and above its investment advisory fee; the Plan merely permits the
reallocation of a portion of the advisory fee the Adviser receives to pay for
distribution related and shareholder servicing activities. See "Investment
Advisory, Administration, Distribution and Servicing Arrangements."
PURCHASE OF SHARES
Shares are offered without a sales load on a continuous basis to
Institutions acting on behalf of their Customers. Service Shares will normally
be held of record by Institutions or in the names of nominees of Institutions.
All Share purchases are effected through a Customer's account at an Institution
through procedures established in connection with the requirements of the
account. Confirmations of Share purchases
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and redemptions will be sent to the Institutions. Beneficial ownership of
Shares will be recorded by the Institutions and reflected in the account
statements provided by such Institutions to their Customers. Investors wishing
to purchase Shares should contact their Institutions.
Service Shares are sold at the net asset value of the Service Shares
of the Portfolios next computed after an order is received by PFPC. Shares may
be purchased by Institutions on any Business Day. A "Business Day" is any
weekday that the New York Stock Exchange (the "NYSE") and the Federal Reserve
Bank of Philadelphia (the "FRB") are open for business. Purchase orders may be
transmitted by telephoning PFPC at (800) 441-7379. Orders received by PFPC
after 4:00 p.m. (Eastern Time) are priced at the net asset value per share on
the following Business Day. The Fund may in its discretion reject any order
for Shares.
Payment for Service Shares may be made only in Federal funds or other
funds immediately available to the Fund's custodian. The minimum initial
investment by an Institution is $5,000; however, Institutions may set a higher
minimum for their Customers. There is no minimum subsequent investment
requirement.
Conflict of interest restrictions may apply to an Institution's
receipt of compensation paid by the Fund in connection with the investment of
fiduciary funds in Shares. Institutions, including banks regulated by the
Comptroller of the Currency and investment advisers and other money managers
subject to the jurisdiction of the SEC, the Department of Labor or state
securities commissions, are urged to consult their legal advisers before
investing fiduciary funds in Service Shares. See also "Management--Shareholder
Servicing."
REDEMPTION OF SHARES
A Customer may redeem all or part of his Service Shares in accordance
with the instructions and limitations pertaining to his account at an
Institution. These procedures will vary according to the type of account and
the Institution involved, and Customers should consult their account managers
in this regard. It is the responsibility of Institutions to transmit
redemption orders to PFPC and credit their Customers' accounts with the
redemption proceeds on a timely basis. In the case of shareholders holding
share certificates, the certificates must accompany the redemption request.
Institutions may transmit redemption orders to PFPC by telephone at
(800) 441-7379. Shares are redeemed at the net asset value per share of the
Service Shares of the Portfolio next determined after PFPC's receipt of the
redemption order. THE FUND, THE ADMINISTRATORS AND THE DISTRIBUTOR WILL NOT BE
LIABLE
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FOR ANY LOSS, LIABILITY, COST OR EXPENSE FOR ACTING UPON TELEPHONE INSTRUCTIONS
THAT ARE REASONABLY BELIEVED TO BE GENUINE. IN ATTEMPTING TO CONFIRM THAT
TELEPHONE INSTRUCTIONS ARE GENUINE, THE FUND WILL USE SUCH PROCEDURES AS ARE
CONSIDERED REASONABLE, INCLUDING RECORDING THOSE INSTRUCTIONS AND REQUESTING
INFORMATION AS TO ACCOUNT REGISTRATION (SUCH AS THE NAME IN WHICH AN ACCOUNT IS
REGISTERED, THE ACCOUNT NUMBER, RECENT TRANSACTIONS IN THE ACCOUNT, AND THE
ACCOUNT HOLDER'S SOCIAL SECURITY NUMBER, ADDRESS AND/OR BANK).
Payment for redeemed Shares for which a redemption order is received
by PFPC before 4:00 p.m. (Eastern Time) on a Business Day is normally made in
Federal funds wired to the redeeming Institution on the next Business Day,
provided that the Fund's custodian is also open for business. Payment for
redemption orders received after 4:00 p.m. (Eastern Time) or on a day when the
Fund's custodian is closed is normally wired in Federal funds on the next
Business Day following redemption on which the Fund's custodian is open for
business. The Fund reserves the right to wire redemption proceeds within seven
days after receiving a redemption order if, in the judgment of the investment
adviser, an earlier payment could adversely affect the Portfolio. No charge
for wiring redemption payments is imposed by the Fund, although Institutions
may charge Customer accounts for redemption services. Information relating to
such redemption services and charges, if any, should be obtained by Customers
from their Institution.
During periods of substantial economic or market change, telephone
redemptions may be difficult to complete. If an Institution is unable to
contact PFPC by telephone, the Institution may also deliver the redemption
request to PFPC by mail at 400 Bellevue Parkway, Wilmington, DE 19809.
A shareholder of record may be required to redeem Shares in the
Portfolio if the balance in such shareholder's account in the Portfolio drops
below $5,000 as the result of a redemption request and the shareholder does not
increase the balance to at least $5,000 upon thirty days' written notice. If a
Customer has agreed with an Institution to maintain a minimum balance in his
account with the Institution, and the balance in the account falls below that
minimum, the Customer may be obligated to redeem all or part of his Shares in
the Portfolio to the extent necessary to maintain the minimum balance required.
The Fund may suspend the right of redemption or postpone the date of
payment upon redemption (as well as suspend the recordation of the transfer of
Shares) for such periods as are permitted under the 1940 Act. The Fund may
also redeem Shares involuntarily or make payment for redemption in securities
or other property if it appears appropriate to do so in light of the Fund's
responsibilities under the 1940 Act. See "Purchase and
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Redemption Information" in the Statement of Additional Information for examples
of when such redemption might be appropriate.
It is the responsibility of the Institutions to provide their
Customers with account statements with respect to Share transactions made for
accounts maintained at the Institutions.
NET ASSET VALUE
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The net asset value for the Service Shares of the Portfolio is
calculated as of the close of trading on the NYSE (currently 4:00 p.m. Eastern
Time) on each Business Day by adding the value of all its securities, cash and
other assets allocable to its Service Shares, subtracting the liabilities
allocable to its Shares and dividing by the total number of Shares outstanding.
The net asset value per Service Share of the Portfolio is determined
independently of the Portfolio's other classes and independently of the Fund's
other portfolios.
Valuation of securities held by the Portfolio is as follows:
securities traded on a national securities exchange or on the NASDAQ National
Market System are valued at the last reported sale price that day; securities
traded on a national securities exchange or on the NASDAQ National Market
System for which there were no sales on that day and securities traded on other
over-the-counter markets for which market quotations are readily available are
valued at the mean of the bid and asked prices; an option or futures contract
is valued at the last sales price prior to 4:00 p.m. (Eastern Time), as quoted
on the principal exchange or board of trade on which such option or contract is
traded, or in the absence of a sale, the mean between the last bid and asked
prices prior to 4:00 p.m. (Eastern Time); and securities for which market
quotations are not readily available are valued at fair market value as
determined in good faith by or under the direction of the Fund's Board of
Trustees. The amortized cost method of valuation will also be used with
respect to debt obligations with sixty days or less remaining to maturity
unless the investment adviser and/or sub-adviser under the supervision of the
Board of Trustees determines such method does not represent fair value.
The Portfolio may use a pricing service, bank or broker/dealer
experienced in such matters to value the Portfolio's securities. A more
detailed discussion of net asset value and security valuation is contained in
the Statement of Additional Information.
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DIVIDENDS AND DISTRIBUTIONS
- -------------------------------------------------------------------------------
The Portfolio will distribute substantially all of its net investment
income and net realized capital gains, if any, to shareholders. For dividend
purposes, the Portfolio's investment income available for distribution to
holders of Service Shares is reduced by accrued expenses directly attributable
to the Portfolio and the general expenses of the Fund prorated to the Portfolio
on the basis of its relative net assets. All distributions are reinvested at
net asset value in the form of additional full and fractional Shares of the
Portfolio unless an Institution elects otherwise. Such election, or any
revocation thereof, must be made in writing to PFPC, and will become effective
with respect to dividends paid after its receipt by PFPC. The net investment
income of the Portfolio is declared daily as a dividend to investors who are
Shareholders of the Portfolio at, and whose payment for Share purchases are
available to the Portfolio in Federal funds by, the close of business on the
day of declaration. All such dividends are paid within ten days after the end
of each month and within seven days after redemption of all of a shareholder's
Shares in the Portfolio. Net realized capital gains (including net short-term
capital gains), if any, will be distributed by the Portfolio at least annually.
TAXES
- -------------------------------------------------------------------------------
The following discussion is only a brief summary of some of the
important tax considerations generally affecting the Portfolio and its
shareholders and is not intended as a substitute for careful tax planning.
Accordingly, investors in the Portfolio should consult their tax advisers with
specific reference to their own tax situation.
The Portfolio will elect to be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. So long
as the Portfolio qualifies for this tax treatment, it generally will be
relieved of Federal income tax on amounts distributed to shareholders, but
shareholders, unless otherwise exempt, will pay income or capital gains taxes
on amounts so distributed (except distributions that are treated as a return of
capital), regardless of whether such distributions are paid in cash or
reinvested in additional Shares.
Distributions paid out of the "net capital gain" (the excess of net
long-term capital gain over net short-term capital loss), if any, of the
Portfolio will be taxed to shareholders as long-term capital gain, regardless
of the length of time a
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shareholder has held his Shares and whether such gain was reflected in the
price paid for the Shares. All other distributions, to the extent they are
taxable, are taxed to shareholders as ordinary income.
The Fund will send written notices to shareholders annually regarding
the tax status of distributions made by the Portfolio. Dividends declared in
October, November or December of any year payable to shareholders of record on
a specified date in those months will be deemed to have been received by the
shareholders on December 31 of such year, if the dividends are paid during
January of the following year.
An investor considering buying shares of the Portfolio on or just
before the record date of a taxable dividend should be aware that the amount of
the forthcoming dividend payment, although in effect a return of capital, will
be taxable to him.
A taxable gain or loss may be realized by a shareholder upon his
redemption, transfer or exchange of Portfolio Shares depending upon the tax
basis of such Shares and their price at the time of redemption, transfer or
exchange.
Future legislative or administrative changes or court decisions may
materially affect the tax consequences of investing in one or more Portfolios
of the Fund. Shareholders are also urged to consult their tax advisers
concerning the application of state and local income taxes to investments in
the Fund which may differ from the Federal income tax consequences described
above. Shareholders who are nonresident alien individuals, foreign trusts or
estates, foreign corporations or foreign partnerships may be subject to
different U.S. Federal income tax treatment and should consult their tax
advisers.
DESCRIPTION OF SHARES
- -------------------------------------------------------------------------------
The Fund was organized as a Massachusetts business trust on December
22, 1988 and is registered under the 1940 Act as an open-end management
investment company. The Declaration of Trust authorizes the Board of Trustees
to classify and reclassify any unissued shares into one or more classes of
shares. Pursuant to such authority, the Board of Trustees has authorized the
issuance of an unlimited number of shares in each of 109 classes (22 classes of
"Series B Investor Shares" and 29 classes each of "Institutional Shares,"
"Service Shares" and "Series A Investor Shares") representing interests in the
Fund's investment portfolios. This Prospectus describes the Core Fixed Income
Portfolio, which is classified as a diversified company under the 1940 Act.
For information regarding other portfolios of the Fund, contact the Distributor
by phone at (800) 998-7633 or at
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the address listed in "Purchase and Redemption of Shares--Distributor."
Each share of an investment portfolio has a par value of $.001,
represents an equal proportionate interest in the portfolio and is entitled to
such dividends and distributions earned on the portfolio's assets as are
declared in the discretion of the Board of Trustees. The Fund's shareholders
are entitled to one vote for each full share held and proportionate fractional
votes for fractional shares held, and will vote in the aggregate and not by
class, except where otherwise required by law or when the Board of Trustees
determines that the matter to be voted upon affects only the interests of the
shareholders of a particular class or investment portfolio. Under
Massachusetts law, the Fund's state of organization, and the Fund's Declaration
of Trust and Code of Regulations, the Fund is not required and does not
currently intend to hold annual meetings of shareholders for the election of
trustees (except as required under the 1940 Act). For a further discussion of
the voting rights of shareholders, see "Additional Information Concerning
Shares" in the Statement of Additional Information.
Holders of the Portfolio's Service Shares bear the fees described in
the prospectus for such shares that will be paid under the Fund's Plan.
Payments under the Plan will cover support services provided to beneficial
owners of Service Shares by certain institutions. Such services are intended
to supplement the services provided by the Fund's Administrators and transfer
agent to the Fund's shareholders of record. In consideration for payment of up
to .15% (on an annualized basis) of the average daily net asset value of
Service Shares owned beneficially by their customers, institutions may provide
one or more of the following services to such customers: processing purchase
and redemption requests from customers and placing orders with the Fund's
transfer agent or the Distributor; processing dividend payments from the Fund
on behalf of customers; providing sub-accounting with respect to Service Shares
beneficially owned by customers or the information necessary for
sub-accounting; and other similar services. In consideration for payment of a
service fee of up to a separate .15% (on an annualized basis) of the average
daily net asset value of Service Shares owned beneficially by their customers,
institutions may provide one or more of these additional services to such
customers: responding to customer inquiries relating to the services performed
by the institution and to customer inquiries concerning their investments in
Service Shares; providing information periodically to customers showing their
positions in Service Shares; and other similar shareholder liaison services.
Similarly, holders of the Portfolio's Series A Investor Shares and Series B
Investor Shares (collectively, "Investor Shares") bear the payments described
in the prospectus for such shares that are paid under the Plan. Under the
Plan,
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the Distributor is entitled to payments by the Portfolio for: (i) promotional
activities in connection with advertising and marketing Investor Shares; and
(ii) payments to broker/dealers ("Service Organizations") for distribution
assistance such as advertising and marketing of Investor Shares. In addition,
payments under the Plan will be used to pay for or finance sales commissions
and other fees payable to Service Organizations and other broker/dealers who
sell Series B Investor Shares. Service Organizations may also provide support
services such as establishing and maintaining accounts and records relating to
shareholders of Investor Shares for whom the Service Organizations are the
dealer of record or holder of record for shareholders with whom the Service
Organizations have a servicing relationship. The Plan provides for payments at
an annual rate not to exceed .50% of the average daily net asset value of the
Portfolio's outstanding Series A Investor Shares. The Plan provides for
payments at an annual rate not to exceed 1.15% of the average daily net asset
value of the Portfolio's outstanding Series B Investor Shares. As a result of
these different fees, the net asset value and the net yields on the Fund's
Institutional Shares will generally be higher than those on the Fund's Service
Shares, the net asset value and the net yields on the Fund's Service Shares
will generally be higher than those on the Fund's Series A Investor Shares, and
the net asset value and the net yields on the Fund's Series A Investor Shares
will generally be higher than those on the Fund's Series B Investor Shares if
payments by the Portfolio under the Plan are made at the maximum rates.
Standardized total return and yield quotations will be computed separately for
each class of Shares. Series A and Series B Investor Shares are exchangeable
at the option of the holder for Series A and Series B Investor Shares,
respectively, in the Fund's other investment portfolios. Series B Investor
Shares are exchangeable for Series B Investor Shares in the Fund's Money Market
Portfolio, but are not exchangeable for shares in the Fund's other money market
investment portfolios. Series A Investor Shares of the Portfolio are offered
to the public at the net asset value per share plus a maximum sales charge of
4.50% of the offering price on single purchases of less than $50,000; the sales
charge is reduced on a graduated scale on single purchases of $50,000 or more
and certain exemptions from the sales charge may apply. The sales charge does
not apply to exchanges of Series A Investor Shares of the Portfolio. Series B
Investor Shares are subject to a maximum contingent deferred sales charge of
5.0%. The deferred sales charge decreases over time. Series B Investor Shares
may be exchanged for Series B Investor Shares of another investment portfolio
of the Fund without the payment of any deferred sales charge at the time the
exchange is made. Because Service Shares and Institutional Shares are sold
without a sales charge, holders of Service Shares and Institutional Shares have
no such exchange privileges.
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On September 29, 1995, PNC Bank held of record approximately 79% of
the Fund's outstanding shares, and may be deemed a controlling person of the
Fund under the 1940 Act. PNC Bank is a subsidiary of PNC Bank Corp., a
multi-bank holding company.
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OTHER INFORMATION
- -------------------------------------------------------------------------------
REPORTS AND INQUIRIES
Shareholders will receive unaudited semi-annual financial statements
and annual financial statements audited by independent accountants.
Shareholder inquiries should be addressed to the Fund c/o PFPC, P.O. Box 8950,
Wilmington, Delaware 19885-9628, toll-free (800) 441-7764 (in Delaware call
collect (302) 791-1104).
PERFORMANCE INFORMATION
From time to time, total return and yield data for Shares of the
Portfolio may be quoted in advertisements or in communications to Institutions.
Total return will be calculated on an average annual total return basis for
various periods. Average annual total return reflects the average annual
percentage change in value of an investment in Shares of the Portfolio over the
measuring period. This method of calculating total return assumes that
dividends and capital gain distributions made by the Portfolio during the
period relating to Shares are reinvested in Shares.
The yield of Shares of the Portfolio are computed based on the net
income of the Portfolio allocated to such Shares during a 30-day (or one month)
period, which period will be identified in connection with the particular yield
quotation. More specifically, the yield of Shares of the Portfolio is computed
by dividing the Portfolio's net income per share allocated to such Shares
during a 30-day (or one month) period by the net asset value per share on the
last day of the period and annualizing the result on a semi-annual basis.
Performance data of Shares of the Portfolio may be compared to those
of other mutual funds with similar investment objectives and to other relevant
indexes or to ratings or rankings prepared by independent services or other
financial or industry publications that monitor the performance of mutual
funds. In addition, certain indexes may be used to illustrate historic
performance of select asset classes. For example, the total return and/or
yield of Shares of the Portfolio may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Weisenberger
Investment Company Service, and with the performance of the Lehman Brothers
Aggregate Index, the T-Bill Index and the "stocks, bonds and inflation Index"
published annually by Ibbotson Associates. Performance information may also
include evaluations of the Portfolio and their Shares published by nationally
recognized ranking services and information as reported by financial
publications such as Business Week, Fortune, Institutional Investor, Money
Magazine,
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<PAGE> 330
Forbes, Barron's, The Wall Street Journal and The New York Times, or in
publications of a local or regional nature.
In addition to providing performance information that demonstrates the
actual yield or returns of Shares of the Portfolio over a particular period of
time, the Portfolio may provide certain other information demonstrating
hypothetical investment returns. Such information may include, but is not
limited to, illustrating the compounding effects of a dividend in a dividend
reinvestment plan.
Performance quotations of Shares of the Portfolio represent past
performance and should not be considered as representative of future results.
The investment return and principal value of an investment in Shares of the
Portfolio will fluctuate so that a shareholder's Shares, when redeemed, may be
worth more or less than their original cost. Since performance will fluctuate,
performance data for Shares of the Portfolio cannot necessarily be used to
compare an investment in such Shares with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that
performance is generally a function of the kind and quality of the instruments
held in the portfolio, portfolio maturity, operating expenses and market
conditions. Any fees charged by Service Organizations directly to their
customer accounts in connection with investments in Shares will not be included
in the Portfolio's calculations of yield and total return.
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APPENDIX A
PORTFOLIO BENCHMARK
LEHMAN BROTHERS AGGREGATE INDEX. The Lehman Brothers Aggregate Index
is made up of the Lehman Brothers Government/Corporate Bond Index, the Lehman
Brothers Mortgage-Backed Securities Index and the Lehman Brothers Asset-Backed
Securities Index and is intended to be representative of the investment grade,
publicly issued, fixed-rate, U.S. fixed income market. These indices include
fixed-rate debt issues rated investment grade or higher by Moody's, S&P or
Fitch Investor's Service. All issues have at least one year to maturity and an
outstanding par value of $100 million for U.S. Government issues and $50
million for all others. The Lehman Brothers Government/Corporate Bond Index
includes the Lehman Brothers Government Bond Index and the Lehman Brothers
Corporate Bond Index. The Lehman Brothers Government Bond Index is made up of
all public obligations of the U.S. Treasury, U.S. Government agencies and
quasi-governmental corporations, and corporate debt guaranteed by the U.S.
Government. The Lehman Brothers Corporate Bond Index includes all publicly
issued, fixed-rate, non-convertible investment grade domestic corporate debt,
as well as Yankee bonds which are dollar denominated, Securities and Exchange
Commission registered, public, non-convertible debt obligations issued or
guaranteed by foreign sovereign governments, municipalities or governmental or
international agencies. The Lehman Brothers Mortgage-Backed Securities Index
is comprised of all fixed-rate securities backed by mortgage pools of the GNMA,
FNMA and FHLMC. Graduated Payment Mortgages ("GPMs") are included, but
Graduated Equity Mortgages ("GEMs") are not. The Lehman Brothers Asset-Backed
Securities Index includes all publicly issued, non-callable fixed-rate
asset-backed securities (excluding subordinated trenches) backed by automobile,
credit card and fixed-rate home equity loans. At December 31, 1994, the
Aggregate Index was comprised of 4,854 issues with a market value of $3.9
trillion. It had a duration of 4.67 years as of that date. On a market value
basis, the Government, Corporate, Mortgage-Backed and Asset-Backed Indices
accounted for 53.85%, 16.03%, 28.89% and 1.23% of the Aggregate Index,
respectively.
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APPENDIX B
CORPORATE BOND, MORTGAGE-BACKED SECURITY
AND COMMERCIAL PAPER RATINGS
CORPORATE BONDS AND MORTGAGE-BACKED SECURITIES
MOODY'S. Bonds rated Aa by Moody's are judged by Moody's to be of
high quality by all standards. Together with bonds rated Aaa (Moody's highest
rating), they comprise what are generally known as high-grade bonds. Aa bonds
are rated lower than Aaa bonds because margins of protection may not be as
large as those of Aaa bonds, or fluctuations of protective elements may be of
greater amplitude, or there may be other elements present which make the
long-term risks appear somewhat larger than those applicable to Aaa securities.
Bonds that are rated A by Moody's possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some time in the future.
Bonds rated Baa by Moody's are considered by Moody's to be 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. Baa bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
S&P. Bonds rated AA by S&P are judged by S&P to have a very strong
capacity to pay interest and repay principal and differ only in a small degree
from issues rated AAA. Bonds rated AAA have the highest rating assigned by
S&P, and the capacity to pay interest and repay principal is extremely strong.
Bonds rated A by S&P have a strong capacity to pay interest and repay
principal, although they are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions. Bonds rated BBB by S&P
are regarded by S&P as having an adequate capacity to pay interest and repay
principal. Whereas BBB bonds normally exhibit adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
The process of determining ratings for Mortgage-Backed securities by
Moody's and S&P includes consideration of the credit quality of the underlying
collateral, including any credit support providers, structural and legal
aspects associated with the securities, and the likelihood that the payment
stream on the mortgage pool is adequate to make payments that investors are
entitled to under the securities. Neither of such ratings represents an
assessment of the likelihood that principal prepayments will be made by
mortgagors or the degree to which such prepayments may differ from that
originally anticipated, nor does it address the possibility that investors may
suffer a lower
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than anticipated yield or that investors in such securities may fail to recoup
fully their initial investment due to prepayments.
COMMERCIAL PAPER
MOODY'S. Moody's employs the Prime rating for investment grade senior
short-term debt obligations. Issuers within the Prime category are given
ratings 1, 2 or 3, depending on the relative strengths of certain factors.
Issuers rated Prime-1, the highest category, have a superior ability for
repayment which will often be evidenced by many of the following
characteristics: (1) leading market positions in well established industries;
(2) high rates of return on funds employed; (3) conservative capitalization
structure with moderate reliance on debt and ample asset protection; (4) broad
margins in earnings coverage of fixed financial charges and high internal cash
generation; and (5) well established access to a range of financial markets and
assured sources of alternative liquidity.
S&P. Ratings are graded into four categories, ranging from A for the
highest quality obligations to D for the lowest. Issues rated A are regarded
as having the greatest capacity for timely payment. Issues in this category
are further refined with the designations 1, 2 and 3 to indicate the relative
degree of safety. Issues rated A-1, the highest category, have a strong degree
of safety regarding timely payment.
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<PAGE> 334
APPENDIX C
GENERAL CHARACTERISTICS AND RISKS OF HEDGING TRANSACTIONS
PUT AND CALL OPTIONS
A put option gives the purchaser of the option the right to sell and
the writer the obligation to buy the underlying security at the exercise price
during the option period. The purchase of a put option on a debt security
would generally be designed to protect the Portfolio's holdings in a security
against a substantial decline in market value. A call option gives the
purchaser of the option the right to buy and the writer the obligation to sell
the underlying security at the exercise price during the option period. The
purchase of a call option on a security would generally be intended to protect
the Portfolio against an increase in the price of a security that it intended
to purchase in the future. The Portfolio may also write put and call options.
The premium that the Portfolio receives for writing the option will serve as a
partial hedge, in the amount of the option premium, against changes in the
value of the securities in its portfolio. The Portfolio is authorized to
purchase exchange listed options and over-the-counter options ("OTC Options").
Listed options are issued by the Options Clearing Corporation ("OCC"), which
guarantees the performance of the obligations of the parties to such options.
The Portfolio's ability to close out its position as a purchaser or
seller of an exchange-listed put or call option is dependent upon the existence
of a liquid secondary market on option exchanges. Among the possible reasons
for the absence of a liquid secondary market on an exchange are: (i)
insufficient trading interest in certain options; (ii) restrictions on
transactions imposed by an exchange; (iii) trading halts, suspensions or other
restrictions imposed with respect to particular classes or series of options or
underlying securities; (iv) interruption of the normal operations on an
exchange; (v) inadequacy of the facilities of an exchange or OCC to handle
current trading volume; or (vi) a decision by one or more exchanges 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
on that exchange that had been listed by the OCC as a result of trades on that
exchange would generally continue to be exercisable in accordance with their
terms.
OTC Options are purchased from or sold to dealers or financial
institutions which have entered into direct agreements with the Portfolios.
With OTC Options, such variables as expiration date, exercise price and premium
will be agreed upon between the Portfolio and the transacting dealer, without
the intermediation of a third party such as the OCC. If the transacting dealer
fails to make or take delivery of the securities underlying an option it has
written, in accordance with the terms of that option, the Portfolio would lose
the premium paid for the option as well as any anticipated benefit of
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the transaction. The Portfolio will engage in OTC Option transactions only
with primary United States government securities dealers recognized by the
Federal Reserve Bank in New York.
The hours of trading for options on debt securities may not conform to
the hours during which the underlying securities are traded. To the extent
that the option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying markets
that will not be reflected in the option markets.
FUTURES CONTRACTS AND RELATED OPTIONS
The Portfolio may purchase and sell exchange-traded financial futures
contracts or purchase and sell put and call options of such futures as a hedge
against anticipated interest rate or currency changes. The sale of a futures
contract creates an obligation by the Portfolio, as seller, to deliver the
specific type of financial instrument called for in the contract at a specified
future time for a specified price. Options on futures contracts are similar to
options on securities except that 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 (a long position if the option is a call and a short position
if the option is a put).
Typically, investment in futures contracts requires the Portfolio to
deposit with a financial intermediary as security for its obligations an amount
of cash or other specified debt securities which initially is 1% to 5% of the
face amount of the contract (but may be higher in some circumstances) and which
thereafter fluctuates on a periodic basis as the value of the contract
fluctuates. Investment in options involves payment of a premium for the option
without any further obligation on the part of the Portfolio. Accordingly, the
daily deposit requirements in futures contracts create an ongoing greater
potential financial risk than do options transactions, where the exposure is
limited to the cost of the initial premium. Transactions may be settled by
entering into an offsetting transaction, and are subject to the risk that the
position may not be able to be closed if no offsetting transaction can be
arranged.
The Portfolio will not engage in transactions in futures contracts or
related options for speculative purposes but only as a hedge against changes
resulting from market conditions in the values of securities in its portfolio.
In addition, the Portfolio will not enter into a futures contract or related
option (except for closing transactions) if, immediately thereafter, the sum of
its annual deposits and premiums on open contracts and options would exceed 5%
of the Portfolio's total assets (taken at current value); provided, however,
that in the case of an option that is in-the-money at the time of the purchase,
the in-the-money amount may be excluded in calculating the 5% limitation.
Also, assets consisting of cash, U.S. Government securities or other liquid
high-grade debt obligations
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will be segregated with the custodian and marked to market in an amount equal
to the market value of the contract.
GENERAL RISKS OF HEDGING TRANSACTIONS
Hedging Transactions present certain additional risks. In particular,
the variable degree of correlation between price movements of hedging
instruments and price movements in the position being hedged creates the
possibility that losses on the hedge may be greater than gains in the value of
the Portfolio's position. In addition, certain hedging instruments and markets
may not be liquid in all circumstances. As a result, in volatile markets, the
Portfolio may not be able to close out a transaction without incurring losses
substantially greater than the initial deposit. Although the contemplated use
of these instruments should tend to minimize the risk of loss due to a decline
in the value of the hedged position, at the same time they tend to limit any
potential gain which might result from an increase in the value of such
position. Losses due to Hedging Transactions will reduce net asset value. The
ability of the Portfolio to hedge successfully will depend on BlackRock's
ability to predict pertinent market movements, which cannot be assured. The
Portfolio's ability to enter into Hedging Transactions may be limited by the
Internal Revenue Code's requirements for qualification as a regulated
investment company. See "Taxes, Dividends and Distributions" in the Statement
of Additional Information.
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<TABLE>
<S> <C>
The Core Fixed
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR Income
MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS Portfolio
PROSPECTUS, OR IN THE STATEMENT OF ADDITIONAL INFORMATION
INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE Service
FUND OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH Class
OFFERING MAY NOT LAWFULLY BE MADE.
</TABLE>
<TABLE>
<CAPTION>
------------------- Prospectus
TABLE OF CONTENTS
Page
----
<S> <C>
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . , 1995
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . --------------
Investment Policies . . . . . . . . . . . . . . . . . . . . . . . .
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase and Redemption Shares . . . . . . . . . . . . . . . . . .
Net Asset Value . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends and Distributions . . . . . . . . . . . . . . . . . . . .
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Description of Shares . . . . . . . . . . . . . . . . . . . . . . .
Other Information . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
INVESTMENT ADVISER
PNC Asset Management Group, Inc.
Philadelphia, Pennsylvania
SUB-ADVISER
BlackRock Financial Management Inc.
New York, New York
CO-ADMINISTRATOR
PNC Mutual Fund Company
New York, New York
CO-ADMINISTRATOR AND TRANSFER AGENT
PFPC Inc.
Wilmington, Delaware
CO-ADMINISTRATOR AND DISTRIBUTOR
Provident Distributors, Inc.
Radnor, Pennsylvania
COUNSEL
Drinker Biddle & Reath
Philadelphia, Pennsylvania
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand, L.L.P.
Philadelphia, Pennsylvania
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THE PNC(R) FUND
(INSTITUTIONAL SHARES OF THE CORE FIXED INCOME PORTFOLIO)
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A ITEM LOCATION
- -------------- --------
PART A PROSPECTUS
<S> <C> <C>
1. Cover page . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expense Table
3. Condensed Financial Information . . . . . . . . . . . . . . . . . Financial Highlights
4. General Description of Registrant . . . . . . . . . . . . . . . . Cover Page; Investment
Policies;
Description of
Shares
5. Management of the Fund . . . . . . . . . . . . . . . . . . . . . . Management
5A. Management's Discussion of Fund Performance . . . . . . . . . . . Inapplicable
6. Capital Stock and Other Securities . . . . . . . . . . . . . . . . Cover Page; Dividends
and Distributions;
Description of
Shares
7. Purchase of Securities Being Offered . . . . . . . . . . . . . . . Purchase and Redemption
of Shares;
Dividends and Distributions
Net Asset Value
8. Redemption or Repurchase . . . . . . . . . . . . . . . . . . . . . Purchase and Redemption
of Shares -
Redemption of
Shares
9. Pending Legal Proceedings . . . . . . . . . . . . . . . . . . . . Inapplicable
</TABLE>
<PAGE> 339
THE CORE FIXED INCOME PORTFOLIO
INSTITUTIONAL CLASS
The PNC(R) Fund (the "Fund") consists of 30 investment portfolios.
This Prospectus relates to shares ("Institutional Shares" or "Shares")
representing interests in the Core Fixed Income Portfolio (the "Portfolio").
The Portfolio seeks to realize a total rate of return that exceeds the total
return of the Lehman Brothers Aggregate Index consistent with preservation of
capital and prudent investment management. It pursues this objective by
investing all of its assets in a broad range of investment grade fixed income
securities, including U.S. Government, Mortgage-Backed, Asset-Backed and
Corporate debt securities.
Institutional Shares of the Portfolio ("Shares") are sold at net asset
value to institutional investors ("Institutions").
This Prospectus contains information that a prospective investor needs
to know before investing. Please keep it for future reference. A Statement of
Additional Information currently dated ____________, 1995 has been filed with
the Securities and Exchange Commission (the "SEC"). The current Statement of
Additional Information may be obtained free of charge from the Fund by calling
(800) 422-6538. The Statement of Additional Information, as it may be
supplemented from time to time, is incorporated by reference in this
Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION OR ANY OTHER BANK AND SHARES ARE
NOT INSURED BY, GUARANTEED BY, OBLIGATIONS OF OR OTHERWISE SUPPORTED BY THE
U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD, OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENTS IN SHARES OF THE FUND
INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL AMOUNT
INVESTED.
PROSPECTUS , 1995
-----------
<PAGE> 340
INTRODUCTION
- -------------------------------------------------------------------------------
The Fund is an open-end management investment company which has
registered shares in 30 investment portfolios, of which only the Portfolio is
described in this Prospectus.
PORTFOLIO MANAGEMENT
PNC Asset Management Group, Inc. ("PAMG") serves as the Fund's
investment adviser. BlackRock Financial Management Inc. ("BlackRock") serves
as sub-adviser to the Portfolio. The investment adviser and sub-adviser are
indirect wholly-owned subsidiaries of PNC Bank Corp.
THE ADMINISTRATORS
PNC Mutual Fund Company ("PMFCO"), PFPC Inc. ("PFPC") and Provident
Distributors, Inc. ("PDI") serve as the Fund's administrators (collectively,
the "Administrators").
THE DISTRIBUTOR
Provident Distributors, Inc. (the "Distributor") serves as the Fund's
distributor.
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<PAGE> 341
EXPENSE TABLE
ANNUAL OPERATING EXPENSES FOR INSTITUTIONAL SHARES AFTER FEE WAIVERS AND
EXPENSE REIMBURSEMENTS AS A PERCENTAGE OF DAILY NET ASSETS
<TABLE>
<S> <C>
Advisory fees(1) . . . . . . . . . . . . . . . . . . 0.30%
Other operating
expenses . . . . . . . . . . . . . . . . . . . . . . 0.25%
-----
Total operating expenses . . . . . . . . . . . . . . 0.55%
=====
</TABLE>
- ---------------
(1) Advisory fees are net of waivers of .20% for the Portfolio. In
addition, the expense table reflects reimbursements made to the
Portfolio by the Adviser and fee waivers by the Administrators.
PAMG and the Administrators are under no obligation to waive
or continue waiving such fees or reimbursing such expenses, but
have informed the Fund that they expect to waive or continue
waiving such fees and reimbursing such expenses during the
current fiscal year as necessary to maintain the Portfolio's total
operating expenses at the level set forth in the table. The expenses
noted above under "Other expenses" are estimated based on the level of
such expenses for the Portfolio's current fiscal year.
EXAMPLE
An investor in Institutional Shares would pay the following expenses
on a $1,000 investment in Shares of the Portfolio, assuming (1) 5% annual
return, and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
FIVE TEN
ONE YEAR THREE YEARS YEARS YEARS
-------- ----------- ----- -----
<S> <C> <C> <C> <C>
Core Fixed Income Portfolio . . . . . . . . . . . $6 $18 $31 $69
</TABLE>
The foregoing Expense Table and Example are intended to assist
investors in understanding the Portfolio's estimated annual operating expenses.
Investors bear these expenses either directly or indirectly. The information
in the table for the Portfolio has been restated based on the advisory and
administration fees and other expenses payable after fee waivers for the
current fiscal year ending September 30, 1996. Total operating expenses would
have been 0.83% for the Portfolio's Institutional Shares without such fee
waivers and reimbursements. See Footnote 1 to the Expense Table, "Financial
Highlights--Background," "Management," "Purchase and Redemption of Shares" and
"Description of Shares" for a more complete description of shareholder
transaction expenses and operating expenses.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
INVESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND
OPERATING EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
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<PAGE> 342
CERTAIN RISK FACTORS TO CONSIDER
An investment in the Portfolio is subject to certain investment
considerations, as set forth in detail under "Investment Policies." As with
other mutual funds, there can be no assurance that the Portfolio will achieve
its investment objective. The following are some of these risks. As with all
fixed income securities, the market values of the Portfolio's assets, and as
such the net asset value of the Portfolio's shares will fluctuate with changes
in prevailing interest rates. While principal and interest payments on some
securities may be guaranteed by the U.S. Government, government agencies or
other guarantors, the market value of the securities is not guaranteed. Events
such as prepayments on underlying mortgage loans may adversely affect the
return from Mortgage-Backed securities. The Portfolio may invest in repurchase
agreements which entail a risk of loss should the seller default on its
obligation to repurchase the security which is the subject of the transaction.
The Portfolio may use futures, options, and options on futures for hedging or
duration management purposes. Use of these instruments involves certain costs
and risks including the risk that the Portfolio could not close out an option
or futures position when it would be most advantageous to do so and the risk of
an imperfect correlation between the value of the security being hedged and the
value of the particular derivative instrument. High portfolio turnover may
involve correspondingly greater brokerage and other transaction costs. The
Portfolio may borrow from banks and enter into reverse repurchase agreements or
dollar rolls up to 33-1/3% of the value of its total assets. This technique,
called "leverage", may cause the Portfolio's Shares net asset value to rise
faster or decrease faster than would otherwise be the case. These and the
other investment practices set forth below and their associated risks deserve
careful consideration by investors.
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
BACKGROUND
The Fund currently offers four classes of shares in the Portfolio --
Service, Series A Investor, Series B Investor and Institutional Shares.
Service, Series A Investor, Series B Investor and Institutional Shares in the
Portfolio represent equal pro-rata interests in the Portfolio, except that they
bear different expenses which reflect the difference in the range of services
provided to them. Under the Fund's Amended and Restated Distribution and
Service Plan (the "Plan"), Service Shares bear the expense of fees at an annual
rate not to exceed .15% of the average daily net asset value of the Portfolio's
outstanding Service Shares. Service Shares also bear the expense of a
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<PAGE> 343
service fee at an annual rate not to exceed .15% of the average daily net asset
value of the Portfolio's outstanding Service Shares for other shareholder
support activities provided by service organizations. See "Description of
Shares" for a description of the Plan and shareholder support activities.
Series A Investor Shares bear expenses under the Plan at an annual rate not to
exceed .50% of the average daily net asset value of the Portfolio's outstanding
Series A Investor Shares. Series B Investor Shares bear the expenses under the
Plan at annual rates not to exceed 1.15% of the average daily net asset value
of the Portfolio's outstanding Series B Investor Shares. See "Description of
Shares" for a description of the Plan. Institutional Shares do not bear the
fees stated above applicable to the other share classes under the Plan.
The Portfolio commenced operations on December 9, 1992 as a separate
investment portfolio (the "Predecessor Portfolio") of The BFM Institutional
Trust Inc., which was organized as a Maryland corporation. On __________,
1996, the assets and liabilities of the Predecessor Portfolio were transferred
to the Portfolio, which had no prior operating history. The Predecessor
Portfolio also received investment advisory services from BlackRock.
The financial highlights set forth certain information concerning the
investment results of the Predecessor Portfolio for the fiscal years or period
ended June 30, 1995, 1994 and 1993. The financial statements and notes thereto
for the Predecessor Portfolio were audited by the Predecessor Portfolio's
former independent accountants, whose report thereon is incorporated by
reference into the Statement of Additional Information. Additional information
about the performance of the Predecessor Portfolio is contained in the
Predecessor Portfolio's annual report. Both the Statement of Additional
Information and the Predecessor Portfolio's annual report may be obtained from
the Fund free of charge by calling the number on the front cover of this
Prospectus. During the years or period shown, the Predecessor Portfolio offered
only one class of shares to institutional investors.
-5-
<PAGE> 344
<TABLE>
<CAPTION>
THE CORE FIXED INCOME PORTFOLIO
-------------------------------
YEAR YEAR DECEMBER 9, 1992(A)
ENDED ENDED THROUGH
JUNE 30, 1995 JUNE 30, 1994 JUNE 30, 1993
------------------- ------------- ----------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period . . . . . . . . . $ 9.36 $ 10.37 $ 10.00
-------- --------
Net investment income (net of $.004, $.003 and
$.001, respectively, of interest expense)(b) . . . 0.62 0.55 0.32
Net realized and unrealized gains
on investments . . . . . . . . . . . . . . . . . . 0.50 (0.60) 0.37
-------- ------- --------
Net (decrease) increase
from investment operations . . . . . . . . . . . . 1.12 (0.05) 0.69
------ ------- --------
Dividends from net investment income . . . . . . . . . (0.62) (0.55) (0.32)
Distributions from net realized capital gains . . . . . (0.01) (0.41)
------- ------
Total dividends and distributions . . . . . . . . (0.63) (0.96) (0.32)
------- ------- -------
Net asset value, end of period . . . . . . . . . . . . $ 9.85 $ 9.36 $ 10.37
======== ======== ========
TOTAL INVESTMENT RETURN (c) . . . . . . . . . . . . . . 11.79% (0.69)% 6.88%
RATIOS TO AVERAGE NET ASSETS:
Expenses (b) . . . . . . . . . . . . . . . . . . . . . 0.55% 0.55% 0.55%(d)
Net investment income (b) . . . . . . . . . . . . . . . 6.62% 5.61% 5.57% (d)
SUPPLEMENTAL DATA:
Average net assets (in thousands) . . . . . . . . . . . . $16,247 $9,702 $6,622
Portfolio turnover . . . . . . . . . . . . . . . . . . . 435% 722% 354%
Net assets, end of period (in thousands) . . . . . . . . $32,191 $12,507 $7,803
</TABLE>
- -------------------------------------------------------------------------------
(a) Commencement of investment operations.
(b) BlackRock waived fees amounting to $56,894, $34,010 and $24,761 and
reimbursed expenses amounting to $137,364, $137,179 and $0 for the
periods ended June 30, 1995, June 30, 1994 and June 30, 1993,
respectively. The Predecessor Portfolio's administrator waived fees
amounting to $32,500 and $3,701 for the periods ended June 30, 1994
and June 30, 1993, respectively. For the period ended June 30, 1993,
the Predecessor Portfolio's custodian and the Portfolio's transfer
agent waived fees amounting to $24,272 and $17,283, respectively. If
the Predecessor Portfolio had borne all expenses for the periods ended
June 30, 1995, 1994 and 1993: the expense ratios would have been
1.75%, 2.65% and 2.44%, respectively; the net investment income ratios
would have been 5.43%, 3.51% and 3.68%, respectively; and the net
investment income on a per share basis would have been $0.51, $0.34
and $0.22, respectively.
(c) Total investment return is calculated assuming a purchase of common
stock at net asset value per share on the first day and a sale at net
asset value per share on the last day of the period reported.
Dividends are assumed, for purposes of this calculation, to be
reinvested at the net asset value per share on the payment date.
(d) Annualized.
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<PAGE> 345
The information above represents audited operating performance based
on an average share of common stock outstanding, total investment
return, ratios to average net assets and other supplemental data, for
each of the periods indicated. This information has been determined
based upon financial information provided in the financial statements.
-7-
<PAGE> 346
INVESTMENT POLICIES
- --------------------------------------------------------------------------------
The Portfolio seeks to maximize total return, consistent with
preservation of capital and prudent investment management. Duration is one of
the fundamental tools used by BlackRock in the selection of securities for the
Portfolio. Duration is a measure of the expected life of a fixed income
security on a present value basis and is indicative of a security's price
"volatility" or "risk" associated with changes in interest rates. The concept
of duration was developed to incorporate a bond's yield, coupons, final
maturity and call features into one measure. There is no assurance that the
Portfolio will achieve its targeted duration at all times. A more detailed
discussion of duration is provided under "Duration" below.
The total return that the Portfolio seeks to maximize will consist of
interest from underlying securities and capital appreciation from the purchase
and sale of securities, and from use of futures and options. The change in
market value of fixed income securities (and therefore their capital
appreciation) is largely a function of changes in the current level of interest
rates. When interest rates are falling, a portfolio with a shorter duration
generally will not generate as high a level of total return as a portfolio with
a longer duration. Conversely, when interest rates are rising, a portfolio
with a shorter duration will generally outperform longer duration portfolios.
When interest rates are stable, shorter duration portfolios generally will not
generate as high a level of total return as longer duration portfolios
(assuming that long-term interest rates are higher than short-term rates, which
is commonly the case).
The Portfolio is structured to seek to realize a total rate of return
that exceeds that total return of the Lehman Brothers Aggregate Index. The
duration of the Lehman Brothers Aggregate Index as of December 31, 1994 was
4.67 years. The Portfolio will invest all of its assets in a broad range of
investment grade fixed income securities, including U.S. Government,
Mortgage-Backed, Asset-Backed and Corporate debt securities. The duration of
the Portfolio will be targeted to be in the range of plus or minus 20% around
the current duration of the Lehman Brothers Aggregate Index. The Portfolio's
assets (i) will be issued by the U.S. Government or its agencies or
instrumentalities, (ii) will be rated BBB- or better by Standard & Poor's
Rating Group, Division of McGraw Hill ("S&P") or Baa3 or better by Moody's
Investor Service, Inc. ("Moody's") or (iii) will have been determined by
BlackRock to be of comparable quality at the time of investment.
For a description of the index mentioned above, see "Portfolio
Benchmark" in Appendix A to this Prospectus. For
-8-
<PAGE> 347
purposes of enhancing liquidity and/or preserving capital, on a temporary
basis, the Portfolio may invest without limit in money market instruments,
including instruments described as follows: obligations issued by the U.S.
Government, its agencies or instrumentalities; high quality commercial paper
and corporate obligations, certificates of deposit, fixed time deposits and
bankers' acceptances of banks that are members of the Federal Deposit Insurance
Corporation and have assets greater than $1 billion; variable and floating rate
debt securities and repurchase agreements. Investments in money market
instruments will be limited to U.S. dollar denominated instruments that are (i)
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, (ii) rated at least A-1 or AAA by S&P and Prime-1 or Aaa by
Moody's or (iii) determined by BlackRock to be of comparable quality at the
time of investment. See "Corporate Bond, Mortgage-Backed Security and
Commercial Paper Ratings" in Appendix B to this Prospectus.
DURATION
Duration is a measure of the expected life of a fixed income security
that was developed as a more precise alternative to the concept of "term to
maturity." Duration incorporates a bond's yield, coupon interest payments,
final maturity and call or prepayment features into one measure. Duration is
one of the fundamental tools used by BlackRock in security selection for the
Portfolio.
Most debt obligations provide interest ("coupon") payments in addition
to a final ("par") payment at maturity. Some obligations also have call or
prepayment provisions. Depending on the relative magnitude of these payments,
the market values of debt obligations may respond differently to changes in the
level and structure of interest rates.
Traditionally, a debt security's "term to maturity" has been used as a
proxy for the sensitivity of the security's price to changes in interest rates
(which is the "interest rate risk" or "volatility" of the security). However,
"term to maturity" measures only the time until a debt security provides its
final payment, taking no account of the pattern of the security's payments
prior to maturity. Duration is a measure of the expected life of a fixed
income security on a present value basis. Duration takes the length of the
time intervals between the present time and the time that the interest and
principal payments are scheduled or, in the case of a bond subject to call or
prepayment, expected to be received, and weights them by the present values of
the cash to be received at each future point in time. For any fixed income
security with interest payments occurring prior to the payment of principal,
duration is always less than maturity. In general, all other things being the
same, the lower the stated or coupon rate of interest of a fixed income
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<PAGE> 348
security, the longer the duration of the security; conversely, the higher the
stated or coupon rate of interest of a fixed income security, the shorter the
duration of the security.
Futures, options and options on futures have durations which, in
general, are closely related to the duration of the securities which underlie
them. Holding long futures or call option positions (backed by a segregated
account of cash and cash equivalents) will lengthen the portfolio duration by
approximately the same amount that holding an equivalent amount of the
underlying securities would. Short futures or put option positions have
durations roughly equal to the negative duration of the securities that
underlie those positions, and have the effect of reducing portfolio duration by
approximately the same amount that selling an equivalent amount of the
underlying securities would.
There are some situations where even the standard duration calculation
does not properly reflect the interest rate exposure of a security. For
example, floating and variable rate securities often have final maturities of
ten or more years; however, their interest rate exposure corresponds to the
frequency of the coupon reset. Another example where the interest rate
exposure is not properly captured by duration is the case of mortgage
pass-through securities. The stated final maturity of such securities is
generally 30 years, but current prepayment rates are more critical in
determining the securities' interest rate exposure. In these and other similar
situations, BlackRock will use more sophisticated analytical techniques that
incorporate the economic life of a security into the determination of its
interest rate exposure.
There is no assurance that the Portfolio will achieve its targeted
duration at all times. This is because the computation of duration is based on
a number of estimated rather than known factors, including expected prepayment
rates.
DESCRIPTION OF SECURITIES
The following describes certain types of securities in which the Portfolio may
invest.
U.S. GOVERNMENT SECURITIES
U.S. TREASURY SECURITIES. The Portfolio will invest in U.S. Treasury
securities, including bills, notes, bonds and other debt securities issued by
the U.S. Treasury. These instruments are direct obligations of the U.S.
Government and, as such, are backed by the "full faith and credit" of the
United States. They differ primarily in their interest rates, the lengths of
their maturities and the dates of their issuances.
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<PAGE> 349
The Portfolio may also invest in "zero coupon" securities, including
U.S. Treasury bills, notes and bonds which have been stripped of their
unmatured interest coupons or which are certificates representing interests in
such stripped debt obligations. Such securities are purchased at a discount
from their face amount, giving the purchaser the right to receive their full
value at maturity. A zero coupon security pays no interest to its holder
during its life. In addition to those issued by the U.S. Government, such zero
coupon securities may be issued by private issuers representing an interest in
securities issued by the U.S. Government. Such privately issued zero coupon
securities are not considered U.S. Government securities and will be deemed
illiquid for purposes of the 15% limitation on illiquid securities. See
"Investment Policies--U.S. Government Securities" in the Statement of
Additional Information and "Illiquid Securities" below.
SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The Portfolio will invest in securities issued by agencies
of the U.S. Government or instrumentalities of the U.S. Government, including,
but not limited to, GNMA, FNMA and FHLMC securities. Obligations of GNMA, the
Farmers Home Administration and the Export-Import Bank are backed by the "full
faith and credit" of the United States. In the case of securities not backed
by the "full faith and credit" of the United States, the Portfolio must look
principally to the agency issuing or guaranteeing the obligation for ultimate
repayment. Such securities include obligations issued by FNMA and FHLMC, each
of which may borrow from the U.S. Treasury to meet its obligations, although
the U.S. Treasury is under no obligation to lend to FNMA or FHLMC. GNMA, FNMA
and FHLMC investments by the Portfolio may also include pass-through
securities, CMOs and certain other Mortgage-Backed securities. See
"Mortgage-Backed Securities" below.
MORTGAGE-BACKED SECURITIES
Mortgage-Backed securities directly or indirectly represent a
participation in, or are secured by and payable from, mortgage loans secured by
real property. The term Mortgage-Backed securities, as used herein, includes
adjustable rate mortgage securities and derivative mortgage products such as
collateralized mortgage obligations, stripped Mortgage-Backed securities and
other products described below.
There are currently three basic types of Mortgage-Backed securities:
(i) those issued or guaranteed by the U.S. Government or one of its agencies or
instrumentalities, such as GNMA, FNMA and FHLMC; (ii) those issued by private
issuers that represent an interest in or are collateralized by Mortgage-Backed
securities issued or guaranteed by the U.S. Government or one of its agencies
or instrumentalities; and (iii) those issued by
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<PAGE> 350
private issuers that represent an interest in or are collateralized by whole
mortgage loans or Mortgage-Backed securities without a government guarantee but
usually having some form of private credit enhancement.
MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The Portfolio will invest in Mortgage-Backed securities,
including those representing an undivided ownership interest in a pool of
mortgages, e.g, GNMA, FNMA and FHLMC certificates. The U.S. Government or the
issuing agency guarantees the payment of interest and principal on these
securities. However, the guarantees do not extend to the securities' yield or
value, nor do the guarantees extend to the yield or value of the Portfolio's
shares. These certificates are in most cases "pass-through" instruments,
through which the holder receives a share of all interest and principal
payments from the mortgages underlying the certificate, net of certain fees.
See "Investment Policies -- Mortgage-Backed Securities" in the Statement of
Additional Information.
PRIVATE MORTGAGE PASS-THROUGH SECURITIES. Private mortgage
pass-through securities are structured similarly to GNMA, FNMA and FHLMC
mortgage pass-through securities and are issued by originators of and investors
in mortgage loans, including depository institutions, mortgage banks,
investment banks and special purpose subsidiaries of the foregoing. These
securities usually are backed either by GNMA, FNMA or FHLMC certificates or by
a pool of fixed rate or adjustable rate mortgage loans. Securities which are
backed by a pool of fixed rate or adjustable rate mortgage loans generally are
structured with one or more types of credit enhancement. See "Types of Credit
Enhancement" below.
ADJUSTABLE RATE MORTGAGE SECURITIES. Adjustable rate mortgage
securities are pass-through mortgage securities collateralized by mortgages
with adjustable rather than fixed rates ("ARMs"). ARMs eligible for inclusion
in a mortgage pool generally provide for a fixed initial mortgage interest rate
for either the first three, six, twelve, thirteen, thirty-six or sixty
scheduled monthly payments. Thereafter, the interest rates are subject to
periodic adjustment based on changes to a designated benchmark index.
ARMs contain maximum and minimum rates beyond which the mortgage
interest rate may not vary over the lifetime of the mortgage. In addition,
certain ARMs provide for additional limitations on the maximum amount by which
the mortgage interest rate may adjust for any single adjustment period.
Alternatively, certain ARMs contain limitations on changes in the required
monthly payment. In the event that a monthly payment is not sufficient to pay
the interest accruing on an ARM, any such excess interest is added to the
principal balance of the mortgage
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<PAGE> 351
loan, which is repaid through future monthly payments. If the monthly payment
for such an instrument exceeds the sum of the interest accrued at the
applicable mortgage interest rate and the principal payment required at such
point to amortize the outstanding principal balance over the remaining term of
the loan, the excess is utilized to reduce the then outstanding principal
balance of the ARM.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS PASS-THROUGH
SECURITIES. Collateralized mortgage obligations or "CMOs" are debt obligations
collateralized by mortgage loans or mortgage pass-through securities.
Typically, CMOs are collateralized by GNMA, FNMA or FHLMC certificates, but
also may be collateralized by whole loans or private mortgage pass-through
securities (collectively, "Mortgage Assets"). Multi-class pass-through
securities are equity interests in a trust composed of Mortgage Assets. Unless
the context indicates otherwise, all references herein to CMOs include
multi-class pass-through certificates. Payments of principal of and interest
on the Mortgage Assets, and any reinvestment income thereon, provide the funds
to pay debt service on the CMOs or make scheduled distributions on the
multi-class pass-through securities. CMOs may be issued by agencies or
instrumentalities of the U.S Government, or by private originators of, or
investors in, mortgage loans, including depository institutions, mortgage
banks, investment banks and special purpose subsidiaries of the foregoing. The
issuer of CMOs or multi-class pass-through securities may elect to be treated
as a Real Estate Mortgage Investment Conduit ("REMIC").
In a CMO, a series of bonds or certificates is issued in multiple
classes. Each class of CMOs, often referred to as a "tranche," is issued at a
specific fixed or floating coupon rate and has a stated maturity or final
distribution date. Principal prepayments on the Mortgage Assets may cause the
CMOs to be retired substantially earlier than their stated maturities or final
distribution dates. Interest is paid or accrues on all classes of the CMOs on
a monthly, quarterly or semi-annual basis. The principal of and interest on
the Mortgage Assets may be allocated among the several classes of a CMO series
in a number of different ways. Generally, the purpose of the allocation of the
cash flow of a CMO to the various classes is to obtain a more predictable cash
flow to the individual trenches than exists with the underlying collateral of
the CMO. As a general rule, the more predictable the cash flow is on a CMO
tranche, the lower the anticipated yield will be on that tranche at the time of
issuance relative to prevailing market yields on Mortgage-Backed securities.
The Portfolio also may invest in, among other things, parallel-pay
CMOs and Planned Amortization Class CMOs ("PAC Bonds"). Parallel-pay CMOs are
structured to provide payments of
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<PAGE> 352
principal on each payment date to more than one class. These simultaneous
payments are taken into account in calculating the stated maturity date or
final distribution date of each class, which, as with other CMO structures,
must be retired by its stated maturity date or final distribution date but may
be retired earlier. PAC Bonds generally require payments of a specified amount
of principal on each payment date. PAC Bonds are parallel-pay CMOs with the
required principal payment on such securities having the highest priority after
interest has been paid to all classes.
The Portfolio does not intend to invest in CMO residuals. The
residual in a CMO structure generally represents the interest in any excess
cash flow remaining after making required payments of principal of and interest
on the CMOs and related administrative expenses of the issuer.
STRIPPED MORTGAGE-BACKED SECURITIES. The Portfolio may also invest in
mortgage pass-through securities where all or a substantial portion of the
interest payments go to one class of holders ("Interest Only Securities" or
"Ios") and all or a substantial portion of the principal payments go to a
second class of holders ("Principal Only Securities" or "Pos"). These
securities are commonly referred to as Stripped Mortgage-Backed securities or
SMBS. The yields to maturity on Ios and Pos are very sensitive to the rate of
principal payments (including prepayments) on the related underlying Mortgage
Assets, and such rate may have a material effect on yield to maturity. If the
underlying Mortgage Assets experience greater than anticipated prepayments of
principal, the Portfolio may not fully recoup its initial investment in Ios.
Conversely, if the underlying Mortgage Assets experience less than anticipated
prepayments of principal, the yield on Pos could be materially adversely
affected.
In addition to SMBS issued by agencies or instrumentalities of the
U.S. Government, the Portfolio may purchase SMBS issued by private originators
of, or investors in, mortgage loans, including depository institutions,
mortgage banks, investment banks and special purpose subsidiaries of the
foregoing. Privately issued SMBS will be deemed illiquid for purposes of the
15% limitation on illiquid securities. See "Illiquid Securities" below. The
determination whether a particular U.S. Government issued SMBS is liquid will
be made by BlackRock under guidelines established by the Board of Trustees.
ASSET-BACKED SECURITIES
The securitization techniques used to develop Mortgage-Backed
securities are also applied to a broad range of other assets. Through the use
of trusts and special purpose corporations, various types of assets, primarily
automobile and
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credit card receivables and home equity loans, are being securitized in
pass-through structures similar to the mortgage pass-through structures
described above or in a pay-through structure similar to the CMO structure.
Other types of assets being securitized include loans to finance boats,
recreational vehicles, mobile homes and manufactured housing; computer, copier,
railcar and medical equipment leases; student and commercial loans; and trade,
health care and franchise receivables. In general, the collateral supporting
Asset-Backed securities is of shorter maturity than mortgage loans and is less
likely to experience substantial prepayments. As with MortgageBacked
securities, Asset-Backed securities are often backed by a pool of assets
representing the obligations of a number of different parties and use similar
credit enhancement techniques. See "Types of Credit Enhancement" below.
The market for certain types of Asset-Backed securities is relatively
new and untested. Certain Asset-Backed securities may have a limited secondary
market and may be subject to restrictions on transferability. Any Asset-Backed
security that cannot be disposed of within seven days and in the usual course
of business without taking a reduced price will be deemed illiquid for purposes
of the 15% limitation on illiquid securities. See "Illiquid Securities" below.
The determination whether a particular Asset-Backed security is liquid will be
made by BlackRock under guidelines established by the Board of Trustees.
New instruments and variations of existing Mortgage-Backed securities
and Asset-Backed securities continue to be developed. The Portfolio may invest
in any such instruments or variations as may be developed to the extent
consistent with their investment objective and policies and applicable
regulatory requirements.
Different types of Asset-Backed Securities and the assets supporting
such securities may be subject to additional restrictions, and may be affected
by economic, legal and other changes, unique to such securities and assets.
For example, a recent legislative proposal to limit credit card interest rates
had a significant adverse effect on the market for credit card receivables.
TYPES OF CREDIT ENHANCEMENT
Mortgage-Backed securities and Asset-Backed securities are often
backed by a pool of assets representing the obligations of a number of
different parties. To lessen the effect of failures by obligors on underlying
assets to make payments, those securities may contain elements of credit
support, which fall into two categories: (i) liquidity protection and (ii)
protection against losses resulting from ultimate default by an obligor on the
underlying assets. Liquidity protection refers to
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the provision of advances, generally by the entity administering the pool of
assets, to ensure that the receipt of payments on the underlying pool occurs in
a timely fashion. Protection against losses resulting from default ensures
ultimate payment of the obligations on at least a portion of the assets in the
pool. This protection may be provided through guarantees, insurance policies
or letters of credit obtained by the issuer or sponsor from third parties,
through various means of structuring the transaction or through a combination
of such approaches. The Portfolio will not pay any additional fees for credit
support, although the existence of credit support may increase the price of a
security.
Examples of credit support arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class securities
with one or more classes subordinate to other classes as to the payment of
principal thereof and interest thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class),
creation of "reserve funds" (where cash or investments, sometimes funded from a
portion of the payments on the underlying assets, are held in reserve against
future losses) and "overcollateralization" (where the scheduled payments on, or
the principal amount of, the underlying assets exceeds that required to make
payment of the securities and pay any servicing or other fees). The degree of
credit support provided for each issue is generally based on historical
information respecting the level of credit risk associated with the underling
assets. Delinquencies or losses in excess of those anticipated could adversely
affect the return on an investment in such issue.
RISK FACTORS RELATING TO MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
The yield characteristics of Mortgage-Backed and Asset-Backed
securities differ from traditional debt securities. Among the major
differences are that interest and principal payments are made more frequently,
usually monthly, and that principal may be prepaid at any time because the
underlying mortgage loans or other assets generally may be prepaid at any time.
As a result, if the Portfolio purchases such a security at a premium, a
prepayment rate that is faster than expected will reduce yield to maturity,
while a prepayment rate that is slower than expected will have the opposite
effect of increasing yield to maturity. Alternatively, if the Portfolio
purchases these securities at a discount, faster than expected prepayments will
increase, while slower than expected prepayments will reduce, yield to
maturity. The Portfolio may invest a portion of its assets in derivative
Mortgage-Backed securities such as Stripped Mortgage-Backed securities, which
are highly sensitive to changes in prepayment and interest rates. BlackRock
will seek to manage these risks
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(and potential benefits) by diversifying its investments in such securities and
through hedging techniques.
Although the extent of prepayments on a pool of mortgage loans depends
on various economic and other factors, as a general rule prepayments on fixed
rate mortgage loans will increase during a period of falling interest rates and
decrease during a period of rising interest rates. Accordingly, amounts
available for reinvestment by the Portfolio are likely to be greater during a
period of declining interest rates and, as a result, likely to be reinvested at
lower interest rates than during a period of rising interest rates.
Asset-Backed securities, although less likely to experience the same prepayment
rates as Mortgage-Backed securities, may respond to certain of the same factors
influencing prepayments, while at other times different factors will
predominate. Mortgage-Backed securities and Asset-Backed securities may
decrease in value as a result of increases in interest rates and may benefit
less than other fixed income securities from declining interest rates because
of the risk of prepayment.
Asset-Backed securities present certain risks that are not presented
by Mortgage-Backed securities. Primarily, Asset-Backed securities do not have
the benefit of the same security interest in the related collateral. Credit
card receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to set off certain amounts owed on the credit
cards, thereby reducing the balance due. Most issuers of Asset-Backed
securities backed by automobile receivables permit the servicers of such
receivables to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would require an interest superior to that of the holders of the
related Asset-Backed securities. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of Asset-Backed securities backed by
automobile receivables may not have a proper security interest in all of the
obligations backing such receivables. Therefore, there is the possibility that
recoveries on repossessed collateral may not, in some cases, be available to
support payments on these securities.
Different types of Asset-Backed securities and the assets supporting
such securities may be subject to additional restrictions, and may be affected
by economic, legal and other changes, unique to such securities and assets.
For example, a recent legislative proposal to limit credit card interest rates
had a significant adverse effect on the market for credit card receivables.
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CORPORATE DEBT SECURITIES
Corporate debt securities include securities issued by corporations
and other entities, including bonds and debentures (which are long-term), notes
(which may be short- or long-term), certificates of deposit (unsecured
borrowings by banks), bankers' acceptances (indirectly secured borrowings to
facilitate commercial transactions) and commercial paper (short-term unsecured
notes). These securities may have adjustable or fixed rates of interest and
may be secured or unsecured by assets of the issuer or another party.
Adjustable rate corporate debt securities may have interest rate caps and
floors but such corporate debt securities are not subject to prepayment risk
other than through contractual call provisions, which generally impose a
penalty for prepayment during all or a portion of the period such securities
are outstanding. Fixed rate debt securities may also be subject to call
provisions. Corporate debt securities are subject to the bankruptcy risk of
the issuer. The Portfolio believes that the high quality securities it
purchases will tend to reduce such risks. The Portfolio may purchase corporate
debt securities rated at the time of investment no lower than BBB- by S&P or
Baa3 by Moody's. The rating of a corporate debt security may change over time,
as S&P and Moody's monitor and evaluate the ratings assigned to corporate debt
securities on an ongoing basis. As a result, corporate debt securities held by
the Portfolio could receive a higher rating (which would tend to increase their
value) or a lower rating (which would tend to decrease their value) during the
time that they are owned by the Portfolio. If a security owned by the
Portfolio is downgraded below either BBB- by S&P or Baa3 by Moody's, BlackRock
will monitor such security and determine whether to sell it based on the
factors it considers relevant such as size of the investment, whether a loss or
gain will result, relative risk to the Portfolio, depth of the trading market
or any other relevant factors. The Portfolio expects that under normal market
conditions no more than 5%, if any, of the Portfolio's assets will consist of
securities whose ratings have been downgraded below BBB- by S&P or Baa3 by
Moody's. The Portfolio will consider whether to retain or dispose of a bond
whose rating drops below the minimum ratings applicable to the Portfolio. The
Portfolio is not restricted in the amount it may invest in any of the
securities described in this section.
FLOATING RATE, INVERSE FLOATING RATE AND INDEX OBLIGATIONS
The Portfolio may invest in debt securities with interest payments or
maturity values that are not fixed, but float in conjunction with (or inversely
to) an underlying index or price. These securities may be backed by U.S.
Government or corporate issuers, or by collateral such as mortgages. In
certain cases, a change in the underlying index or price may have a leveraging
effect on the periodic coupon payments, creating larger possible
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swings in the prices of such securities than would be expected when taking into
account their maturities alone. The indices and prices upon which such
securities can be based include interest rates, currency rates and commodities
prices.
Floating rate securities pay interest according to a coupon which is
reset periodically. This reset mechanism may be formula based, or reflect the
passing through of floating interest payments on an underlying collateral pool.
The coupon is usually reset daily, weekly, monthly, quarterly or semi-annually,
but other schedules are possible. Floating rate obligations generally exhibit
a low price volatility for a given stated maturity or average life because
their coupons adjust with changes in interest rates. If their underlying index
is not an interest rate, or the reset mechanism lags the movement of rates in
the current market, greater price volatility may be experienced.
Inverse floating rate securities are similar to floating rate
securities except that their coupon payments vary inversely with an underlying
index by use of a formula. Inverse floating rate securities tend to exhibit
greater price volatility than other floating rate securities. Because the
changes in the coupon are usually negatively correlated with changes in overall
interest rates, interest rate risk and price volatility on inverse floating
rate obligations can be high, especially if leverage is used in the formula.
The Portfolio does not intend to invest more than 10% of its total assets in
inverse floating rate securities.
Index securities pay a fixed rate of interest, but have a maturity
value that varies by formula, so that when the obligation matures a gain or
loss is realized. The risk of index obligations depends on the volatility of
the underlying index, the coupon payment and the maturity of the obligation.
ILLIQUID SECURITIES
The Portfolio may invest up to 15% of its net assets in securities for
which there are legal or contractual restrictions on resale or for which there
is no readily available market or other illiquid securities. Illiquid
securities include restricted securities of corporate and other issuers,
privately stripped securities, repurchase agreements having maturities of more
than seven days, and certain hedging instruments. Such securities may
experience limitations on resale that may have an adverse effect on the
marketability of portfolio securities. A mutual fund may not be able to
dispose of illiquid securities promptly or at reasonable prices. The Board of
Trustees has adopted procedures pursuant to the guidelines of the SEC that
permits BlackRock to determine whether restricted securities issued pursuant to
Rule 144A under the Securities Act of 1933 are
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liquid for purposes of this limitation. Nevertheless, Rule 144A securities may
be subject to a greater possibility of becoming illiquid than registered
securities due to changing market or other factors. Portfolio purchases may
increase the level of illiquidity and institutional buyers may become
disinterested in purchasing such securities. See "Investment Policies-Illiquid
Securities" in the Statement of Additional Information.
OTHER INVESTMENT STRATEGIES
HEDGING
The Portfolio may enter into various interest rate transactions,
purchase and sell futures contracts and purchase and sell (or write)
exchange-listed and over-the-counter put and call options on securities and
futures contracts (collectively "Hedging Transactions"). Hedging Transactions
may be used to attempt to protect against possible changes in the market value
of the Portfolio's securities resulting from trends in the debt securities
markets, to protect the Portfolio's unrealized gains on its securities, to
facilitate the sale of such securities, to manage the duration of the
Portfolio, to establish a position in the securities markets as a temporary
substitute for purchasing particular securities. Any or all of these
techniques may be used at any time, and there is no particular strategy that
requires use of one technique rather than another. Use of any Hedging
Transaction is a function of market conditions. The ability of the Portfolio
to hedge successfully will depend on BlackRock's ability to predict pertinent
market movements, which cannot be assured. The Hedging Transactions that the
Portfolios may use are described below.
INTEREST RATE TRANSACTIONS. Among the Hedging Transactions into which
the Portfolio may enter are interest rate swaps and the purchase or sale of
interest rate caps and floors. The Portfolio expects to enter into these
transactions primarily to preserve a return or spread on a particular
investment or portion of the portfolio, as a duration management technique or
to protect against an increase in the price of securities the Portfolio
anticipates purchasing at a later date. The Portfolio intends to use these
transactions as a hedge and not as a speculative investment.
Interest rate swaps involve the exchange by the Portfolio with another
party of their respective commitments to pay or receive interest, e.g., an
exchange of floating rate payments for fixed rate payments. The purchase of an
interest rate cap entitles the purchaser, to the extent that a specified index
exceeds a predetermined interest rate, to receive payments of interest on a
notional principal amount from the party selling such interest rate cap. The
purchase of an interest rate floor entitles the purchaser, to the extent that a
specified index
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falls below a predetermined interest rate, to receive payments of interest on a
notional principal amount from the party selling such interest rate floor. See
"Investment Policies--Other Investment Strategies--Interest Rate Transactions"
in the Statement of Additional Information.
FUTURES CONTRACTS. In connection with hedging and other risk
management strategies, the Portfolio may enter into contracts for the purchase
or sale for future delivery ("futures contracts") of debt securities,
aggregates of debt securities or indices or prices thereof, and other financial
indices, to hedge the value of its portfolio securities that might result from
a change in interest rates. The Portfolio will engage in such transactions
only for bona fide hedging, risk management, duration management and other
portfolio management purposes, in each case, in accordance with the rules and
regulations of the Commodity Futures Trading Commission.
CALLS ON SECURITIES AND FUTURES CONTRACTS. In order to reduce
fluctuations in net asset value, the Portfolio may sell or purchase call
options (calls) on U.S. Government securities, Mortgage-Backed securities,
Corporate debt securities and Eurodollar instruments and related futures on
such securities. A call option gives the purchaser of the option the right to
buy, and obligates the seller to sell, the underlying security or futures
contract at the exercise price at any time or at a specified time during the
option period. The purchase of a call gives the Portfolio the right to buy a
security at a fixed price. A call sold by the Portfolio exposes the Portfolio
during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security and may require the
Portfolio to hold a security, which it might otherwise have sold. All such
calls sold by the Portfolio must be "covered" as long as the call is
outstanding (i.e., the Portfolio must segregate the securities or futures
contract subject to the call or other liquid assets).
PUTS ON SECURITIES AND FUTURES CONTRACTS. The Portfolio may purchase
put options (puts) that relate to U.S. Government securities, Mortgage-Backed
securities, Corporate debt securities and Eurodollar instruments (whether or
not it holds such securities in its portfolio) or futures on such securities.
The Portfolio may also sell puts on U.S. Government securities, Mortgage-Backed
securities, Corporate debt securities and Eurodollar instruments and related
futures on such securities if the Portfolio's contingent obligations on such
puts are covered by segregated assets consisting of cash or liquid debt
securities having a value not less than the exercise price. The Portfolio will
not sell puts if, as a result, more than 50% of the Portfolio's assets would be
required to be segregated to cover its potential obligations under its hedging
and other investment transactions. In selling puts, there is a risk that the
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Portfolio may be required to buy the underlying security, at a disadvantageous
price.
EURODOLLAR INSTRUMENTS. The Portfolio may make investments in
Eurodollar instruments. Eurodollar instruments are U.S dollar-denominated
futures contracts or options thereon which are linked to the London Interbank
Offered Rate ("LIBOR"), although foreign currency denominated instruments are
available from time to time. Eurodollar futures contracts enable purchasers to
obtain a fixed rate for the lending of funds and sellers to obtain a fixed rate
for borrowings. The Portfolio intends to use Eurodollar futures contracts and
options thereon to hedge against changes in LIBOR, to which many interest rate
swaps are linked. The use of these instruments is subject to the same
limitations and risks as those applicable to the use of the interest rate
futures contracts and options thereon described under "Futures Contracts,"
"Calls on Securities and Futures Contracts" and "Puts on Securities and Futures
Contracts" above.
FURTHER INFORMATION ON HEDGING TRANSACTIONS. Appendix C and the
Statement of Additional Information under "Investment Objectives and
Policies-Other Investment Strategies-Options and Futures Transactions" contains
further information about the characteristics, risks and possible benefits of
Hedging Transactions and the Portfolio's other policies and limitations
relating to investments in futures and options. The principal risks relating
to the use of futures, options and other Hedging Transactions are: (a) less
than perfect correlation between the prices of the instrument and the market
value of the securities in the Portfolio; (b) possible lack of a liquid
secondary market for closing out a position, (c) losses resulting from interest
rate or currency exchange movements not anticipated by BlackRock; and (d) the
obligation to meet additional variation margin or other payment requirements.
BORROWING
The Portfolio may borrow from banks and enter into reverse repurchase
agreements or dollar rolls up to 33 1/3% of the value of its total assets
(computed at the time the loan is made) to take advantage of investment
opportunities. See "Reverse Repurchase Agreements and Dollar Rolls" below.
The Portfolio may pledge up to 33 1/3% of its total assets to secure these
borrowings. If the Portfolio's asset coverage for borrowings falls below 300%,
the Portfolio will take prompt action to reduce its borrowings. If the
Portfolio borrows to invest in securities, any investment gains made on the
securities in excess of interest paid on the borrowing will cause the net asset
value of the shares to rise faster than would otherwise be the case. On the
other hand, if the investment performance of the additional securities
purchased fails to cover their cost (including any interest paid on the money
borrowed) to the
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Portfolio, the net asset value of the Portfolio's shares will decrease faster
than would otherwise be the case. This is a speculative characteristic known
as "leverage." The Portfolio is also authorized to borrow an additional 5% of
its total assets without regard to the foregoing limitations for temporary
purposes such as clearance of portfolio transactions and share redemptions.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
The Portfolio may use reverse repurchase agreements and dollar rolls
as part of its investment strategy. Reverse repurchase agreements involve
sales by the Portfolio of assets concurrently with an agreement by the
Portfolio to repurchase the same assets at a later date at a fixed price.
During the reverse repurchase agreement period, the Portfolio continues to
receive principal and interest payments on these assets.
The Portfolio may also enter into dollar rolls in which the Portfolio
sells securities for delivery in the current month and simultaneously contracts
to repurchase substantially similar (same type and coupon) securities on a
specified future date from the same party. During the roll period, the
Portfolio forgoes principal and interest paid on the securities. The Portfolio
is compensated by the difference between the current sales price and the
forward price for the future purchase (often referred to as the "drop") as well
as by the interest earned on the cash proceeds of the initial sale.
The Portfolio will establish a segregated account with the custodian
in which it will maintain cash, U.S. Government securities or other liquid
high-grade debt obligations at least equal in value to its obligations in
respect to reverse repurchase agreements and dollar rolls. Reverse repurchase
agreements and dollar rolls involve the risk that the market value of the
securities retained by the Portfolio may decline below the price of the
securities the Portfolio has sold but is obligated to repurchase under the
agreement. In addition, in the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, the Portfolio's
use of the proceeds of the agreement may be restricted pending a determination
by the other party, or its trustee or receiver, whether to enforce the
Portfolio's obligation to repurchase the securities.
Reverse repurchase agreements and dollar rolls are speculative
techniques involving leverage and are considered borrowings by the Portfolio
for purposes of the percentage limitations applicable to borrowings. See
"Borrowing" above.
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WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS
From time to time, the Portfolio may purchase securities on a
when-issued or delayed delivery basis or may purchase or sell securities on a
forward commitment basis. When such transactions are negotiated, the price is
fixed at the time of the commitment, but delivery and payment can take place a
month or more after the date of the commitment. The securities purchased are
subject to market fluctuation and no interest accrues to the Portfolio during
this period. While the Portfolio will only purchase securities on a
when-issued, delayed delivery or forward commitment basis with the intention of
acquiring the securities, the Portfolio may sell the securities before the
settlement date, if it is deemed advisable. At the time the Portfolio makes
the commitment to purchase securities on a when-issued or delayed delivery
basis, it will record the transaction and thereafter reflect the value, each
day, of such security in determining the net asset value of the Portfolio. At
the time of delivery, the value of the securities may be more or less than the
purchase price. An increase in the percentage of a Portfolio's assets
committed to the purchase of securities on a when-issued, delayed delivery or
forward commitment basis may increase the volatility of a Portfolio's net asset
value. At the time the Portfolio enters into a transaction on a when-issued or
forward commitment basis, a segregated account consisting of cash, U.S.
Government securities or other liquid high-grade debt securities equal to at
least 102% of the value of the when-issued or forward commitment securities
will be established and maintained with the custodian. Subject to this
requirement, the Portfolio may purchase securities on such basis without limit.
SHORT SALES
The Portfolio may only make short sales of securities
"against-the-box." A short sale is a transaction in which the Portfolio sells
a security it does not own in anticipation that the market price of that
security will decline. The Portfolio expects to make short sales both as a
form of hedging to offset potential declines in long positions in similar
securities and in order to maintain portfolio flexibility. In a short sale
"against-the-box," at the time of the sale, the Portfolio owns or has the
immediate and unconditional right to acquire the identical security at no
additional cost. When selling short "against-the-box," the Portfolio foregoes
an opportunity for capital appreciation in the security.
REPURCHASE AGREEMENTS
The Portfolio may enter into repurchase agreements, which may be
viewed as a type of secured lending, and which typically involve the
acquisition of debt securities from a selling
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financial institution such as a bank, savings and loan association or
broker-dealer. The repurchase agreement provides that the Portfolio will sell
back to the institution, and that the institution will repurchase, the
underlying security at a specified price and at a fixed time in the future,
usually not more than seven days from the date of purchase. The repurchase
agreement will at all times be fully collateralized by the institution in an
amount at least equal to the repurchase price, including accrued interest
earned on the underlying securities. The collateral will be maintained in a
segregated account and will be valued daily. As the value of the collateral
declines, the seller will deposit additional collateral. If the seller
defaults and the value of the collateral securing the repurchase agreement
declines or, in some cases, if the seller fails financially, the Portfolio may
incur a loss. See "Investment Policies-Other Investment Strategies-Repurchase
Agreements" in the Statement of Additional Information.
LENDING OF PORTFOLIO SECURITIES
Consistent with applicable regulatory requirements, the Portfolio may
lend up to 33 1/3% of its portfolio securities to brokers, dealers and other
financial institutions, provided that such loans are callable at any time by
the Portfolio (subject to certain notice provisions), and are at all times
secured by cash or U.S. Government securities which are at least equal to the
market value, determined daily, of the loaned securities. The Portfolio
continues to receive the income on the loaned securities while at the same time
earning interest on the loan or on the cash amounts deposited as collateral,
which will be invested in short-term obligations. The Portfolio may incur a
loss, however, if the seller defaults and the value of the loaned securities
exceeds the value of the collateral or, in some cases, if the borrower fails
financially. See "Investment Policies-Other Investment Strategies-Securities
Lending" in the Statement of Additional Information.
INVESTMENT RESTRICTIONS
The Statement of Additional Information contains, under the heading
"Additional Investment Limitations," specific enumerated investment
restrictions which govern the investments of the Portfolio. The investment
objective and all investment policies and practices described in this
Prospectus and in the Statement of Additional Information are not fundamental,
meaning that the Board of Trustees may change them without stockholder
approval.
The fundamental restrictions applicable to the Portfolio include (i) a
prohibition on purchasing any security (other than a U.S. Government security)
if as a result (a) with respect to 75% of its total assets, more than 5% of the
Portfolio's total assets would be invested in the securities of a single issuer
or
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(b) 25% or more of the Portfolio's total assets would be invested in the
securities of issuers in a particular industry, and (ii) a prohibition on
purchasing more than 10% of all outstanding voting securities of any one
issuer.
PORTFOLIO TURNOVER
The Portfolio has no fixed policy with respect to portfolio turnover.
The Portfolio does not expect to trade in securities for short-term gain. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the
Portfolio's securities, excluding securities having a maturity at the date of
purchase of one year or less. While the Portfolio will pay commissions in
connection with its options and futures transactions, the other securities in
which the Portfolio invests are generally traded on a "net" basis with dealers
acting as principals for their own account without a stated commission.
Nevertheless, high portfolio turnover may involve correspondingly greater
brokerage commissions and other transaction costs which will be borne directly
by the Portfolio. BlackRock will monitor the tax status of the Portfolio under
the Internal Revenue Code during any period in which the annual turnover rate
of the Portfolio exceeds 100%. To the extent that increased portfolio turnover
results in sales at a profit of securities held less than three months, the
Portfolio's ability to qualify as a "regulated investment company" under the
Internal Revenue Code may be affected. See "Portfolio Transactions" in the
Statement of Additional Information.
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MANAGEMENT
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BOARD OF TRUSTEES
The business and affairs of the Fund are managed under the direction
of the Fund's Board of Trustees. The Statement of Additional Information
contains the name of each trustee and certain background information.
ADVISER AND SUB-ADVISER
PAMG was organized in 1995 to perform advisory services for investment
companies. BlackRock (formerly BlackRock Financial Management L.P.) was
organized in 1988. On February 28, 1995, BlackRock Financial Management L.P.
sold its business to PNC Bank, National Association ("PNC Bank"). The
principal business address of PAMG is 1835 Market Street, 15th Floor,
Philadelphia, Pennsylvania 19103. The principal business address of BlackRock
is 345 Park Avenue, New York, New York 10154.
As adviser, PAMG is responsible for the overall investment management
of the Portfolio. The sub-adviser, BlackRock, is responsible for the
day-to-day management of the Portfolio, and generally makes all purchase and
sale decisions regarding the investments made by the Portfolio. BlackRock also
provides research and credit analysis as well as certain other services.
Scott Amero is the person primarily responsible for the day-to-day
management of the Portfolio's investments. Mr. Amero has managed the Portfolio
(and the Predecessor Portfolio) since their inception and has been employed by
BlackRock as a portfolio manager since 1990. Prior to joining BlackRock in
1990, Mr. Amero was a Vice-President in Fixed Income Research at The First
Boston Corporation.
For the services provided and expenses assumed by it, PAMG is entitled
to receive from the Portfolio a fee, computed daily and payable monthly, at an
annual rate of 0.50% of the first $1 billion of the average daily net assets of
the Portfolio, plus 0.45% of the next $1 billion of the Portfolio's average
daily net assets, plus 0.425% of the next $1 billion of the Portfolio's average
daily net assets, plus 0.40% of the Portfolio's average daily net assets in
excess of $3 billion. The Predecessor Portfolio bore advisory fees during its
most recent fiscal year pursuant to the investment advisory agreement then in
effect with BlackRock at the effective annual rate of .30% of its average daily
net assets. From time to time PAMG may waive all or any portion of its
advisory fee for and may reimburse expenses of the Portfolio. See
"Introduction--Expense Table."
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For its sub-advisory services, BlackRock is entitled to receive from
PAMG a fee, computed daily and payable monthly, at an annual rate of .35% of
the Portfolio's first $1 billion of average daily net assets, .30% of its next
$1 billion of average daily net assets, .275% of its next $1 billion of average
daily net assets, and .25% of its average daily net assets in excess of $3
billion. Such sub-advisory fee has no effect on the advisory fee payable by
the Portfolio to PAMG. BlackRock may from time to time waive all or any
portion of its sub-advisory fee for the Portfolio.
ADMINISTRATORS
PMFCO, whose principal business address is 345 Park Avenue, New York,
New York 10154, PFPC, whose principal business address is 400 Bellevue Parkway,
Wilmington, Delaware 19809 and PDI, whose principal business address is 259
Radnor-Chester Road, Suite 120, Radnor, Pennsylvania 19087, serve as the Fund's
co-administrators. PMFCO and PFPC are indirect wholly-owned subsidiaries of
PNC Bank Corp. A majority of the outstanding stock of PDI is owned by its
officers and the remaining outstanding stock is owned by Pennsylvania Merchant
Group Ltd.
The Administrators generally assist the Fund in all aspects of its
administration and operation, including matters relating to the maintenance of
financial records and fund accounting. As compensation for their services,
PMFCO is entitled to receive a fee, computed daily and payable monthly, at an
annual rate of .03% of the Portfolio's average daily net assets, and PFPC and
PDI are entitled to receive a combined fee, computed daily and payable monthly,
at an annual rate of .20% of the first $500 million of the Portfolio's average
daily net assets, .18% of the next $500 million of the Portfolio's average
daily net assets, .16% of the next $1 billion of the Portfolio's average daily
net assets and .15% of the Portfolio's average daily net assets in excess of $2
billion. From time to time the Administrators may waive all or any portion of
the administration fees for the Portfolio.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND CUSTODIAN
PNC Bank serves as the Fund's custodian and PFPC serves as the Fund's
transfer agent and dividend disbursing agent.
EXPENSES
Expenses are deducted from the total income of the Portfolio before
dividends and distributions are paid. These expenses include, but are not
limited to, fees paid to PAMG and the Administrators, transfer agency fees,
fees and expenses of officers and trustees who are not affiliated with PAMG or
the Distributor or any of their affiliates, taxes, interest, legal
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fees, custodian fees, auditing fees, servicing fees, certain fees and expenses
in registering and qualifying the Portfolio and its Shares for distribution
under Federal and state securities laws, expenses of preparing prospectuses and
statements of additional information and of printing and distributing
prospectuses and statements of additional information to existing shareholders,
the expense of reports to shareholders, shareholders' meetings and proxy
solicitations, fidelity bond and trustees and officers liability insurance
premiums, the expense of using independent pricing services and other expenses
which are not expressly assumed by PIMC or the Administrators under their
respective agreements with the Fund. Any general expenses of the Fund that are
not readily identifiable as belonging to a particular investment portfolio will
be allocated among all investment portfolios by or under the direction of the
Board of Trustees in a manner the Board determines to be fair and equitable.
Any expenses relating only to a particular class of shares within the Portfolio
will be borne solely by such Shares.
If the total expenses borne by the Portfolio in any fiscal year exceed
the expense limitations imposed by applicable state securities regulations,
PAMG, BlackRock and the Administrators will bear the amount of such excess to
the extent required by such regulations in proportion to the fees otherwise
payable to them for such year. Such amount, if any, will be estimated and
accrued daily and paid on a monthly basis. See "Introduction--Example,"
"Management--Adviser and Sub-Adviser" and "Management--Administrators" for
discussions of expense reimbursements and fee waivers.
PORTFOLIO TRANSACTIONS
The Portfolio's sub-adviser will seek the best price and execution in
placing brokerage transactions. In this regard, the sub-adviser may consider a
number of factors in determining which brokers to use in purchasing or selling
portfolio securities. These factors, which are more fully discussed in the
Statement of Additional Information, include, but are not limited to, research
services, sales of shares of the Fund, the reasonableness of commissions and
quality of services and execution. Brokerage transactions for the Portfolio
may be directed through registered broker/dealers ("Authorized Dealers") who
have entered into dealer agreements with the Distributor, subject to the
requirements of best execution.
BANKING LAWS
Banking laws and regulations currently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered open-end investment company
continuously engaged in
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the issuance of its shares, and prohibit banks generally from underwriting
securities, but such banking laws and regulations do not prohibit such a
holding company or affiliate or banks generally from acting as investment
adviser, administrator, transfer agent or custodian to such an investment
company, or from purchasing shares of such company as agent for and upon the
order of customers. PNC Bank, PAMG, BlackRock, PMFCO, PFPC and Institutions
that are banks or bank affiliates, are subject to such banking laws and
regulations. In addition, state securities laws on this issue may differ from
the interpretations of Federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
Should future legislative, judicial or administrative action prohibit
or restrict the activities of such companies in connection with the provision
of services on behalf of the Fund and the holders of Institutional Shares, the
Fund might be required to alter materially or discontinue its arrangements with
such companies and change its method of operations with respect to the
Institutional Shares. It is not anticipated, however, that any change in the
Fund's method of operations would affect its net asset value per share or
result in a financial loss to any investor.
PURCHASE AND REDEMPTION OF SHARES
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DISTRIBUTOR
Shares of the Portfolio are offered on a continuous basis for the Fund
by the distributor, Provident Distributors, Inc. (the "Distributor"). The
Distributor is a registered broker/dealer with principal offices at 259
Radnor-Chester Road, Suite 120, Radnor, Pennsylvania 19087.
The Fund has adopted a distribution plan pursuant to Rule 12b-1 under
the 1940 Act. This plan permits the Adviser to pay a fee to the Distributor,
which in turn is authorized to make payments to securities dealers with which
the Distributor may enter into solicitation fee agreements. The Distributor
may also use a portion of the fee it receives under the plan to compensate
institutions who perform support services that would otherwise be performed by
an Administrator or its agents. The purpose of the plan is to promote
distribution of the Fund's shares and to enhance the provision of shareholder
services. The Fund is not required or permitted under the plan to make
payments over and above its investment advisory fee with respect to
Institutional Shares; the plan merely permits the reallocation of a portion of
the advisory fee the Adviser receives to pay for distribution related and
shareholder servicing activities. See "Investment
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Advisory, Administration, Distribution and Servicing Arrangements" in the SAI.
PURCHASE OF SHARES
Institutional Shares are offered without a sales load on a continuous
basis to Institutions at the net asset value per share for the Institutional
Shares of the Portfolio next computed after an order is received by PFPC.
Shares may be purchased on any Business Day. A "Business Day" is any weekday
that the New York Stock Exchange (the "NYSE") and the Federal Reserve Bank of
Philadelphia (the "FRB") are open for business. Purchase orders may be
transmitted by telephoning PFPC at (800) 441-7379. Orders received by PFPC
after 4:00 p.m. (Eastern Time) are priced at the net asset value per share on
the following Business Day. The Fund may in its discretion reject any order
for Shares.
Payment for Shares may be made only in Federal funds or other funds
immediately available to the Fund's custodian. The minimum initial investment
by an Institution is $5,000. There is no minimum subsequent investment.
REDEMPTION OF SHARES
Redemption orders may be transmitted to PFPC by telephone at (800)
441-7379. Shares are redeemed at the net asset value per share of the
Institutional Shares of the Portfolio next determined after PFPC's receipt of
the redemption order. THE FUND, THE ADMINISTRATORS AND THE DISTRIBUTOR WILL
NOT BE LIABLE FOR ANY LOSS, LIABILITY, COST OR EXPENSE FOR ACTING UPON
TELEPHONE INSTRUCTIONS THAT ARE REASONABLY BELIEVED TO BE GENUINE. IN
ATTEMPTING TO CONFIRM THAT TELEPHONE INSTRUCTIONS ARE GENUINE, THE FUND WILL
USE SUCH PROCEDURES AS ARE CONSIDERED REASONABLE, INCLUDING RECORDING THOSE
INSTRUCTIONS AND REQUESTING INFORMATION AS TO ACCOUNT REGISTRATION (SUCH AS THE
NAME IN WHICH AN ACCOUNT IS REGISTERED, THE ACCOUNT NUMBER, RECENT TRANSACTIONS
IN THE ACCOUNT, AND THE ACCOUNT HOLDER'S SOCIAL SECURITY NUMBER, ADDRESS AND/OR
BANK).
Payment for redeemed Shares for which a redemption order is received
by PFPC before 4:00 p.m. (Eastern Time) on a Business Day is normally made in
Federal funds wired to the redeeming Institution on the next Business Day,
provided that the Fund's custodian is also open for business. Payment for
redemption orders received after 4:00 p.m. (Eastern Time) or on a day when the
Fund's custodian is closed is normally wired in Federal funds on the next
Business Day following redemption on which the Fund's custodian is open for
business. The Fund reserves the right to wire redemption proceeds within seven
days after receiving a redemption order if, in the judgment of the investment
adviser, an earlier payment could adversely affect the Portfolio. No charge
for wiring redemption payments is imposed by the Fund.
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<PAGE> 370
During periods of substantial economic or market change, telephone
redemptions may be difficult to complete. If an Institution is unable to
contact PFPC by telephone, the Institution may also deliver the redemption
request to PFPC by mail at 400 Bellevue Parkway, Wilmington, DE 19809.
An Institution may be required to redeem Shares in the Portfolio if
the balance in its account in the Portfolio drops below $5,000 as the result of
a redemption request and the shareholder does not increase the balance to at
least $5,000 upon thirty days' written notice.
The Fund may suspend the right of redemption or postpone the date of
payment upon redemption (as well as suspend the recordation of the transfer of
Shares) for such periods as are permitted under the 1940 Act. The Fund may
also redeem Shares involuntarily or make payment for redemption in securities
or other property if it appears appropriate to do so in light of the Fund's
responsibilities under the 1940 Act. See "Purchase and Redemption Information"
in the Statement of Additional Information for examples of when such redemption
might be appropriate.
NET ASSET VALUE
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The net asset value for the Institutional Shares of the Portfolio is
calculated as of the close of trading on the NYSE (currently 4:00 p.m. Eastern
Time) on each Business Day by adding the value of all its securities, cash and
other assets allocable to its Shares, subtracting the liabilities allocable to
its Shares and dividing by the total number of Shares outstanding. The net
asset value per Share of the Portfolio is determined independently of the
Portfolio's other classes and independently of the Fund's other portfolios.
Valuation of securities held by the Portfolio is as follows:
securities traded on a national securities exchange or on the NASDAQ National
Market System are valued at the last reported sale price that day; securities
traded on a national securities exchange or on the NASDAQ National Market
System for which there were no sales on that day and securities traded on other
over-the-counter markets for which market quotations are readily available are
valued at the mean of the bid and asked prices; an option or futures contract
is valued at the last sales price prior to 4:00 p.m. (Eastern Time), as quoted
on the principal exchange or board of trade on which such option or contract is
traded, or in the absence of a sale, the mean between the last bid and asked
prices prior to 4:00 p.m. (Eastern Time); and securities for which market
quotations are not readily available are valued at fair market value as
determined in good faith by or
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under the direction of the Fund's Board of Trustees. The amortized cost method
of valuation will also be used with respect to debt obligations with sixty days
or less remaining to maturity unless the investment adviser and/or sub-adviser
under the supervision of the Board of Trustees determines such method does not
represent fair value.
The Portfolio may use a pricing service, bank or broker/dealer
experienced in such matters to value the Portfolio's securities. A more
detailed discussion of net asset value and security valuation is contained in
the Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
- -------------------------------------------------------------------------------
The Portfolio will distribute substantially all of its net investment
income and net realized capital gains, if any, to shareholders. For dividend
purposes, the Portfolio's investment income available for distribution to
holders of Institutional Shares is reduced by accrued expenses directly
attributable to the Portfolio and the general expenses of the Fund prorated to
the Portfolio on the basis of its relative net assets. All distributions are
reinvested at net asset value in the form of additional full and fractional
Shares of the Portfolio unless an Institution elects otherwise. Such election,
or any revocation thereof, must be made in writing to PFPC, and will become
effective with respect to dividends paid after its receipt by PFPC. The net
investment income of the Portfolio is declared daily as a dividend to investors
who are Shareholders of the Portfolio at, and whose payment for Share purchases
are available to the Portfolio in Federal funds by, the close of business on
the day of declaration. All such dividends are paid within ten days after the
end of each month and within seven days after redemption of all of a
shareholder's Shares in the Portfolio. Net realized capital gains (including
net short-term capital gains), if any, will be distributed by the Portfolio at
least annually.
TAXES
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The following discussion is only a brief summary of some of the
important tax considerations generally affecting the Portfolio and its
shareholders and is not intended as a substitute for careful tax planning.
Accordingly, investors in the Portfolio should consult their tax advisers with
specific reference to their own tax situation.
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The Portfolio will elect to be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. So long
as the Portfolio qualifies for this tax treatment, it generally will be
relieved of Federal income tax on amounts distributed to shareholders, but
shareholders, unless otherwise exempt, will pay income or capital gains taxes
on amounts so distributed (except distributions that are treated as a return of
capital), regardless of whether such distributions are paid in cash or
reinvested in additional Shares.
Distributions paid out of the "net capital gain" (the excess of net
long-term capital gain over net short-term capital loss), if any, of the
Portfolio will be taxed to shareholders as long-term capital gain, regardless
of the length of time a shareholder has held his Shares and whether such gain
was reflected in the price paid for the Shares. All other distributions, to
the extent they are taxable, are taxed to shareholders as ordinary income.
The Fund will send written notices to shareholders annually regarding
the tax status of distributions made by the Portfolio. Dividends declared in
October, November or December of any year payable to shareholders of record on
a specified date in those months will be deemed to have been received by the
shareholders on December 31 of such year, if the dividends are paid during
January of the following year.
An investor considering buying shares of the Portfolio on or just
before the record date of a taxable dividend should be aware that the amount of
the forthcoming dividend payment, although in effect a return of capital, will
be taxable to him.
A taxable gain or loss may be realized by a shareholder upon his
redemption, transfer or exchange of Portfolio Shares depending upon the tax
basis of such Shares and their price at the time of redemption, transfer or
exchange.
Future legislative or administrative changes or court decisions may
materially affect the tax consequences of investing in one or more Portfolios
of the Fund. Shareholders are also urged to consult their tax advisers
concerning the application of state and local income taxes to investments in
the Fund which may differ from the Federal income tax consequences described
above. Shareholders who are nonresident alien individuals, foreign trusts or
estates, foreign corporations or foreign partnerships may be subject to
different U.S. Federal income tax treatment and should consult their tax
advisers.
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DESCRIPTION OF SHARES
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The Fund was organized as a Massachusetts business trust on December
22, 1988 and is registered under the 1940 Act as an open-end management
investment company. The Declaration of Trust authorizes the Board of Trustees
to classify and reclassify any unissued shares into one or more classes of
shares. Pursuant to such authority, the Board of Trustees has authorized the
issuance of an unlimited number of shares in each of 109 classes (22 classes of
"Series B Investor Shares" and 29 classes each of "Institutional Shares,"
"Service Shares" and "Series A Investor Shares") representing interests in the
Fund's investment portfolios. This Prospectus describes the Core Fixed Income
Portfolio, which is classified as a diversified company under the 1940 Act.
For information regarding other portfolios of the Fund, contact the Distributor
by phone at (800) 998-7633 or at the address listed in "Purchase and Redemption
of Shares--Distributor."
Each share of an investment portfolio has a par value of $.001,
represents an equal proportionate interest in the portfolio and is entitled to
such dividends and distributions earned on the portfolio's assets as are
declared in the discretion of the Board of Trustees. The Fund's shareholders
are entitled to one vote for each full share held and proportionate fractional
votes for fractional shares held, and will vote in the aggregate and not by
class, except where otherwise required by law or when the Board of Trustees
determines that the matter to be voted upon affects only the interests of the
shareholders of a particular class or investment portfolio. Under
Massachusetts law, the Fund's state of organization, and the Fund's Declaration
of Trust and Code of Regulations, the Fund is not required and does not
currently intend to hold annual meetings of shareholders for the election of
trustees (except as required under the 1940 Act). For a further discussion of
the voting rights of shareholders, see "Additional Information Concerning
Shares" in the Statement of Additional Information.
Holders of the Portfolio's Service Shares bear the fees described in
the prospectus for such shares that will be paid under the Fund's Amended and
Restated Distribution and Service Plan (the "Plan"). Payments under the Plan
will cover support services provided to beneficial owners of Service Shares by
certain institutions. Such services are intended to supplement the services
provided by the Fund's Administrators and transfer agent to the Fund's
shareholders of record. In consideration for payment of up to .15% (on an
annualized basis) of the average daily net asset value of Service Shares owned
beneficially by their customers, institutions may provide one or more of the
following services to such customers: processing purchase and redemption
requests from customers and placing orders with the
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Fund's transfer agent or the Distributor; processing dividend payments from the
Fund on behalf of customers; providing sub-accounting with respect to Service
Shares beneficially owned by customers or the information necessary for
sub-accounting; and other similar services. In consideration for payment of a
service fee of up to a separate .15% (on an annualized basis) of the average
daily net asset value of Service Shares owned beneficially by their customers,
institutions may provide one or more of these additional services to such
customers: responding to customer inquiries relating to the services performed
by the institution and to customer inquiries concerning their investments in
Service Shares; providing information periodically to customers showing their
positions in Service Shares; and other similar shareholder liaison services.
Similarly, holders of the Portfolio's Series A Investor Shares and Series B
Investor Shares (collectively, "Investor Shares") bear the payments described
in the prospectus for such shares that are paid under the Plan. Under the
Plan, the Distributor is entitled to payments by the Portfolio for: (i)
payments in connection with advertising and marketing Investor Shares; and (ii)
payments to broker/dealers that are not affiliated with the Distributor
("Service Organizations") for distribution assistance such as advertising and
marketing of Investor Shares. In addition, payments under the Plan will be
used to pay for or finance sales commissions and other fees payable to Service
Organizations and other broker/dealers who sell Series B Investor Shares.
Service Organizations may also provide support services such as establishing
and maintaining accounts and records relating to shareholders of Investor
Shares for whom the Service Organizations are the dealer of record or holder of
record for shareholders with whom the Service Organizations have a servicing
relationship. The Plan provides for payments at an annual rate not to exceed
.50% of the average daily net asset value of the Portfolio's outstanding Series
A Investor Shares. The Plan provides for payments at an annual rate not to
exceed 1.15% of the average daily net asset value of the Portfolio's
outstanding Series B Investor Shares. As a result of these different fees, the
net asset value and the net yields on the Fund's Institutional Shares will
generally be higher than those on the Fund's Service Shares, the net asset
value and the net yields on the Fund's Service Shares will generally be higher
than those on the Fund's Series A Investor Shares, and the net asset value and
the net yields on the Fund's Series A Investor Shares will generally be higher
than those on the Fund's Series B Investor Shares if payments by the Portfolio
under the Plan are made at the maximum rates. Standardized total return and
yield quotations will be computed separately for each class of Shares. Series
A and Series B Investor Shares are exchangeable at the option of the holder for
Series A and Series B Investor Shares, respectively, in the Fund's other
investment portfolios. Series B Investor Shares are exchangeable for Series B
Investor Shares in the Fund's Money Market Portfolio, but are not exchangeable
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for shares in the Fund's other money market investment portfolios. Series A
Investor Shares of the Portfolio are offered to the public at the net asset
value per share plus a maximum sales charge of 4.50% of the offering price on
single purchases of less than $50,000; the sales charge is reduced on a
graduated scale on single purchases of $50,000 or more and certain exemptions
from the sales charge may apply. The sales charge does not apply to exchanges
of Series A Investor Shares of the Portfolio. Series B Investor Shares are
subject to a maximum contingent deferred sales charge of 5.0%. The deferred
sales charge decreases over time. Series B Investor Shares may be exchanged
for Series B Investor Shares of another investment portfolio of the Fund
without the payment of any deferred sales charge at the time the exchange is
made. Because Service Shares and Institutional Shares are sold without a sales
charge, holders of Service Shares and Institutional Shares have no such
exchange privileges.
On September 29, 1995, PNC Bank held of record approximately 79% of
the Fund's outstanding shares, and may be deemed a controlling person of the
Fund under the 1940 Act. PNC Bank is a subsidiary of PNC Bank Corp., a
multi-bank holding company.
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OTHER INFORMATION
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REPORTS AND INQUIRIES
Shareholders will receive unaudited semi-annual financial statements
and annual financial statements audited by independent accountants.
Shareholder inquiries should be addressed to the Fund c/o PFPC, P.O. Box 8950,
Wilmington, Delaware 19885-9628, toll-free (800) 441-7764 (in Delaware call
collect (302) 791-1104).
PERFORMANCE INFORMATION
From time to time, total return and yield data for Shares of the
Portfolio may be quoted in advertisements or in communications to Institutions.
Total return will be calculated on an average annual total return basis for
various periods. Average annual total return reflects the average annual
percentage change in value of an investment in Shares of the Portfolio over the
measuring period. This method of calculating total return assumes that
dividends and capital gain distributions made by the Portfolio during the
period relating to Shares are reinvested in Shares.
The yield of Shares of the Portfolio are computed based on the net
income of the Portfolio allocated to such Shares during a 30-day (or one month)
period, which period will be identified in connection with the particular yield
quotation. More specifically, the yield of Shares of the Portfolio is computed
by dividing the Portfolio's net income per share allocated to such Shares
during a 30-day (or one month) period by the net asset value per share on the
last day of the period and annualizing the result on a semi-annual basis.
Performance data of Shares of the Portfolio may be compared to those
of other mutual funds with similar investment objectives and to other relevant
indexes or to ratings or rankings prepared by independent services or other
financial or industry publications that monitor the performance of mutual
funds. In addition, certain indexes may be used to illustrate historic
performance of select asset classes. For example, the total return and/or
yield of Shares of the Portfolio may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Weisenberger
Investment Company Service, and with the performance of the Lehman Brothers
Aggregate Index, the T-Bill Index and the "stocks, bonds and inflation Index"
published annually by Ibbotson Associates. Performance information may also
include evaluations of the Portfolio and their Shares published by nationally
recognized ranking services and information as reported by financial
publications such as Business Week, Fortune, Institutional Investor, Money
Magazine,
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Forbes, Barron's, The Wall Street Journal and The New York Times, or in
publications of a local or regional nature.
In addition to providing performance information that demonstrates the
actual yield or returns of Shares of the Portfolio over a particular period of
time, the Portfolio may provide certain other information demonstrating
hypothetical investment returns. Such information may include, but is not
limited to, illustrating the compounding effects of a dividend in a dividend
reinvestment plan.
Performance quotations of Shares of the Portfolio represent past
performance and should not be considered as representative of future results.
The investment return and principal value of an investment in Shares of the
Portfolio will fluctuate so that a shareholder's Shares, when redeemed, may be
worth more or less than their original cost. Since performance will fluctuate,
performance data for Shares of the Portfolio cannot necessarily be used to
compare an investment in such Shares with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that
performance is generally a function of the kind and quality of the instruments
held in the portfolio, portfolio maturity, operating expenses and market
conditions. Any fees charged by Service Organizations directly to their
customer accounts in connection with investments in Shares will not be included
in the Portfolio's calculations of yield and total return.
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APPENDIX A
PORTFOLIO BENCHMARK
LEHMAN BROTHERS AGGREGATE INDEX. The Lehman Brothers Aggregate Index
is made up of the Lehman Brothers Government/Corporate Bond Index, the Lehman
Brothers Mortgage-Backed Securities Index and the Lehman Brothers Asset-Backed
Securities Index and is intended to be representative of the investment grade,
publicly issued, fixed-rate, U.S. fixed income market. These indices include
fixed-rate debt issues rated investment grade or higher by Moody's, S&P or
Fitch Investor's Service. All issues have at least one year to maturity and an
outstanding par value of $100 million for U.S. Government issues and $50
million for all others. The Lehman Brothers Government/Corporate Bond Index
includes the Lehman Brothers Government Bond Index and the Lehman Brothers
Corporate Bond Index. The Lehman Brothers Government Bond Index is made up of
all public obligations of the U.S. Treasury, U.S. Government agencies and
quasi-governmental corporations, and corporate debt guaranteed by the U.S.
Government. The Lehman Brothers Corporate Bond Index includes all publicly
issued, fixed-rate, non-convertible investment grade domestic corporate debt,
as well as Yankee bonds which are dollar denominated, Securities and Exchange
Commission registered, public, non-convertible debt obligations issued or
guaranteed by foreign sovereign governments, municipalities or governmental or
international agencies. The Lehman Brothers Mortgage-Backed Securities Index
is comprised of all fixed-rate securities backed by mortgage pools of the GNMA,
FNMA and FHLMC. Graduated Payment Mortgages ("GPMs") are included, but
Graduated Equity Mortgages ("GEMs") are not. The Lehman Brothers Asset-Backed
Securities Index includes all publicly issued, non-callable fixed-rate
asset-backed securities (excluding subordinated trenches) backed by automobile,
credit card and fixed-rate home equity loans. At December 31, 1994, the
Aggregate Index was comprised of 4,854 issues with a market value of $3.9
trillion. It had a duration of 4.67 years as of that date. On a market value
basis, the Government, Corporate, Mortgage-Backed and Asset-Backed Indices
accounted for 53.85%, 16.03%, 28.89% and 1.23% of the Aggregate Index,
respectively.
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APPENDIX B
CORPORATE BOND, MORTGAGE-BACKED SECURITY
AND COMMERCIAL PAPER RATINGS
CORPORATE BONDS AND MORTGAGE-BACKED SECURITIES
MOODY'S. Bonds rated Aa by Moody's are judged by Moody's to be of
high quality by all standards. Together with bonds rated Aaa (Moody's highest
rating), they comprise what are generally known as high-grade bonds. Aa bonds
are rated lower than Aaa bonds because margins of protection may not be as
large as those of Aaa bonds, or fluctuations of protective elements may be of
greater amplitude, or there may be other elements present which make the
long-term risks appear somewhat larger than those applicable to Aaa securities.
Bonds that are rated A by Moody's possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some time in the future.
Bonds rated Baa by Moody's are considered by Moody's to be 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. Baa bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
S&P. Bonds rated AA by S&P are judged by S&P to have a very strong
capacity to pay interest and repay principal and differ only in a small degree
from issues rated AAA. Bonds rated AAA have the highest rating assigned by
S&P, and the capacity to pay interest and repay principal is extremely strong.
Bonds rated A by S&P have a strong capacity to pay interest and repay
principal, although they are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions. Bonds rated BBB by S&P
are regarded by S&P as having an adequate capacity to pay interest and repay
principal. Whereas BBB bonds normally exhibit adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
The process of determining ratings for Mortgage-Backed securities by
Moody's and S&P includes consideration of the credit quality of the underlying
collateral, including any credit support providers, structural and legal
aspects associated with the securities, and the likelihood that the payment
stream on the mortgage pool is adequate to make payments that investors are
entitled to under the securities. Neither of such ratings represents an
assessment of the likelihood that principal prepayments will be made by
mortgagors or the degree to which such prepayments may differ from that
originally anticipated, nor does it address the possibility that investors may
suffer a lower
B-1
<PAGE> 380
than anticipated yield or that investors in such securities may fail to recoup
fully their initial investment due to prepayments.
COMMERCIAL PAPER
MOODY'S. Moody's employs the Prime rating for investment grade senior
short-term debt obligations. Issuers within the Prime category are given
ratings 1, 2 or 3, depending on the relative strengths of certain factors.
Issuers rated Prime-1, the highest category, have a superior ability for
repayment which will often be evidenced by many of the following
characteristics: (1) leading market positions in well established industries;
(2) high rates of return on funds employed; (3) conservative capitalization
structure with moderate reliance on debt and ample asset protection; (4) broad
margins in earnings coverage of fixed financial charges and high internal cash
generation; and (5) well established access to a range of financial markets and
assured sources of alternative liquidity.
S&P. Ratings are graded into four categories, ranging from A for the
highest quality obligations to D for the lowest. Issues rated A are regarded
as having the greatest capacity for timely payment. Issues in this category
are further refined with the designations 1, 2 and 3 to indicate the relative
degree of safety. Issues rated A-1, the highest category, have a strong degree
of safety regarding timely payment.
B-2
<PAGE> 381
APPENDIX C
GENERAL CHARACTERISTICS AND RISKS OF HEDGING TRANSACTIONS
PUT AND CALL OPTIONS
A put option gives the purchaser of the option the right to sell and
the writer the obligation to buy the underlying security at the exercise price
during the option period. The purchase of a put option on a debt security
would generally be designed to protect the Portfolio's holdings in a security
against a substantial decline in market value. A call option gives the
purchaser of the option the right to buy and the writer the obligation to sell
the underlying security at the exercise price during the option period. The
purchase of a call option on a security would generally be intended to protect
the Portfolio against an increase in the price of a security that it intended
to purchase in the future. The Portfolio may also write put and call options.
The premium that the Portfolio receives for writing the option will serve as a
partial hedge, in the amount of the option premium, against changes in the
value of the securities in its portfolio. The Portfolio is authorized to
purchase exchange listed options and over-the-counter options ("OTC Options").
Listed options are issued by the Options Clearing Corporation ("OCC"), which
guarantees the performance of the obligations of the parties to such options.
The Portfolio's ability to close out its position as a purchaser or
seller of an exchange-listed put or call option is dependent upon the existence
of a liquid secondary market on option exchanges. Among the possible reasons
for the absence of a liquid secondary market on an exchange are: (i)
insufficient trading interest in certain options; (ii) restrictions on
transactions imposed by an exchange; (iii) trading halts, suspensions or other
restrictions imposed with respect to particular classes or series of options or
underlying securities; (iv) interruption of the normal operations on an
exchange; (v) inadequacy of the facilities of an exchange or OCC to handle
current trading volume; or (vi) a decision by one or more exchanges 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
on that exchange that had been listed by the OCC as a result of trades on that
exchange would generally continue to be exercisable in accordance with their
terms.
OTC Options are purchased from or sold to dealers or financial
institutions which have entered into direct agreements with the Portfolios.
With OTC Options, such variables as expiration date, exercise price and premium
will be agreed upon between the Portfolio and the transacting dealer, without
the intermediation of a third party such as the OCC. If the transacting dealer
fails to make or take delivery of the securities underlying an option it has
written, in accordance with the terms of that option, the Portfolio would lose
the premium paid for the option as well as any anticipated benefit of
C-1
<PAGE> 382
the transaction. The Portfolio will engage in OTC Option transactions only
with primary United States government securities dealers recognized by the
Federal Reserve Bank in New York.
The hours of trading for options on debt securities may not conform to
the hours during which the underlying securities are traded. To the extent
that the option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying markets
that will not be reflected in the option markets.
FUTURES CONTRACTS AND RELATED OPTIONS
The Portfolio may purchase and sell exchange-traded financial futures
contracts or purchase and sell put and call options of such futures as a hedge
against anticipated interest rate or currency changes. The sale of a futures
contract creates an obligation by the Portfolio, as seller, to deliver the
specific type of financial instrument called for in the contract at a specified
future time for a specified price. Options on futures contracts are similar to
options on securities except that 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 (a long position if the option is a call and a short position
if the option is a put).
Typically, investment in futures contracts requires the Portfolio to
deposit with a financial intermediary as security for its obligations an amount
of cash or other specified debt securities which initially is 1% to 5% of the
face amount of the contract (but may be higher in some circumstances) and which
thereafter fluctuates on a periodic basis as the value of the contract
fluctuates. Investment in options involves payment of a premium for the option
without any further obligation on the part of the Portfolio. Accordingly, the
daily deposit requirements in futures contracts create an ongoing greater
potential financial risk than do options transactions, where the exposure is
limited to the cost of the initial premium. Transactions may be settled by
entering into an offsetting transaction, and are subject to the risk that the
position may not be able to be closed if no offsetting transaction can be
arranged.
The Portfolio will not engage in transactions in futures contracts or
related options for speculative purposes but only as a hedge against changes
resulting from market conditions in the values of securities in its portfolio.
In addition, the Portfolio will not enter into a futures contract or related
option (except for closing transactions) if, immediately thereafter, the sum of
its annual deposits and premiums on open contracts and options would exceed 5%
of the Portfolio's total assets (taken at current value); provided, however,
that in the case of an option that is in-the-money at the time of the purchase,
the in-the-money amount may be excluded in calculating the 5% limitation.
Also, assets consisting of cash, U.S. Government securities or other liquid
high-grade debt obligations
C-2
<PAGE> 383
will be segregated with the custodian and marked to market in an amount equal
to the market value of the contract.
GENERAL RISKS OF HEDGING TRANSACTIONS
Hedging Transactions present certain additional risks. In particular,
the variable degree of correlation between price movements of hedging
instruments and price movements in the position being hedged creates the
possibility that losses on the hedge may be greater than gains in the value of
the Portfolio's position. In addition, certain hedging instruments and markets
may not be liquid in all circumstances. As a result, in volatile markets, the
Portfolio may not be able to close out a transaction without incurring losses
substantially greater than the initial deposit. Although the contemplated use
of these instruments should tend to minimize the risk of loss due to a decline
in the value of the hedged position, at the same time they tend to limit any
potential gain which might result from an increase in the value of such
position. Losses due to Hedging Transactions will reduce net asset value. The
ability of the Portfolio to hedge successfully will depend on BlackRock's
ability to predict pertinent market movements, which cannot be assured. The
Portfolio's ability to enter into Hedging Transactions may be limited by the
Internal Revenue Code's requirements for qualification as a regulated
investment company. See "Taxes, Dividends and Distributions" in the Statement
of Additional Information.
C-3
<PAGE> 384
<TABLE>
<S> <C>
The Core Fixed
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR Income
MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS Portfolio
PROSPECTUS, OR IN THE STATEMENT OF ADDITIONAL INFORMATION
INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE Institutional
FUND OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH Class
OFFERING MAY NOT LAWFULLY BE MADE.
</TABLE>
<TABLE>
<CAPTION>
------------------- Prospectus
TABLE OF CONTENTS
Page
----
<S> <C>
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . , 1995
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . --------------
Investment Policies . . . . . . . . . . . . . . . . . . . . . . . .
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase and Redemption Shares . . . . . . . . . . . . . . . . . .
Net Asset Value . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends and Distributions . . . . . . . . . . . . . . . . . . . .
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Description of Shares . . . . . . . . . . . . . . . . . . . . . . .
Other Information . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
INVESTMENT ADVISER
PNC Asset Management Group, Inc.
Philadelphia, Pennsylvania
SUB-ADVISER
BlackRock Financial Management Inc.
New York, New York
CO-ADMINISTRATOR
PNC Mutual Fund Company
New York, New York
CO-ADMINISTRATOR AND TRANSFER AGENT
PFPC Inc.
Wilmington, Delaware
CO-ADMINISTRATOR AND DISTRIBUTOR
Provident Distributors, Inc.
Radnor, Pennsylvania
COUNSEL
Drinker Biddle & Reath
Philadelphia, Pennsylvania
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand, L.L.P.
Philadelphia, Pennsylvania
C-4
<PAGE> 385
THE PNC(R) FUND
(SERIES A AND SERIES B INVESTOR SHARES
OF THE CORE FIXED INCOME PORTFOLIO)
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A ITEM LOCATION
- -------------- --------
PART A PROSPECTUS
<S> <C> <C>
1. Cover page . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expense Table
3. Condensed Financial Information . . . . . . . . . . . . . . . . . Financial Highlights
4. General Description of Registrant . . . . . . . . . . . . . . . . Cover Page; Investment
Policies;
Description of
Shares
5. Management of the Fund . . . . . . . . . . . . . . . . . . . . . . Management
5A. Management's Discussion of Fund Performance . . . . . . . . . . . Inapplicable
6. Capital Stock and Other Securities . . . . . . . . . . . . . . . . Cover Page; Dividends
and Distributions;
Description of
Shares
7. Purchase of Securities Being Offered . . . . . . . . . . . . . . . Purchase and Redemption
of Shares;
Dividends and Distributions
Net Asset Value
8. Redemption or Repurchase . . . . . . . . . . . . . . . . . . . . . Purchase and Redemption
of Shares -
Redemption of
Shares
9. Pending Legal Proceedings . . . . . . . . . . . . . . . . . . . . Inapplicable
</TABLE>
<PAGE> 386
THE CORE FIXED INCOME PORTFOLIO
INVESTOR CLASS
The PNC(R) Fund (the "Fund") consists of 30 investment portfolios.
This Prospectus relates to shares ("Investor Shares" or "Shares") representing
interests in the Core Fixed Income Portfolio (the "Portfolio"). The Portfolio
seeks to realize a total rate of return that exceeds the total return of the
Lehman Brothers Aggregate Index consistent with preservation of capital and
prudent investment management. It pursues this objective by investing all of
its assets in a broad range of investment grade fixed income securities,
including U.S. Government, Mortgage-Backed, Asset-Backed and Corporate debt
securities.
This Prospectus relates to two classes of shares from which investors
may choose representing interests in the Portfolio: Series A Investor Shares
("Series A Shares") and Series B Investor Shares ("Series B Shares" and,
collectively with Series A Shares, "Investor Shares" or "Shares"). Series A
Shares are sold with a front-end sales charge. Series B Shares are sold with a
contingent deferred sales charge.
This Prospectus contains information that a prospective investor needs
to know before investing. Please keep it for future reference. A Statement of
Additional Information currently dated __________, ____ has been filed with the
Securities and Exchange Commission (the "SEC"). The current Statement of
Additional Information may be obtained free of charge from the Fund by calling
(800) 422-6538. The Statement of Additional Information, as it may be
supplemented from time to time, is incorporated by reference in this
Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION OR ANY OTHER BANK AND SHARES OF
THE FUND ARE NOT INSURED BY, GUARANTEED BY, OBLIGATIONS OF OR OTHERWISE
SUPPORTED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENTS IN
SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL AMOUNT INVESTED.
PROSPECTUS ___________, 1995
<PAGE> 387
INTRODUCTION
- --------------------------------------------------------------------------------
The Fund is an open-end management investment company which has
registered shares in 30 investment portfolios, of which only the Portfolio is
described in this Prospectus.
PORTFOLIO MANAGEMENT
PNC Asset Management Group, Inc. ("PAMG") serves as the Fund's
investment adviser. BlackRock Financial Management Inc. ("BlackRock") serves
as sub-adviser to the Portfolio. The investment adviser and sub-adviser are
indirect wholly-owned subsidiaries of PNC Bank Corp.
THE ADMINISTRATORS
PNC Mutual Fund Company ("PMFCO"), PFPC Inc. ("PFPC") and Provident
Distributors, Inc. ("PDI") serve as the Fund's administrators (collectively,
the "Administrators").
THE DISTRIBUTOR
Provident Distributors, Inc. (the "Distributor") serves as the Fund's
distributor.
-2-
<PAGE> 388
EXPENSE TABLE
<TABLE>
<CAPTION>
Core Fixed
Income
Portfolio
---------------------
Series A Series B
-------- --------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Front-End Sales Charge (1) (as a percentage of offering price) . . 4.00% None
Sales Charge on Reinvested Dividends . . . . . . . . . . . . . . . None None
Deferred Sales Charge (2) (as a
percentage of original purchase
price or redemption proceeds,
whichever is lower) . . . . . . . . . . . . . . . . . . . . . . . None 4.00%
ANNUAL FUND OPERATING EXPENSES FOR
INVESTOR SHARES AFTER FEE WAIVERS
AS A PERCENTAGE OF DAILY NET
ASSETS
Advisory Fees (3) . . . . . . . . . . . . . . . . . . . . . . . . . 0.30% 0.30%
12b-1 fees(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.40% 0.75%
----- -----
Other operating expenses . . . . . . . . . . . . . . . . . . . . . 0.32% 0.72%
Total fund operating expenses . . . . . . . . . . . . . . . . . . . 1.02% 1.77%
===== =====
</TABLE>
(1) Reduced front-end sales charges may be available. See "How to
Purchase Shares--Purchases of Series A Shares."
(2) This amount applies to redemptions during the first year. The
deferred sales charge decreases 1.00% annually to 3.00% for
redemptions made during the third and fourth years and then decreases
to 2.00% and 1.00% for redemptions made during the fifth and sixth
years, respectively. See "How to Purchase Shares - Purchase of Series
B Shares."
(3) Advisory fees are net of waivers of .20% for the Portfolio. In
addition, the expense table reflects reimbursements made to the
Portfolio by the Adviser and fee waivers by the Administrator.
PAMG and the Administrators are under no obligation to waive
or continue waiving such fees or reimbursing such expenses,
but have informed the Fund that they expect to waive or
continue waving such fees and reimbursing such expenses during the
current fiscal year as necessary to maintain the Portfolio's total
operating expenses at the levels set forth in the table. The expenses
noted above under "Other expenses" are estimated based on the level of
such expenses for the Portfolio's current fiscal year. Securities
dealers,
-3-
<PAGE> 389
financial institutions and other industry professionals may charge
their clients additional fees for account services.
(4) Long-term shareholders may pay more than the economic equivalent of
the maximum front-end sales charges permitted by the rules of the
National Association of Securities Dealers, Inc. ("NASD").
-4-
<PAGE> 390
EXAMPLE
An investor in Investor Shares would pay the following expenses on a
$1,000 investment in Shares of the Portfolio, assuming (1) imposition of the
maximum sales load, (2) 5% annual return, and (3) redemption at the end of each
time period:
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
Core Fixed Income
Income Portfolio
Series A Shares* $50 $71 $ 94 $160
Series B Shares** $58 $88 $119 $170*
</TABLE>
* Reflects the imposition of the maximum front-end sales charge at the
beginning of the period.
** Reflects the deduction of the deferred sales charge.
*** Based on the conversion of Series B Shares to Series A Shares after
six years.
The foregoing Expense Table and Example are intended to assist
investors in understanding the Portfolio's shareholder transaction and
estimated operating expenses. Investors bear these expenses either directly or
indirectly. The information in the table for the Portfolio has been restated
based on the advisory and administration fees and other expenses payable after
fee waivers for the current fiscal year ending September 30, 1996. Total
operating expenses would have been 1.30% and 2.05%, respectively, without fee
waivers and reimbursements. See Footnote 3 to the Expense Table, "Financial
Highlights - Background," "Management," "Distribution of Shares," "How to Pur-
chase Shares" and "Description of Shares" for a further description of
shareholder transaction expenses and operating expenses.
-5-
<PAGE> 391
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
INVESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND
OPERATING EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
-6-
<PAGE> 392
CERTAIN RISK FACTORS TO CONSIDER
An investment in the Portfolio is subject to certain investment
considerations, as set forth in detail under "Investment Policies." As with
other mutual funds, there can be no assurance that the Portfolio will achieve
its investment objective. The following are some of these risks. As with all
fixed income securities, the market values of the Portfolio's assets, and as
such the net asset value of the Portfolio's shares will fluctuate with changes
in prevailing interest rates. While principal and interest payments on some
securities may be guaranteed by the U.S. Government, government agencies or
other guarantors, the market value of the securities is not guaranteed. Events
such as prepayments on underlying mortgage loans may adversely affect the
return from Mortgage-Backed securities. The Portfolio may invest in repurchase
agreements which entail a risk of loss should the seller default on its
obligation to repurchase the security which is the subject of the transaction.
The Portfolio may use futures options, and options on futures for hedging or
duration management purposes. Use of these instruments involves certain costs
and risks including the risk that the Portfolio could not close out an option
or futures position when it would be most advantageous to do so and the risk of
an imperfect correlation between the value of the security being hedged and the
value of the particular derivative instrument. High portfolio turnover may
involve correspondingly greater brokerage and other transaction costs. The
Portfolio may borrow from banks and enter into reverse repurchase agreements or
dollar rolls up to 33-1/3% of the value of its total assets. This technique,
called "leverage", may cause the Portfolio's Shares net asset value to rise
faster or decrease faster than would otherwise be the case. These and the
other investment practices set forth below and their associated risks deserve
careful consideration by investors.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
BACKGROUND
The Fund currently offers four classes of shares in the Portfolio --
Service, Series A Investor, Series B Investor and Institutional Shares.
Service, Series A Investor, Series B Investor and Institutional Shares in the
Portfolio represent equal pro-rata interests in the Portfolio, except that they
bear different expenses which reflect the difference in the range of services
provided to them. Under the Fund's Amended and Restated Distribution and
Service Plan (the "Plan"), Service Shares bear the expense of fees at an annual
rate not to exceed .15% of the average daily net asset value of the Portfolio's
outstanding Service Shares. Service Shares also bear the expense of a
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<PAGE> 393
service fee at an annual rate not to exceed .15% of the average daily net asset
value of the Portfolio's outstanding Service Shares for other shareholder
support activities provided by service organizations. See "Description of
Shares" for a description of the Plan and shareholder support activities.
Series A Investor Shares bear expenses under the Plan at an annual rate not to
exceed .50% of the average daily net asset value of the Portfolio's outstanding
Series A Investor Shares. Series B Investor Shares bear the expenses under the
Plan at annual rates not to exceed 1.15% of the average daily net asset value
of the Portfolio's outstanding Series B Investor Shares. See "Description of
Shares" for a description of the Plan. Institutional Shares do not bear the
fees stated above applicable to the other share classes under the Plan.
The Portfolio commenced investment operations on December 9, 1992 as a
separate investment portfolio (the "Predecessor Portfolio") of The BFM
Institutional Trust Inc., which was organized as a Maryland corporation. On
__________, 1996, the assets and liabilities of the Predecessor Portfolio were
transferred to the Portfolio, which had no prior operating history. The
Predecessor Portfolio also received investment advisory services from
BlackRock.
The financial highlights set forth certain information concerning the
investment results of the Predecessor Portfolio for the fiscal years or period
ended June 30, 1995, 1994 and 1993. The financial statements and notes thereto
for the Predecessor Portfolio were audited by the Predecessor Portfolio's
former independent accountants, whose report thereon is incorporated by
reference into the Statement of Additional Information. Additional information
about the performance of the Predecessor Portfolio is contained in the
Predecessor Portfolio's annual report. Both the Statement of Additional
Information and the Predecessor Portfolio's annual report may be obtained from
the Fund free of charge by calling the number on the front cover of this
Prospectus. During the years or period shown, the Predecessor Portfolio
offered only one class of shares to institutional investors.
-8-
<PAGE> 394
<TABLE>
<CAPTION>
THE CORE FIXED INCOME PORTFOLIO
-------------------------------
YEAR YEAR DECEMBER 9, 1992(a)
ENDED ENDED THROUGH
JUNE 30, 1995 JUNE 30, 1994 JUNE 30, 1993
------------------- ------------- ----------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period . . . . . . . . . $ 9.36 $ 10.37 $ 10.00
------- -------
Net investment income (net of $.004, $.003 and
$.001, respectively, of interest expense)(b) . . . 0.62 0.55 0.32
Net realized and unrealized gains
on investments . . . . . . . . . . . . . . . . . . 0.50 (0.60) 0.37
-------- ------- -------
Net (decrease) increase
from investment operations . . . . . . . . . . . . 1.12 (0.05) 0.69
------ ------- -------
Dividends from net investment income . . . . . . . . . (0.62) (0.55) (0.32)
Distributions from net realized capital gains . . . . . (0.01) (0.41)
------ ------
Total dividends and distributions . . . . . . . . (0.63) (0.96) (0.32)
------- ------- -------
Net asset value, end of period . . . . . . . . . . . . $ 9.85 $ 9.36 $ 10.37
======= ======= =======
TOTAL INVESTMENT RETURN (c) . . . . . . . . . . . . . . 11.79% (0.69)% 6.88%
RATIOS TO AVERAGE NET ASSETS:
Expenses (b) . . . . . . . . . . . . . . . . . . . . . 0.55% 0.55% 0.55%(d)
Net investment income (b) . . . . . . . . . . . . . . . 6.62% 5.61% 5.57%(d)
SUPPLEMENTAL DATA:
Average net assets (in thousands) . . . . . . . . . . . . $16,247 $9,702 $6,622
Portfolio turnover . . . . . . . . . . . . . . . . . . . 435% 722% 354%
Net assets, end of period (in thousands) . . . . . . . . $32,191 $12,507 $7,803
</TABLE>
- --------------------------------------------------------------------------------
(a) Commencement of investment operations.
(b) BlackRock waived fees amounting to $56,894, $34,010 and $24,761 and
reimbursed expenses amounting to $137,364, $137,179 and $0 for the
periods ended June 30, 1995, June 30, 1994 and June 30, 1993,
respectively. The Predecessor Portfolio's administrator waived fees
amounting to $32,500 and $3,701 for the periods ended June 30, 1994
and June 30, 1993, respectively. For the period ended June 30, 1993,
the Predecessor Portfolio's custodian and the Portfolio's transfer
agent waived fees amounting to $24,272 and $17,283, respectively. If
the Predecessor Portfolio had borne all expenses for the periods ended
June 30, 1995, 1994 and 1993: the expense ratios would have been
1.75%, 2.65% and 2.44%, respectively; the net investment income ratios
would have been 5.43%, 3.51% and 3.68%, respectively; and the net
investment income on a per share basis would have been $0.51, $0.34
and $0.22, respectively.
(c) Total investment return is calculated assuming a purchase of common
stock at net asset value per share on the first day and a sale at net
asset value per share on the last day of the period reported.
Dividends are assumed, for purposes of this calculation, to be
reinvested at the net asset value per share on the payment date.
(d) Annualized.
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The information above represents audited operating performance based
on an average share of common stock outstanding, total investment
return, ratios to average net assets and other supplemental data, for
each of the periods indicated. This information has been determined
based upon financial information provided in the financial statements.
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INVESTMENT POLICIES
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The Portfolio seeks to maximize total return, consistent with
preservation of capital and prudent investment management. Duration is one of
the fundamental tools used by BlackRock in the selection of securities for the
Portfolio. Duration is a measure of the expected life of a fixed income
security on a present value basis and is indicative of a security's price
"volatility" or "risk" associated with changes in interest rates. The concept
of duration was developed to incorporate a bond's yield, coupons, final
maturity and call features into one measure. There is no assurance that the
Portfolio will achieve its targeted duration at all times. A more detailed
discussion of duration is provided under "Duration" below.
The total return that the Portfolio seeks to maximize will consist of
interest from underlying securities and capital appreciation from the purchase
and sale of securities, and from use of futures and options. The change in
market value of fixed income securities (and therefore their capital
appreciation) is largely a function of changes in the current level of interest
rates. When interest rates are falling, a portfolio with a shorter duration
generally will not generate as high a level of total return as a portfolio with
a longer duration. Conversely, when interest rates are rising, a portfolio
with a shorter duration will generally outperform longer duration portfolios.
When interest rates are stable, shorter duration portfolios generally will not
generate as high a level of total return as longer duration portfolios
(assuming that long-term interest rates are higher than short-term rates, which
is commonly the case).
The Portfolio is structured to seek to realize a total rate of return
that exceeds that total return of the Lehman Brothers Aggregate Index. The
duration of the Lehman Brothers Aggregate Index as of December 31, 1994 was
4.67 years. The Portfolio will invest all of its assets in a broad range of
investment grade fixed income securities, including U.S. Government,
Mortgage-Backed, Asset-Backed and Corporate debt securities. The duration of
the Portfolio will be targeted to be in the range of plus or minus 20% around
the current duration of the Lehman Brothers Aggregate Index. The Portfolio's
assets (i) will be issued by the U.S. Government or its agencies or
instrumentalities, (ii) will be rated BBB- or better by Standard & Poor's
Rating Group, Division of McGraw Hill ("S&P") or Baa3 or better by Moody's
Investor Service, Inc. ("Moody's") or (iii) will have been determined by
BlackRock to be of comparable quality at the time of investment.
For a description of the index mentioned above, see "Portfolio
Benchmark" in Appendix A to this Prospectus. For
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purposes of enhancing liquidity and/or preserving capital, on a temporary
basis, the Portfolio may invest without limit in money market instruments,
including instruments described as follows: obligations issued by the U.S.
Government, its agencies or instrumentalities; high quality commercial paper
and corporate obligations, certificates of deposit, fixed time deposits and
bankers' acceptances of banks that are members of the Federal Deposit Insurance
Corporation and have assets greater than $1 billion; variable and floating rate
debt securities and repurchase agreements. Investments in money market
instruments will be limited to U.S. dollar denominated instruments that are (i)
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, (ii) rated at least A-1 or AAA by S&P and Prime-1 or Aaa by
Moody's or (iii) determined by BlackRock to be of comparable quality at the
time of investment. See "Corporate Bond, Mortgage-Backed Security and
Commercial Paper Ratings" in Appendix B to this Prospectus.
DURATION
Duration is a measure of the expected life of a fixed income security
that was developed as a more precise alternative to the concept of "term to
maturity." Duration incorporates a bond's yield, coupon interest payments,
final maturity and call or prepayment features into one measure. Duration is
one of the fundamental tools used by BlackRock in security selection for the
Portfolio.
Most debt obligations provide interest ("coupon") payments in addition
to a final ("par") payment at maturity. Some obligations also have call or
prepayment provisions. Depending on the relative magnitude of these payments,
the market values of debt obligations may respond differently to changes in the
level and structure of interest rates.
Traditionally, a debt security's "term to maturity" has been used as a
proxy for the sensitivity of the security's price to changes in interest rates
(which is the "interest rate risk" or "volatility" of the security). However,
"term to maturity" measures only the time until a debt security provides its
final payment, taking no account of the pattern of the security's payments
prior to maturity. Duration is a measure of the expected life of a fixed
income security on a present value basis. Duration takes the length of the
time intervals between the present time and the time that the interest and
principal payments are scheduled or, in the case of a bond subject to call or
prepayment, expected to be received, and weights them by the present values of
the cash to be received at each future point in time. For any fixed income
security with interest payments occurring prior to the payment of principal,
duration is always less than maturity. In general, all other things being the
same, the lower the stated or coupon rate of interest of a fixed income
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security, the longer the duration of the security; conversely, the higher the
stated or coupon rate of interest of a fixed income security, the shorter the
duration of the security.
Futures, options and options on futures have durations which, in
general, are closely related to the duration of the securities which underlie
them. Holding long futures or call option positions (backed by a segregated
account of cash and cash equivalents) will lengthen the portfolio duration by
approximately the same amount that holding an equivalent amount of the
underlying securities would. Short futures or put option positions have
durations roughly equal to the negative duration of the securities that
underlie those positions, and have the effect of reducing portfolio duration by
approximately the same amount that selling an equivalent amount of the
underlying securities would.
There are some situations where even the standard duration calculation
does not properly reflect the interest rate exposure of a security. For
example, floating and variable rate securities often have final maturities of
ten or more years; however, their interest rate exposure corresponds to the
frequency of the coupon reset. Another example where the interest rate
exposure is not properly captured by duration is the case of mortgage
pass-through securities. The stated final maturity of such securities is
generally 30 years, but current prepayment rates are more critical in
determining the securities' interest rate exposure. In these and other similar
situations, BlackRock will use more sophisticated analytical techniques that
incorporate the economic life of a security into the determination of its
interest rate exposure.
There is no assurance that the Portfolio will achieve its targeted
duration at all times. This is because the computation of duration is based on
a number of estimated rather than known factors, including expected prepayment
rates.
DESCRIPTION OF SECURITIES
The following describes certain types of securities in which the Portfolio may
invest.
U.S. GOVERNMENT SECURITIES
U.S. TREASURY SECURITIES. The Portfolio will invest in U.S. Treasury
securities, including bills, notes, bonds and other debt securities issued by
the U.S. Treasury. These instruments are direct obligations of the U.S.
Government and, as such, are backed by the "full faith and credit" of the
United States. They differ primarily in their interest rates, the lengths of
their maturities and the dates of their issuances.
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The Portfolio may also invest in "zero coupon" securities, including
U.S. Treasury bills, notes and bonds which have been stripped of their
unmatured interest coupons or which are certificates representing interests in
such stripped debt obligations. Such securities are purchased at a discount
from their face amount, giving the purchaser the right to receive their full
value at maturity. A zero coupon security pays no interest to its holder
during its life. In addition to those issued by the U.S. Government, such zero
coupon securities may be issued by private issuers representing an interest in
securities issued by the U.S. Government. Such privately issued zero coupon
securities are not considered U.S. Government securities and will be deemed
illiquid for purposes of the 15% limitation on illiquid securities. See
"Investment Policies--U.S. Government Securities" in the Statement of
Additional Information and "Illiquid Securities" below.
SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The Portfolio will invest in securities issued by agencies
of the U.S. Government or instrumentalities of the U.S. Government, including,
but not limited to, GNMA, FNMA and FHLMC securities. Obligations of GNMA, the
Farmers Home Administration and the Export-Import Bank are backed by the "full
faith and credit" of the United States. In the case of securities not backed
by the "full faith and credit" of the United States, the Portfolio must look
principally to the agency issuing or guaranteeing the obligation for ultimate
repayment. Such securities include obligations issued by FNMA and FHLMC, each
of which may borrow from the U.S. Treasury to meet its obligations, although
the U.S. Treasury is under no obligation to lend to FNMA or FHLMC. GNMA, FNMA
and FHLMC investments by the Portfolio may also include pass-through
securities, CMOs and certain other Mortgage-Backed securities. See
"Mortgage-Backed Securities" below.
MORTGAGE-BACKED SECURITIES
Mortgage-Backed securities directly or indirectly represent a
participation in, or are secured by and payable from, mortgage loans secured by
real property. The term Mortgage-Backed securities, as used herein, includes
adjustable rate mortgage securities and derivative mortgage products such as
collateralized mortgage obligations, stripped Mortgage-Backed securities and
other products described below.
There are currently three basic types of Mortgage-Backed securities:
(i) those issued or guaranteed by the U.S. Government or one of its agencies or
instrumentalities, such as GNMA, FNMA and FHLMC; (ii) those issued by private
issuers that represent an interest in or are collateralized by Mortgage-Backed
securities issued or guaranteed by the U.S. Government or one of its agencies
or instrumentalities; and (iii) those issued by
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private issuers that represent an interest in or are collateralized by whole
mortgage loans or Mortgage-Backed securities without a government guarantee but
usually having some form of private credit enhancement.
MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The Portfolio will invest in Mortgage-Backed securities,
including those representing an undivided ownership interest in a pool of
mortgages, e.g, GNMA, FNMA and FHLMC certificates. The U.S. Government or the
issuing agency guarantees the payment of interest and principal on these
securities. However, the guarantees do not extend to the securities' yield or
value, nor do the guarantees extend to the yield or value of the Portfolio's
shares. These certificates are in most cases "pass-through" instruments,
through which the holder receives a share of all interest and principal
payments from the mortgages underlying the certificate, net of certain fees.
See "Investment Policies -- Mortgage-Backed Securities" in the Statement of
Additional Information.
PRIVATE MORTGAGE PASS-THROUGH SECURITIES. Private mortgage
pass-through securities are structured similarly to GNMA, FNMA and FHLMC
mortgage pass-through securities and are issued by originators of and investors
in mortgage loans, including depository institutions, mortgage banks,
investment banks and special purpose subsidiaries of the foregoing. These
securities usually are backed either by GNMA, FNMA or FHLMC certificates or by
a pool of fixed rate or adjustable rate mortgage loans. Securities which are
backed by a pool of fixed rate or adjustable rate mortgage loans generally are
structured with one or more types of credit enhancement. See "Types of Credit
Enhancement" below.
ADJUSTABLE RATE MORTGAGE SECURITIES. Adjustable rate mortgage
securities are pass-through mortgage securities collateralized by mortgages
with adjustable rather than fixed rates ("ARMs"). ARMs eligible for inclusion
in a mortgage pool generally provide for a fixed initial mortgage interest rate
for either the first three, six, twelve, thirteen, thirty-six or sixty
scheduled monthly payments. Thereafter, the interest rates are subject to
periodic adjustment based on changes to a designated benchmark index.
ARMs contain maximum and minimum rates beyond which the mortgage
interest rate may not vary over the lifetime of the mortgage. In addition,
certain ARMs provide for additional limitations on the maximum amount by which
the mortgage interest rate may adjust for any single adjustment period.
Alternatively, certain ARMs contain limitations on changes in the required
monthly payment. In the event that a monthly payment is not sufficient to pay
the interest accruing on an ARM, any such excess interest is added to the
principal balance of the mortgage
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loan, which is repaid through future monthly payments. If the monthly payment
for such an instrument exceeds the sum of the interest accrued at the
applicable mortgage interest rate and the principal payment required at such
point to amortize the outstanding principal balance over the remaining term of
the loan, the excess is utilized to reduce the then outstanding principal
balance of the ARM.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS PASS-THROUGH
SECURITIES. Collateralized mortgage obligations or "CMOs" are debt obligations
collateralized by mortgage loans or mortgage pass-through securities.
Typically, CMOs are collateralized by GNMA, FNMA or FHLMC certificates, but
also may be collateralized by whole loans or private mortgage pass-through
securities (collectively, "Mortgage Assets"). Multi-class pass-through
securities are equity interests in a trust composed of Mortgage Assets. Unless
the context indicates otherwise, all references herein to CMOs include
multi-class pass-through certificates. Payments of principal of and interest
on the Mortgage Assets, and any reinvestment income thereon, provide the funds
to pay debt service on the CMOs or make scheduled distributions on the
multi-class pass-through securities. CMOs may be issued by agencies or
instrumentalities of the U.S Government, or by private originators of, or
investors in, mortgage loans, including depository institutions, mortgage
banks, investment banks and special purpose subsidiaries of the foregoing. The
issuer of CMOs or multi-class pass-through securities may elect to be treated
as a Real Estate Mortgage Investment Conduit ("REMIC").
In a CMO, a series of bonds or certificates is issued in multiple
classes. Each class of CMOs, often referred to as a "tranche," is issued at a
specific fixed or floating coupon rate and has a stated maturity or final
distribution date. Principal prepayments on the Mortgage Assets may cause the
CMOs to be retired substantially earlier than their stated maturities or final
distribution dates. Interest is paid or accrues on all classes of the CMOs on
a monthly, quarterly or semi-annual basis. The principal of and interest on
the Mortgage Assets may be allocated among the several classes of a CMO series
in a number of different ways. Generally, the purpose of the allocation of the
cash flow of a CMO to the various classes is to obtain a more predictable cash
flow to the individual trenches than exists with the underlying collateral of
the CMO. As a general rule, the more predictable the cash flow is on a CMO
tranche, the lower the anticipated yield will be on that tranche at the time of
issuance relative to prevailing market yields on Mortgage-Backed securities.
The Portfolio also may invest in, among other things, parallel-pay
CMOs and Planned Amortization Class CMOs ("PAC Bonds"). Parallel-pay CMOs are
structured to provide payments of
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principal on each payment date to more than one class. These simultaneous
payments are taken into account in calculating the stated maturity date or
final distribution date of each class, which, as with other CMO structures,
must be retired by its stated maturity date or final distribution date but may
be retired earlier. PAC Bonds generally require payments of a specified amount
of principal on each payment date. PAC Bonds are parallel-pay CMOs with the
required principal payment on such securities having the highest priority after
interest has been paid to all classes.
The Portfolio does not intend to invest in CMO residuals. The
residual in a CMO structure generally represents the interest in any excess
cash flow remaining after making required payments of principal of and interest
on the CMOs and related administrative expenses of the issuer.
STRIPPED MORTGAGE-BACKED SECURITIES. The Portfolio may also invest in
mortgage pass-through securities where all or a substantial portion of the
interest payments go to one class of holders ("Interest Only Securities" or
"33IOs") and all or a substantial portion of the principal payments go to a
second class of holders ("Principal Only Securities" or "Pos"). These
securities are commonly referred to as Stripped Mortgage-Backed securities or
SMBS. The yields to maturity on Ios and Pos are very sensitive to the rate of
principal payments (including prepayments) on the related underlying Mortgage
Assets, and such rate may have a material effect on yield to maturity. If the
underlying Mortgage Assets experience greater than anticipated prepayments of
principal, the Portfolio may not fully recoup its initial investment in Ios.
Conversely, if the underlying Mortgage Assets experience less than anticipated
prepayments of principal, the yield on Pos could be materially adversely
affected.
In addition to SMBS issued by agencies or instrumentalities of the
U.S. Government, the Portfolio may purchase SMBS issued by private originators
of, or investors in, mortgage loans, including depository institutions,
mortgage banks, investment banks and special purpose subsidiaries of the
foregoing. Privately issued SMBS will be deemed illiquid for purposes of the
15% limitation on illiquid securities. See "Illiquid Securities" below. The
determination whether a particular U.S. Government issued SMBS is liquid will
be made by BlackRock under guidelines established by the Board of Trustees.
ASSET-BACKED SECURITIES
The securitization techniques used to develop Mortgage-Backed
securities are also applied to a broad range of other assets. Through the use
of trusts and special purpose corporations, various types of assets, primarily
automobile and
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credit card receivables and home equity loans, are being securitized in
pass-through structures similar to the mortgage pass-through structures
described above or in a pay-through structure similar to the CMO structure.
Other types of assets being securitized include loans to finance boats,
recreational vehicles, mobile homes and manufactured housing; computer, copier,
railcar and medical equipment leases; student and commercial loans; and trade,
health care and franchise receivables. In general, the collateral supporting
Asset-Backed securities is of shorter maturity than mortgage loans and is less
likely to experience substantial prepayments. As with MortgageBacked
securities, Asset-Backed securities are often backed by a pool of assets
representing the obligations of a number of different parties and use similar
credit enhancement techniques. See "Types of Credit Enhancement" below.
The market for certain types of Asset-Backed securities is relatively
new and untested. Certain Asset-Backed securities may have a limited secondary
market and may be subject to restrictions on transferability. Any Asset-Backed
security that cannot be disposed of within seven days and in the usual course
of business without taking a reduced price will be deemed illiquid for purposes
of the 15% limitation on illiquid securities. See "Illiquid Securities" below.
The determination whether a particular Asset-Backed security is liquid will be
made by BlackRock under guidelines established by the Board of Trustees.
New instruments and variations of existing Mortgage-Backed securities
and Asset-Backed securities continue to be developed. The Portfolio may invest
in any such instruments or variations as may be developed to the extent
consistent with their investment objective and policies and applicable
regulatory requirements.
Different types of Asset-Backed Securities and the assets supporting
such securities may be subject to additional restrictions, and may be affected
by economic, legal and other changes, unique to such securities and assets.
For example, a recent legislative proposal to limit credit card interest rates
had a significant adverse effect on the market for credit card receivables.
TYPES OF CREDIT ENHANCEMENT
Mortgage-Backed securities and Asset-Backed securities are often
backed by a pool of assets representing the obligations of a number of
different parties. To lessen the effect of failures by obligors on underlying
assets to make payments, those securities may contain elements of credit
support, which fall into two categories: (i) liquidity protection and (ii)
protection against losses resulting from ultimate default by an obligor on the
underlying assets. Liquidity protection refers to
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the provision of advances, generally by the entity administering the pool of
assets, to ensure that the receipt of payments on the underlying pool occurs in
a timely fashion. Protection against losses resulting from default ensures
ultimate payment of the obligations on at least a portion of the assets in the
pool. This protection may be provided through guarantees, insurance policies
or letters of credit obtained by the issuer or sponsor from third parties,
through various means of structuring the transaction or through a combination
of such approaches. The Portfolio will not pay any additional fees for credit
support, although the existence of credit support may increase the price of a
security.
Examples of credit support arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class securities
with one or more classes subordinate to other classes as to the payment of
principal thereof and interest thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class),
creation of "reserve funds" (where cash or investments, sometimes funded from a
portion of the payments on the underlying assets, are held in reserve against
future losses) and "overcollateralization" (where the scheduled payments on, or
the principal amount of, the underlying assets exceeds that required to make
payment of the securities and pay any servicing or other fees). The degree of
credit support provided for each issue is generally based on historical
information respecting the level of credit risk associated with the underling
assets. Delinquencies or losses in excess of those anticipated could adversely
affect the return on an investment in such issue.
RISK FACTORS RELATING TO MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
The yield characteristics of Mortgage-Backed and Asset-Backed
securities differ from traditional debt securities. Among the major
differences are that interest and principal payments are made more frequently,
usually monthly, and that principal may be prepaid at any time because the
underlying mortgage loans or other assets generally may be prepaid at any time.
As a result, if the Portfolio purchases such a security at a premium, a
prepayment rate that is faster than expected will reduce yield to maturity,
while a prepayment rate that is slower than expected will have the opposite
effect of increasing yield to maturity. Alternatively, if the Portfolio
purchases these securities at a discount, faster than expected prepayments will
increase, while slower than expected prepayments will reduce, yield to
maturity. The Portfolio may invest a portion of its assets in derivative
Mortgage-Backed securities such as Stripped Mortgage-Backed securities, which
are highly sensitive to changes in prepayment and interest rates. BlackRock
will seek to manage these risks
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(and potential benefits) by diversifying its investments in such securities and
through hedging techniques.
Although the extent of prepayments on a pool of mortgage loans depends
on various economic and other factors, as a general rule prepayments on fixed
rate mortgage loans will increase during a period of falling interest rates and
decrease during a period of rising interest rates. Accordingly, amounts
available for reinvestment by the Portfolio are likely to be greater during a
period of declining interest rates and, as a result, likely to be reinvested at
lower interest rates than during a period of rising interest rates.
Asset-Backed securities, although less likely to experience the same prepayment
rates as Mortgage-Backed securities, may respond to certain of the same factors
influencing prepayments, while at other times different factors will
predominate. Mortgage-Backed securities and Asset-Backed securities may
decrease in value as a result of increases in interest rates and may benefit
less than other fixed income securities from declining interest rates because
of the risk of prepayment.
Asset-Backed securities present certain risks that are not presented
by Mortgage-Backed securities. Primarily, Asset-Backed securities do not have
the benefit of the same security interest in the related collateral. Credit
card receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to set off certain amounts owed on the credit
cards, thereby reducing the balance due. Most issuers of Asset-Backed
securities backed by automobile receivables permit the servicers of such
receivables to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would require an interest superior to that of the holders of the
related Asset-Backed securities. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of Asset-Backed securities backed by
automobile receivables may not have a proper security interest in all of the
obligations backing such receivables. Therefore, there is the possibility that
recoveries on repossessed collateral may not, in some cases, be available to
support payments on these securities.
Different types of Asset-Backed securities and the assets supporting
such securities may be subject to additional restrictions, and may be affected
by economic, legal and other changes, unique to such securities and assets.
For example, a recent legislative proposal to limit credit card interest rates
had a significant adverse effect on the market for credit card receivables.
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CORPORATE DEBT SECURITIES
Corporate debt securities include securities issued by corporations
and other entities, including bonds and debentures (which are long-term), notes
(which may be short- or long-term), certificates of deposit (unsecured
borrowings by banks), bankers' acceptances (indirectly secured borrowings to
facilitate commercial transactions) and commercial paper (short-term unsecured
notes). These securities may have adjustable or fixed rates of interest and
may be secured or unsecured by assets of the issuer or another party.
Adjustable rate corporate debt securities may have interest rate caps and
floors but such corporate debt securities are not subject to prepayment risk
other than through contractual call provisions, which generally impose a
penalty for prepayment during all or a portion of the period such securities
are outstanding. Fixed rate debt securities may also be subject to call
provisions. Corporate debt securities are subject to the bankruptcy risk of
the issuer. The Portfolio believes that the high quality securities it
purchases will tend to reduce such risks. The Portfolio may purchase corporate
debt securities rated at the time of investment no lower than BBB- by S&P or
Baa3 by Moody's. The rating of a corporate debt security may change over time,
as S&P and Moody's monitor and evaluate the ratings assigned to corporate debt
securities on an ongoing basis. As a result, corporate debt securities held by
the Portfolio could receive a higher rating (which would tend to increase their
value) or a lower rating (which would tend to decrease their value) during the
time that they are owned by the Portfolio. If a security owned by the
Portfolio is downgraded below either BBB- by S&P or Baa3 by Moody's, BlackRock
will monitor such security and determine whether to sell it based on the
factors it considers relevant such as size of the investment, whether a loss or
gain will result, relative risk to the Portfolio, depth of the trading market
or any other relevant factors. The Portfolio expects that under normal market
conditions no more than 5%, if any, of the Portfolio's assets will consist of
securities whose ratings have been downgraded below BBB- by S&P or Baa3 by
Moody's. The Portfolio will consider whether to retain or dispose of a bond
whose rating drops below the minimum ratings applicable to the Portfolio. The
Portfolio is not restricted in the amount it may invest in any of the
securities described in this section.
FLOATING RATE, INVERSE FLOATING RATE AND INDEX OBLIGATIONS
The Portfolio may invest in debt securities with interest payments or
maturity values that are not fixed, but float in conjunction with (or inversely
to) an underlying index or price. These securities may be backed by U.S.
Government or corporate issuers, or by collateral such as mortgages. In
certain cases, a change in the underlying index or price may have a leveraging
effect on the periodic coupon payments, creating larger possible
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swings in the prices of such securities than would be expected when taking into
account their maturities alone. The indices and prices upon which such
securities can be based include interest rates, currency rates and commodities
prices.
Floating rate securities pay interest according to a coupon which is
reset periodically. This reset mechanism may be formula based, or reflect the
passing through of floating interest payments on an underlying collateral pool.
The coupon is usually reset daily, weekly, monthly, quarterly or semi-annually,
but other schedules are possible. Floating rate obligations generally exhibit
a low price volatility for a given stated maturity or average life because
their coupons adjust with changes in interest rates. If their underlying index
is not an interest rate, or the reset mechanism lags the movement of rates in
the current market, greater price volatility may be experienced.
Inverse floating rate securities are similar to floating rate
securities except that their coupon payments vary inversely with an underlying
index by use of a formula. Inverse floating rate securities tend to exhibit
greater price volatility than other floating rate securities. Because the
changes in the coupon are usually negatively correlated with changes in overall
interest rates, interest rate risk and price volatility on inverse floating
rate obligations can be high, especially if leverage is used in the formula.
The Portfolio does not intend to invest more than 10% of its total assets in
inverse floating rate securities.
Index securities pay a fixed rate of interest, but have a maturity
value that varies by formula, so that when the obligation matures a gain or
loss is realized. The risk of index obligations depends on the volatility of
the underlying index, the coupon payment and the maturity of the obligation.
ILLIQUID SECURITIES
The Portfolio may invest up to 15% of its net assets in securities for
which there are legal or contractual restrictions on resale or for which there
is no readily available market or other illiquid securities. Illiquid
securities include restricted securities of corporate and other issuers,
privately stripped securities, repurchase agreements having maturities of more
than seven days, and certain hedging instruments. Such securities may
experience limitations on resale that may have an adverse effect on the
marketability of portfolio securities. A mutual fund may not be able to
dispose of illiquid securities promptly or at reasonable prices. The Board of
Trustees has adopted procedures pursuant to the guidelines of the SEC that
permits BlackRock to determine whether restricted securities issued pursuant to
Rule 144A under the Securities Act of 1933 are
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liquid for purposes of this limitation. Nevertheless, Rule 144A securities may
be subject to a greater possibility of becoming illiquid than registered
securities due to changing market or other factors. Portfolio purchases may
increase the level of illiquidity and institutional buyers may become
disinterested in purchasing such securities. See "Investment Policies-Illiquid
Securities" in the Statement of Additional Information.
OTHER INVESTMENT STRATEGIES
HEDGING
The Portfolio may enter into various interest rate transactions,
purchase and sell futures contracts and purchase and sell (or write)
exchange-listed and over-the-counter put and call options on securities and
futures contracts (collectively "Hedging Transactions"). Hedging Transactions
may be used to attempt to protect against possible changes in the market value
of the Portfolio's securities resulting from trends in the debt securities
markets, to protect the Portfolio's unrealized gains on its securities, to
facilitate the sale of such securities, to manage the duration of the
Portfolio, to establish a position in the securities markets as a temporary
substitute for purchasing particular securities. Any or all of these
techniques may be used at any time, and there is no particular strategy that
requires use of one technique rather than another. Use of any Hedging
Transaction is a function of market conditions. The ability of the Portfolio
to hedge successfully will depend on BlackRock's ability to predict pertinent
market movements, which cannot be assured. The Hedging Transactions that the
Portfolios may use are described below.
INTEREST RATE TRANSACTIONS. Among the Hedging Transactions into which
the Portfolio may enter are interest rate swaps and the purchase or sale of
interest rate caps and floors. The Portfolio expects to enter into these
transactions primarily to preserve a return or spread on a particular
investment or portion of the portfolio, as a duration management technique or
to protect against an increase in the price of securities the Portfolio
anticipates purchasing at a later date. The Portfolio intends to use these
transactions as a hedge and not as a speculative investment.
Interest rate swaps involve the exchange by the Portfolio with another
party of their respective commitments to pay or receive interest, e.g., an
exchange of floating rate payments for fixed rate payments. The purchase of an
interest rate cap entitles the purchaser, to the extent that a specified index
exceeds a predetermined interest rate, to receive payments of interest on a
notional principal amount from the party selling such interest rate cap. The
purchase of an interest rate floor entitles the purchaser, to the extent that a
specified index
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falls below a predetermined interest rate, to receive payments of interest on a
notional principal amount from the party selling such interest rate floor. See
"Investment Policies--Other Investment Strategies--Interest Rate Transactions"
in the Statement of Additional Information.
FUTURES CONTRACTS. In connection with hedging and other risk
management strategies, the Portfolio may enter into contracts for the purchase
or sale for future delivery ("futures contracts") of debt securities,
aggregates of debt securities or indices or prices thereof, and other financial
indices, to hedge the value of its portfolio securities that might result from
a change in interest rates. The Portfolio will engage in such transactions
only for bona fide hedging, risk management, duration management and other
portfolio management purposes, in each case, in accordance with the rules and
regulations of the Commodity Futures Trading Commission.
CALLS ON SECURITIES AND FUTURES CONTRACTS. In order to reduce
fluctuations in net asset value, the Portfolio may sell or purchase call
options (calls) on U.S. Government securities, Mortgage-Backed securities,
Corporate debt securities and Eurodollar instruments and related futures on
such securities. A call option gives the purchaser of the option the right to
buy, and obligates the seller to sell, the underlying security or futures
contract at the exercise price at any time or at a specified time during the
option period. The purchase of a call gives the Portfolio the right to buy a
security at a fixed price. A call sold by the Portfolio exposes the Portfolio
during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security and may require the
Portfolio to hold a security, which it might otherwise have sold. All such
calls sold by the Portfolio must be "covered" as long as the call is
outstanding (i.e., the Portfolio must segregate the securities or futures
contract subject to the call or other liquid assets).
PUTS ON SECURITIES AND FUTURES CONTRACTS. The Portfolio may purchase
put options (puts) that relate to U.S. Government securities, Mortgage-Backed
securities, Corporate debt securities and Eurodollar instruments (whether or
not it holds such securities in its portfolio) or futures on such securities.
The Portfolio may also sell puts on U.S. Government securities, Mortgage-Backed
securities, Corporate debt securities and Eurodollar instruments and related
futures on such securities if the Portfolio's contingent obligations on such
puts are covered by segregated assets consisting of cash or liquid debt
securities having a value not less than the exercise price. The Portfolio will
not sell puts if, as a result, more than 50% of the Portfolio's assets would be
required to be segregated to cover its potential obligations under its hedging
and other investment transactions. In selling puts, there is a risk that the
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Portfolio may be required to buy the underlying security, at a disadvantageous
price.
EURODOLLAR INSTRUMENTS. The Portfolio may make investments in
Eurodollar instruments. Eurodollar instruments are U.S dollar-denominated
futures contracts or options thereon which are linked to the London Interbank
Offered Rate ("LIBOR"), although foreign currency denominated instruments are
available from time to time. Eurodollar futures contracts enable purchasers to
obtain a fixed rate for the lending of funds and sellers to obtain a fixed rate
for borrowings. The Portfolio intends to use Eurodollar futures contracts and
options thereon to hedge against changes in LIBOR, to which many interest rate
swaps are linked. The use of these instruments is subject to the same
limitations and risks as those applicable to the use of the interest rate
futures contracts and options thereon described under "Futures Contracts,"
"Calls on Securities and Futures Contracts" and "Puts on Securities and Futures
Contracts" above.
FURTHER INFORMATION ON HEDGING TRANSACTIONS. Appendix C and the
Statement of Additional Information under "Investment Objectives and
Policies-Other Investment Strategies-Options and Futures Transactions" contains
further information about the characteristics, risks and possible benefits of
Hedging Transactions and the Portfolio's other policies and limitations
relating to investments in futures and options. The principal risks relating
to the use of futures, options and other Hedging Transactions are: (a) less
than perfect correlation between the prices of the instrument and the market
value of the securities in the Portfolio; (b) possible lack of a liquid
secondary market for closing out a position, (c) losses resulting from interest
rate or currency exchange movements not anticipated by BlackRock; and (d) the
obligation to meet additional variation margin or other payment requirements.
BORROWING
The Portfolio may borrow from banks and enter into reverse repurchase
agreements or dollar rolls up to 33 1/3% of the value of its total assets
(computed at the time the loan is made) to take advantage of investment
opportunities. See "Reverse Repurchase Agreements and Dollar Rolls" below.
The Portfolio may pledge up to 33 1/3% of its total assets to secure these
borrowings. If the Portfolio's asset coverage for borrowings falls below 300%,
the Portfolio will take prompt action to reduce its borrowings. If the
Portfolio borrows to invest in securities, any investment gains made on the
securities in excess of interest paid on the borrowing will cause the net asset
value of the shares to rise faster than would otherwise be the case. On the
other hand, if the investment performance of the additional securities
purchased fails to cover their cost (including any interest paid on the money
borrowed) to the
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Portfolio, the net asset value of the Portfolio's shares will decrease faster
than would otherwise be the case. This is a speculative characteristic known
as "leverage." The Portfolio is also authorized to borrow an additional 5% of
its total assets without regard to the foregoing limitations for temporary
purposes such as clearance of portfolio transactions and share redemptions.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
The Portfolio may use reverse repurchase agreements and dollar rolls
as part of its investment strategy. Reverse repurchase agreements involve
sales by the Portfolio of assets concurrently with an agreement by the
Portfolio to repurchase the same assets at a later date at a fixed price.
During the reverse repurchase agreement period, the Portfolio continues to
receive principal and interest payments on these assets.
The Portfolio may also enter into dollar rolls in which the Portfolio
sells securities for delivery in the current month and simultaneously contracts
to repurchase substantially similar (same type and coupon) securities on a
specified future date from the same party. During the roll period, the
Portfolio forgoes principal and interest paid on the securities. The Portfolio
is compensated by the difference between the current sales price and the
forward price for the future purchase (often referred to as the "drop") as well
as by the interest earned on the cash proceeds of the initial sale.
The Portfolio will establish a segregated account with the custodian
in which it will maintain cash, U.S. Government securities or other liquid
high-grade debt obligations at least equal in value to its obligations in
respect to reverse repurchase agreements and dollar rolls. Reverse repurchase
agreements and dollar rolls involve the risk that the market value of the
securities retained by the Portfolio may decline below the price of the
securities the Portfolio has sold but is obligated to repurchase under the
agreement. In addition, in the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, the Portfolio's
use of the proceeds of the agreement may be restricted pending a determination
by the other party, or its trustee or receiver, whether to enforce the
Portfolio's obligation to repurchase the securities.
Reverse repurchase agreements and dollar rolls are speculative
techniques involving leverage and are considered borrowings by the Portfolio
for purposes of the percentage limitations applicable to borrowings. See
"Borrowing" above.
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WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS
From time to time, the Portfolio may purchase securities on a
when-issued or delayed delivery basis or may purchase or sell securities on a
forward commitment basis. When such transactions are negotiated, the price is
fixed at the time of the commitment, but delivery and payment can take place a
month or more after the date of the commitment. The securities purchased are
subject to market fluctuation and no interest accrues to the Portfolio during
this period. While the Portfolio will only purchase securities on a
when-issued, delayed delivery or forward commitment basis with the intention of
acquiring the securities, the Portfolio may sell the securities before the
settlement date, if it is deemed advisable. At the time the Portfolio makes
the commitment to purchase securities on a when-issued or delayed delivery
basis, it will record the transaction and thereafter reflect the value, each
day, of such security in determining the net asset value of the Portfolio. At
the time of delivery, the value of the securities may be more or less than the
purchase price. An increase in the percentage of a Portfolio's assets
committed to the purchase of securities on a when-issued, delayed delivery or
forward commitment basis may increase the volatility of a Portfolio's net asset
value. At the time the Portfolio enters into a transaction on a when-issued or
forward commitment basis, a segregated account consisting of cash, U.S.
Government securities or other liquid high-grade debt securities equal to at
least 102% of the value of the when-issued or forward commitment securities
will be established and maintained with the custodian. Subject to this
requirement, the Portfolio may purchase securities on such basis without limit.
SHORT SALES
The Portfolio may only make short sales of securities
"against-the-box." A short sale is a transaction in which the Portfolio sells
a security it does not own in anticipation that the market price of that
security will decline. The Portfolio expects to make short sales both as a
form of hedging to offset potential declines in long positions in similar
securities and in order to maintain portfolio flexibility. In a short sale
"against-the-box," at the time of the sale, the Portfolio owns or has the
immediate and unconditional right to acquire the identical security at no
additional cost. When selling short "against-the-box," the Portfolio foregoes
an opportunity for capital appreciation in the security.
REPURCHASE AGREEMENTS
The Portfolio may enter into repurchase agreements, which may be
viewed as a type of secured lending, and which typically involve the
acquisition of debt securities from a selling
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financial institution such as a bank, savings and loan association or
broker-dealer. The repurchase agreement provides that the Portfolio will sell
back to the institution, and that the institution will repurchase, the
underlying security at a specified price and at a fixed time in the future,
usually not more than seven days from the date of purchase. The repurchase
agreement will at all times be fully collateralized by the institution in an
amount at least equal to the repurchase price, including accrued interest
earned on the underlying securities. The collateral will be maintained in a
segregated account and will be valued daily. As the value of the collateral
declines, the seller will deposit additional collateral. If the seller
defaults and the value of the collateral securing the repurchase agreement
declines or, in some cases, if the seller fails financially, the Portfolio may
incur a loss. See "Investment Policies-Other Investment Strategies-Repurchase
Agreements" in the Statement of Additional Information.
LENDING OF PORTFOLIO SECURITIES
Consistent with applicable regulatory requirements, the Portfolio may
lend up to 33 1/3% of its portfolio securities to brokers, dealers and other
financial institutions, provided that such loans are callable at any time by
the Portfolio (subject to certain notice provisions), and are at all times
secured by cash or U.S. Government securities which are at least equal to the
market value, determined daily, of the loaned securities. The Portfolio
continues to receive the income on the loaned securities while at the same time
earning interest on the loan or on the cash amounts deposited as collateral,
which will be invested in short-term obligations. The Portfolio may incur a
loss, however, if the seller defaults and the value of the loaned securities
exceeds the value of the collateral or, in some cases, if the borrower fails
financially. See "Investment Policies-Other Investment Strategies-Securities
Lending" in the Statement of Additional Information.
INVESTMENT RESTRICTIONS
The Statement of Additional Information contains, under the heading
"Additional Investment Limitations," specific enumerated investment
restrictions which govern the investments of the Portfolio. The investment
objective and investment policies and practices described in this Prospectus
and in the Statement of Additional Information are not fundamental, meaning
that the Board of Trustees may change them without stockholder approval.
The fundamental restrictions applicable to the Portfolio include (i) a
prohibition on purchasing any security (other than a U.S. Government security)
if as a result (a) with respect to 75% of its total assets, more than 5% of the
Portfolio's total assets would be invested in the securities of a single issuer
or
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(b) 25% or more of the Portfolio's total assets would be invested in the
securities of issuers in a particular industry, and (ii) a prohibition on
purchasing more than 10% of all outstanding voting securities of any one
issuer.
PORTFOLIO TURNOVER
The Portfolio has no fixed policy with respect to portfolio turnover.
The Portfolio does not expect to trade in securities for short-term gain. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the
Portfolio's securities, excluding securities having a maturity at the date of
purchase of one year or less. While the Portfolio will pay commissions in
connection with its options and futures transactions, the other securities in
which the Portfolio invests are generally traded on a "net" basis with dealers
acting as principals for their own account without a stated commission.
Nevertheless, high portfolio turnover may involve correspondingly greater
brokerage commissions and other transaction costs which will be borne directly
by the Portfolio. BlackRock will monitor the tax status of the Portfolio under
the Internal Revenue Code during any period in which the annual turnover rate
of the Portfolio exceeds 100%. To the extent that increased portfolio turnover
results in sales at a profit of securities held less than three months, the
Portfolio's ability to qualify as a "regulated investment company" under the
Internal Revenue Code may be affected. See "Portfolio Transactions" in the
Statement of Additional Information.
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MANAGEMENT
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BOARD OF TRUSTEES
The business and affairs of the Fund are managed under the direction
of the Fund's Board of Trustees. The Statement of Additional Information
contains the name of each trustee and certain background information.
ADVISER AND SUB-ADVISER
PAMG was organized in 1995 to perform advisory services for investment
companies. BlackRock (formerly BlackRock Financial Management L.P.) was
organized in 1988. On February 28, 1995, BlackRock Financial Management L.P.
sold its business to PNC Bank, National Association ("PNC Bank"). The
principal business address of PAMG is 1835 Market Street, 15th Floor,
Philadelphia, Pennsylvania 19103. The principal business address of BlackRock
is 345 Park Avenue, New York, New York 10154.
As adviser, PAMG is responsible for the overall investment management
of the Portfolio. The sub-adviser, BlackRock, is responsible for the
day-to-day management of the Portfolio, and generally makes all purchase and
sale decisions regarding the investments made by the Portfolio. BlackRock also
provides research and credit analysis as well as certain other services.
Scott Amero is the person primarily responsible for the day-to-day
management of the Portfolio's investments. Mr. Amero has managed the Portfolio
(and the Predecessor Portfolio) since their inception and has been employed by
BlackRock as a portfolio manager since 1990. Prior to joining BlackRock in
1990, Mr. Amero was a Vice-President in Fixed Income Research at The First
Boston Corporation.
For the services provided and expenses assumed by it, PAMG is entitled
to receive from the Portfolio a fee, computed daily and payable monthly, at an
annual rate of 0.50% of the first $1 billion of the average daily net assets of
the Portfolio, plus 0.45% of the next $1 billion of the Portfolio's average
daily net assets, plus 0.425% of the next $1 billion of the Portfolio's average
daily net assets, plus 0.40% of the Portfolio's average daily net assets in
excess of $3 billion. The Predecessor Portfolio bore advisory fees during its
most recent fiscal year pursuant to the investment advisory agreement then in
effect with BlackRock at the effective annual rate of .30% of its average daily
net assets. From time to time PAMG may waive all or any portion of its
advisory fee for and may reimburse expenses of the Portfolio. See
"Introduction--Expense Table."
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For its sub-advisory services, BlackRock is entitled to receive from
PAMG a fee, computed daily and payable monthly, at an annual rate of .35% of
the Portfolio's first $1 billion of average daily net assets, .30% of its next
$1 billion of average daily net assets, .275% of its next $1 billion of average
daily net assets, and .25% of its average daily net assets in excess of $3
billion. Such sub-advisory fee has no effect on the advisory fee payable by
the Portfolio to PAMG. BlackRock may from time to time waive all or any
portion of its sub-advisory fee for the Portfolio.
ADMINISTRATORS
PMFCO, whose principal business address is 345 Park Avenue, New York,
New York 10154, PFPC, whose principal business address is 400 Bellevue Parkway,
Wilmington, Delaware 19809 and PDI, whose principal business address is 259
Radnor-Chester Road, Suite 120, Radnor, Pennsylvania 19087, serve as the Fund's
co-administrators. PMFCO and PFPC are indirect wholly-owned subsidiaries of
PNC Bank Corp. A majority of the outstanding stock of PDI is owned by its
officers and the remaining outstanding stock is owned by Pennsylvania Merchant
Group Ltd.
The Administrators generally assist the Fund in all aspects of its
administration and operation, including matters relating to the maintenance of
financial records and fund accounting. As compensation for their services,
PMFCO is entitled to receive a fee, computed daily and payable monthly, at an
annual rate of .03% of the Portfolio's average daily net assets, and PFPC and
PDI are entitled to receive a combined fee, computed daily and payable monthly,
at an annual rate of .20% of the first $500 million of the Portfolio's average
daily net assets, .18% of the next $500 million of the Portfolio's average
daily net assets, .16% of the next $1 billion of the Portfolio's average daily
net assets and .15% of the Portfolio's average daily net assets in excess of $2
billion. From time to time the Administrators may waive all or any portion of
the administration fees for the Portfolio.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND CUSTODIAN
PNC Bank serves as the Fund's custodian and PFPC serves as the Fund's
transfer agent and dividend disbursing agent.
EXPENSES
Expenses are deducted from the total income of the Portfolio before
dividends and distributions are paid. These expenses include, but are not
limited to, fees paid to PAMG and the Administrators, transfer agency fees,
fees and expenses of officers and trustees who are not affiliated with PAMG or
the Distributor or any of their affiliates, taxes, interest, legal
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fees, custodian fees, auditing fees, 12b-1 fees, servicing fees, certain fees
and expenses in registering and qualifying the Portfolio and its Shares for
distribution under Federal and state securities laws, expenses of preparing
prospectuses and statements of additional information and of printing and
distributing prospectuses and statements of additional information to existing
shareholders, the expense of reports to shareholders, shareholders' meetings
and proxy solicitations, fidelity bond and trustees and officers liability
insurance premiums, the expense of using independent pricing services and other
expenses which are not expressly assumed by PIMC or the Administrators under
their respective agreements with the Fund. Any general expenses of the Fund
that are not readily identifiable as belonging to a particular investment
portfolio will be allocated among all investment portfolios by or under the
direction of the Board of Trustees in a manner the Board determines to be fair
and equitable. Any expenses relating only to a particular class of shares
within the Portfolio will be borne solely by such Shares.
If the total expenses borne by the Portfolio in any fiscal year exceed
the expense limitations imposed by applicable state securities regulations,
PAMG, BlackRock and the Administrators will bear the amount of such excess to
the extent required by such regulations in proportion to the fees otherwise
payable to them for such year. Such amount, if any, will be estimated and
accrued daily and paid on a monthly basis. See "Introduction--Example,"
"Management--Adviser and Sub-Adviser" and "Management--Administrators" for
discussions of expense reimbursements and fee waivers.
PORTFOLIO TRANSACTIONS
The Portfolio's sub-adviser will seek the best price and execution in
placing brokerage transactions. In this regard, the sub-adviser may consider a
number of factors in determining which brokers to use in purchasing or selling
portfolio securities. These factors, which are more fully discussed in the
Statement of Additional Information, include, but are not limited to, research
services, sales of shares of the Fund, the reasonableness of commissions and
quality of services and execution. Brokerage transactions for the Portfolio
may be directed through registered broker/dealers ("Authorized Dealers") who
have entered into dealer agreements with the Distributor, subject to the
requirements of best execution.
BANKING LAWS
Banking laws and regulations currently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of
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a registered open-end investment company continuously engaged in the issuance
of its shares, and prohibit banks generally from underwriting securities, but
such banking laws and regulations do not prohibit such a holding company or
affiliate or banks generally from acting as investment adviser, administrator,
transfer agent or custodian to such an investment company, or from purchasing
shares of such company as agent for and upon the order of customers. PNC Bank,
PAMG, BlackRock, PMFCO, PFPC and Institutions that are banks or bank
affiliates, are subject to such banking laws and regulations. In addition,
state securities laws on this issue may differ from the interpretations of
Federal law expressed herein and banks and financial institutions may be
required to register as dealers pursuant to state law.
Should future legislative, judicial or administrative action prohibit
or restrict the activities of such companies in connection with the provision
of services on behalf of the Fund and the holders of Investor Shares, the Fund
might be required to alter materially or discontinue its arrangements with such
companies and change its method of operations with respect to the Investor
Shares. It is not anticipated, however, that any change in the Fund's method
of operations would affect its net asset value per share or result in a
financial loss to any investor.
DISTRIBUTION OF SHARES
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DISTRIBUTOR
Shares of the Portfolio are offered on a continuous basis for the Fund
by the distributor, Provident Distributors, Inc. (the "Distributor"). The
Distributor is a registered broker/dealer with principal offices at 259
Radnor-Chester Road, Suite 120, Radnor, Pennsylvania 19087.
The Fund's Board of Trustees has adopted an Amended and Restated
Distribution and Service Plan for Series A Shares and Series B Shares (the
"Plan").
Under the Plan the Distributor is entitled to payments by the
Portfolio for: (i) promotional activities in connection with advertising and
marketing Shares; and (ii) payments to broker/dealers that are not affiliated
with the Distributor ("Service Organizations") for distribution assistance such
as advertising and marketing of Fund Shares. In addition, with respect to
Series B Shares, payments under the Plan will be used to pay for or finance
sales commissions and other fees payable to Service Organizations and other
broker/dealers who sell Series B Shares. Service Organizations may also
provide support services such as establishing and maintaining accounts and
records relating to shareholders for whom the Service Organizations are
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the dealer of record or holder of record for shareholders with whom the Service
Organizations have a servicing relationship. Promotional activities include
advertising via radio, television, newspapers, magazines and otherwise;
preparing, printing and mailing sales materials, brochures and prospectuses
(except for prospectuses used for regulatory purposes or for distribution to
existing shareholders); and other activities in connection with the promotion
of Shares. Payments under the Plan may also be used for telephone facilities
and in-house telemarketing or shareholder servicing.
Payments under the Plan with respect to Series A Shares will not
exceed .50% (annualized) of the average daily net asset value of the
Portfolio's outstanding Series A Shares. Service Organizations may charge
their clients additional fees for account services. Customers who are
beneficial owners of Series A Shares should read this Prospectus in light of
the terms and fees governing their accounts with Service Organizations. The
NASD has adopted rules which generally limit the aggregate sales charges and
payments under the Plan with respect to each Portfolio to 7.25% of total new
gross Series A Share sales, plus interest. The Fund would retain any deferred
front-end sales charges collected and stop accruing payments under the Plan
with respect to Series A Shares if, to the extent, and for as long as, such
limit would otherwise be exceeded. See "How to Purchase Shares--Purchases of
Series A Shares" for a description of the front-end sales charge.
Payments under the Plan with respect to Series B Shares will not
exceed 1.15% (annualized) of the average daily net asset value of the
Portfolio's outstanding Series B Shares. Service Organizations may charge
their clients additional fees for account services. Customers who are
beneficial owners of Series B Shares should read this Prospectus in light of
the terms and fees governing their accounts with Service Organizations. Under
applicable NASD rules, the aggregate deferred sales charges and payments under
the Plan with respect to Series B Shares are generally limited with respect to
the Portfolio to 6.25% of total new gross Series B Share sales, plus interest.
The Fund would retain any deferred sales charges collected and stop accruing
payments under the Plan if, to the extent, and for as long as, such limit would
otherwise be exceeded. See "How to Purchase Shares--Purchases of Series B
Shares" for a description of the deferred sales charge.
Payments under the Plan which are expenses of the Portfolio's Investor
Shares are for distribution and/or other services rendered for or on behalf of
the Investor Shares of the Portfolio. However, joint distribution financing
with respect to Shares of the Portfolio (which financing may also involve other
investment portfolios or companies that are affiliated persons of such a
person, or affiliated persons of the Distributor) will be
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permitted in accordance with applicable regulations of the SEC if and when such
regulations are adopted.
Payments under the Plan are not tied directly to out-of-pocket
expenses and may be used as the Distributor or PMFCO elect (for example, to
defray their overhead expenses). See "Description of Shares."
SHAREHOLDER SERVICING
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The Fund intends to enter into service agreements pursuant to which
Service Organizations and sometimes the Distributor will render certain support
services to their customers who are the beneficial owners of Investor Shares.
Such services will be provided to customers who are the beneficial owners of
Investor Shares and are intended to supplement the services provided by the
Fund's Administrators and transfer agent. Service Organizations and the
Distributor may provide one or more of the following services to such
customers: establishing and maintaining accounts and records relating to
customers that invest in Investor Shares; processing dividend and distribution
payments from the Fund on behalf of customers; arranging for bank wires;
providing sub-accounting with respect to Investor Shares beneficially owned by
customers or the information necessary for sub-accounting; forwarding
shareholder communications from the Fund (such as proxies, shareholder reports,
annual and semi-annual financial statements and dividend, distribution and tax
notices) to customers; assisting in processing purchase, exchange and
redemption requests from customers and in placing such orders with the Fund's
service contractors; assisting customers in changing dividend options, account
designations and addresses; providing customers with a service that invests the
assets of their accounts in Investor Shares pursuant to specific or
pre-authorized instructions; providing information periodically to customers
showing their positions in Investor Shares and integrating such statements with
those of other transactions and balances in customers' other accounts with the
Service Organization; responding to customer inquiries relating
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to the services performed by the Service Organization or the Distributor;
responding to customer inquiries concerning their investments in Investor
Shares; and providing other similar shareholder liaison services. Customers
who are beneficial owners of Investor Shares should read this Prospectus in
light of the terms and fees governing their accounts with Service
Organizations.
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HOW TO PURCHASE SHARES
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GENERAL
Shares in the Portfolio may be purchased through PNC Bank, PNC Bank
Ohio, institutional investors and Authorized Dealers, or by completing and
forwarding the application included in this Prospectus, through any one of
them, to the Fund's transfer agent. Subsequent purchases of Shares may be
effected through PNC Bank, PNC Bank Ohio, institutional investors and
Authorized Dealers or by mailing a check or Federal Reserve Draft, payable to
the order of "The PNC Fund" c/o PFPC, P.O. Box 8907, Wilmington, Delaware
19899-8907. The name of the Portfolio for which Shares are being purchased
must also appear on the check or Federal Reserve Draft. Federal Reserve Drafts
are available at national banks or any state bank which is a member of the
Federal Reserve System. Initial investments in the Portfolio must be at least
$500, except that such minimum investment requirement is: (i) $100 for
employees of the Fund, the Fund's adviser, sub-advisers, Distributor or
transfer agent or employees of any such service providers' affiliate; and (ii)
$50 for investors purchasing shares under the automatic investing program
described in "Investor Programs--Automatic Investing. "Subsequent investments
must be at least $100. The Fund reserves the right to reject any purchase
order. Certificates for Series A Shares will be issued only upon request. No
certificates will be issued for Series B Shares.
Investor Shares may be purchased on any Business Day. A "Business
Day" is any weekday that the New York Stock Exchange (the "NYSE") and the
Federal Reserve Bank of Philadelphia (the "FRB") are open for business.
Investor Shares are sold at the applicable offering price next
computed after an order is received by the Fund's transfer agent. It is the
responsibility of the Distributor, PNC Bank, PNC Bank Ohio, institutional
investors and the Authorized Dealers to transmit orders received by them from
investors to the Fund's transfer agent in a timely manner. Orders of less than
$500 may be mailed by PNC Bank, PNC Bank Ohio, institutional investors and
Authorized Dealers to the transfer agent. Orders received by the Fund's
transfer agent after 4:00 p.m. are priced at the applicable offering price on
the following Business Day.
ALTERNATIVE PURCHASE OPTIONS
Purchases of Investor Shares of the Portfolio are subject to a sales
charge. Purchases of Series A Shares are subject to a "front-end" sales charge
deducted at the time of purchase. Series B Shares are subject to a deferred or
"back-end" sales charge which is deducted upon their redemption. The deferred
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sales charge applicable to purchases of Series B Shares declines over time and
is known as a "contingent deferred sales charge." Investors may elect to have
the sales charge applicable to their purchase of Shares deducted at the time of
purchase by purchasing Series A Shares. Alternatively, investors may elect to
have the sales charge applicable to their purchase of Shares deducted upon
their redemption by purchasing Series B Shares. INVESTORS WHO PURCHASE SHARES
OF THE PORTFOLIO MUST SPECIFY AT THE TIME OF PURCHASE WHETHER THEY ARE
PURCHASING SERIES A SHARES OR SERIES B SHARES.
EXEMPTIONS FROM THE FRONT-END SALES CHARGE. The following persons
associated with the Fund, the Distributor, the Fund's investment adviser,
sub-advisers or transfer agent and affiliates of any of the above may buy
Series A Shares without paying a sales charge to the extent permitted by such
firms: (a) officers, directors and partners (and their spouses and minor
children); (b) full-time employees and retirees (and their spouses and minor
children); (c) registered representatives of Authorized Dealers and of the
Distributor; (d) spouses or children of any such persons; (e) any trust,
pension, profit-sharing or other benefit plan for any of the persons set forth
in (a) through (d). The following persons may also buy Series A Shares without
paying a sales charge: (a) persons investing through an authorized payroll
deductions plan; (b) persons investing through an authorized investment plan
for organizations which operate under Section 501(c)(3) of the Internal Revenue
Code; and (c) registered investment advisers, trust companies and bank trust
departments exercising discretionary investment authority with respect to
amounts to be invested in the Portfolio, provided that the aggregate amount
invested pursuant to this exemption equals at least $250,000. INVESTORS WHO
QUALIFY FOR ANY EXEMPTION FROM THE SALES CHARGE ORDINARILY PAYABLE WITH RESPECT
TO PURCHASES OF INVESTOR SHARES MUST PURCHASE SERIES A SHARES.
CHOOSING BETWEEN SERIES A SHARES AND SERIES B SHARES
Investors should understand the differences between Series A Shares
and Series B Shares before purchasing Shares of the Portfolio.
SERIES A SHARES. Series A Shares are sold at the net asset value for
Series A Shares of the Portfolio plus the applicable front-end sales charge.
This front-end sales charge may be reduced or waived in some cases. See "How
to Purchase Shares--Exemptions from the Sales Charge" and "How to Purchase
Shares--Purchases of Series A Shares." Series A Shares bear the expense of
payments under the Plan at an annual rate not to exceed .50% of the average
daily net asset value of the Portfolio's outstanding Series A Investor Shares.
See "Distribution of Shares."
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SERIES B SHARES. Series B Shares are sold at the net asset value for
Series B Shares of the Portfolio. A deferred sales charge is deducted if
Series B Shares are redeemed within six years of purchase. The deferred sales
charge deducted upon the redemption of Series B Shares decreases over time.
See "How to Purchase Shares--Purchases of Series B Shares." Series B Shares
bear the expense of payments under the Plan at an annual rate not to exceed
1.15% of the average daily net asset value of the Portfolio's outstanding
Series B Investor Shares. See "Distribution of Shares." If payments under the
Plan are made at the maximum rates, then Series B Shares of the Portfolio will
have higher operating expenses and will pay lower dividends than Series A
Shares of the Portfolio.
Six years after the date of purchase, Series B Shares will
automatically convert to Series A Shares. The purpose of the conversion is to
relieve the holders of Series B Shares of the higher operating expenses charged
to Series B Shares. The conversion from Series B Shares to Series A Shares
will take place at the net asset value of each class of Shares at the time of
the conversion. Upon such conversion, an investor would hold Series A Shares
subject to the operating expenses for Series A Shares discussed above. Upon
each conversion of Series B Shares that were not acquired through reinvestment
of dividends or distributions, a proportionate amount of Series B Shares that
were acquired through reinvestment of dividends or distributions will likewise
automatically convert to Series A Shares.
FACTORS TO CONSIDER IN CHOOSING BETWEEN SERIES A SHARES AND SERIES B
SHARES. Before deciding between Series A Shares and Series B Shares of the
Portfolio, an investor should carefully consider the amount and intended length
of his investment in Investor Shares. Specifically, an investor should
consider whether the accumulated distribution and servicing fees and the
deferred sales charge applicable to Series B Shares would be less than the
front-end sales charge and accumulated distribution fees applicable to Series A
Shares purchased at the same time and held for the same period, and the extent
to which the difference between those amounts would be offset by the higher
returns associated with Series A Shares. Because the operating expenses of
Series B Shares are greater than those of Series A Shares in the Portfolio, the
dividends on Series A Shares will be higher than the dividends on Series B
Shares. However, since a front-end sales charge is deducted at the time of
purchase of Series A Shares, not all of the purchase amount will purchase
Series A Shares. Consequently, the same initial investment will purchase more
Series B Shares than Series A Shares of the Portfolio.
Because of reductions in the front-end sales charge for purchases of
Series A Shares aggregating $50,000 or more, it may be advantageous for
investors purchasing large quantities of
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Investor Shares to purchase Series A Shares. In any event, the Fund will not
accept any purchase order for $1 million or more of Series B Shares. In
addition, because the accumulated higher operating expenses of Series B Shares
may eventually exceed the amount of the front-end sales charge and distribution
fees associated with Series A Shares, investors who intend to hold their
Investor Shares for an extended period of time should consider purchasing
Series A Shares.
Investors who would not qualify for a reduction in the front-end sales
charge for purchases of Series A Shares may decide that it is more advantageous
to have the entire purchase amount invested immediately in Series B Shares
notwithstanding the higher operating expenses associated with Series B Shares.
These higher operating expenses may be offset by any return an investor
receives from the additional Investor Shares received as a result of not having
to pay a front-end sales charge. However, investors should understand that the
Portfolio's future return cannot be predicted, and that there is no assurance
that such return, if any, would compensate for the higher operating expenses
associated with Series B Shares.
PURCHASES OF SERIES A SHARES
Series A Investor Shares are sold at their public offering price
(i.e., net asset value of the Series A Shares plus the applicable front-end
sales charge) next computed after a purchase order is received by the Fund's
transfer agent. The following table shows sales charges at various investment
levels. Sales charges are reduced on a graduated scale on single purchases of
$50,000 or more. During special promotions, the entire sales charge may be
reallowed to dealers. In addition, certain dealers who enter into an agreement
to provide extra training and information on products, or marketing and related
services, and who increase sales of Shares may also receive additional payments
from the Distributor. Dealers who receive 90% or more of the sales charge may
be deemed to be "underwriters" under the 1933 Act.
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<TABLE>
<CAPTION>
Sales Reallowance
Charge as for
Percentage Sales Charge as Placement fees
of Percentage of to dealers (as %
Amount of Transaction Offering Net of Offering
at Offering Price Price Asset Value Price)
--------------------- ----- ----------- ------
<S> <C> <C> <C>
Less than $50,000 . . . . . . . . . . . . . . . 4.50% 4.71% 4.00%
$50,000 but less than $75,000 . . . . . . . . . 3.50 3.63 3.00
$75,000 but less than $100,000 . . . . . . . . 3.00 3.09 2.50
$100,000 but less than $250,000 . . . . . . . . 2.50 2.56 2.00
$250,000 but less than $500,000 . . . . . . . . 1.50 1.52 1.25
$500,000 but less than $1,000,000 . . . . . . . 1.00 1.01 0.75
$1,000,000 but less than $2,000,000 . . . . . . 0.00 0.00 0.50*
$2,000,000 and over . . . . . . . . . . . . . . 0.00 0.00 0.25*
</TABLE>
* Placement fees the Distributor may pay to dealers, provided the
aggregate of such fees (including placement fees described below
payable to dealers in connection with investments of redemption
proceeds from other investment companies) does not exceed the
aggregate amount of front-end sales charges, net of dealer
reallowances, on Fund shares subject to a front-end sales charge.
Dealers must refund a pro-rata portion of such fee if the Series A
Shares are redeemed within six months.
The foregoing schedule of sales charges applies to purchases made at
any one time by the following: (a) any individual; (b) any individual, his or
her spouse, and their children under the age of 21; (c) a trustee or fiduciary
of a single trust estate or single fiduciary account; or (d) any organized
group which has been in existence for more than six months, provided that it is
not organized for the purpose of buying redeemable securities of a registered
investment company, and provided that the purchase is made through a central
administrator, or through a single dealer, or by other means which result in
economy of sales effort or expense. An organized group does not include a
group of individuals whose sole organizational connection is participation as
credit card holders of a company, policyholders of an insurance company,
customers of either a bank or broker/dealer or clients of an investment
adviser. Purchases made by an organized group may include, for example, a
trustee or other fiduciary purchasing for a single fiduciary account or other
employee benefit plan purchases made through a payroll deduction plan.
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The sales charge (as a percentage of the offering price) payable by
qualified employee benefit plans ("Qualified Plans") having at least 20
employees eligible to participate on purchases of Series A Investor Shares of
the Portfolio aggregating less than $500,000 will be 1.00%. The above schedule
will apply to purchases by those Qualified Plans of Series A Investor Shares of
the Portfolio aggregating $500,000 and above. The effect of this policy is to
make the sales load 1.00% for purchases by such Qualified Plans of Series A
Investor Shares of the Portfolio aggregating less than $1,000,000, while no
sales charge applies to purchases aggregating $1,000,000 and above. The sales
charge payable by Qualified Plans having less than 20 employees eligible to
participate on purchases of Series A Investor Shares of the Portfolio
aggregating less than $100,000 will be 2.50%. The above schedule will apply to
purchases by such Qualified Plans of Series A Investor Shares aggregating
$100,000 and above. The effect of this policy is to make the maximum sales
load 2.50% for purchases of Series A Investor Shares of the Portfolio by
Qualified Plans with less than 20 employees eligible to participate. Such
Qualified Plans may take advantage of the lower sales charges set forth in the
above schedule by purchasing Series A Investor Shares of the Portfolio
aggregating $250,000 and above.
HOW TO REDEEM SHARES
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REDEMPTION
Shareholders may redeem for cash some or all of their Shares of the
Portfolio at any time. To do so, a written request in proper form must be sent
directly to The PNC Fund c/o PFPC, P.O. Box 8907, Wilmington, Delaware
19899-8907. Except for the contingent deferred sales charge that may be
charged with respect to Series B Shares, there is no charge for a redemption.
Shareholders may also place redemption requests through an Authorized Dealer,
but the Authorized Dealer might charge a fee for this service.
WHEN REDEEMING INVESTOR SHARES IN THE PORTFOLIO, SHAREHOLDERS SHOULD
INDICATE WHETHER THEY ARE REDEEMING SERIES A SHARES OR SERIES B SHARES. In the
event a redeeming shareholder owns both Series A Shares and Series B Shares in
the Portfolio, the Series A Shares will be redeemed first unless the
shareholder indicates otherwise.
Except as noted below, a request for redemption must be signed by all
persons in whose names the Shares are registered. Signatures must conform
exactly to the account registration. If the proceeds of the redemption would
exceed $25,000, or if the
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proceeds are not to be paid to the record owner at the record address, or if
the shareholder is a corporation, partnership, trust or fiduciary, signature(s)
must be guaranteed by any eligible guarantor institution as defined in Rule
17Ad-15 under the Securities Exchange Act of 1934. Eligible guarantor
institutions generally include banks, broker/dealers, credit unions, national
securities exchanges, registered securities associations, clearing agencies and
savings associations.
Generally, a properly signed written request with any required
signature guarantee is all that is required for a redemption. In some cases,
however, other documents may be necessary. In the case of shareholders holding
Series A Share certificates, the certificates for the Series A Shares being
redeemed must accompany the redemption request. Additional documentary
evidence of authority is required by PFPC in the event redemption is requested
by a corporation, partnership, trust, fiduciary, executor or administrator.
EXPEDITED REDEMPTIONS
If a shareholder has given authorization for expedited redemption,
Shares can be redeemed by telephone and the proceeds sent by check to the
shareholder or by Federal wire transfer to a single previously designated bank
account. Once authorization is on file, PFPC will honor requests by any person
by telephone at (800) 441-7762 (in Delaware call collect (302) 791-1194) or
other means. The minimum amount that may be sent by check is $500, while the
minimum amount that may be wired is $10,000. The Fund reserves the right to
change these minimums or to terminate these redemption privileges. If the
proceeds of a redemption would exceed $25,000, the redemption request must be
in writing and will be subject to the signature guarantee requirement described
above in "How to Redeem Shares--Redemption." This privilege may not be used to
redeem Series A Shares in certificated form.
During periods of substantial economic or market change, telephone
redemptions may be difficult to complete. If a shareholder is unable to
contact the transfer agent by telephone, the shareholder may also deliver the
redemption request to the transfer agent by mail at PFPC Inc., P.O. Box 8907,
Wilmington, DE 19899-8907.
The Fund is not responsible for the efficiency of the Federal wire
system or the shareholder's firm or bank. The Fund does not currently charge
for wire transfers. The shareholder is responsible for any charges imposed by
the shareholder's bank. To change the name of the single designated bank
account to receive wire redemption proceeds, it is necessary to send a written
request (with a guaranteed signature as described under "How to Redeem
Shares--Redemption") to The PNC Fund c/o PFPC, P.O. Box 8907, Wilmington,
Delaware 19899-8907.
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The Fund reserves the right to refuse a telephone redemption if it
believes it advisable to do so. The Fund, the Administrators and the
Distributor will not be liable for any loss, liability, cost or expense for
acting upon telephone instructions reasonably believed to be genuine. See
"Investor Programs--Exchange Privilege" for a description of the Fund's policy
on telephone instructions. For further information, see "How to Redeem
Shares--Payment of Redemption Proceeds."
ACCOUNTS WITH LOW BALANCES
The Fund reserves the right to redeem a shareholder's account in the
Portfolio at any time the net asset value of the account in the Portfolio falls
below the minimum initial investment requirement amount as the result of a
redemption or an exchange request. A shareholder will be notified in writing
that the value of the shareholder's account in the Portfolio is less than the
required amount and will be allowed 30 days to make additional investments
before the redemption is processed.
PAYMENT OF REDEMPTION PROCEEDS
The redemption price for Series A and Series B Shares of the Portfolio
is the net asset value per share of the Series A and Series B Shares,
respectively, of the Portfolio next determined after the request for redemption
is received in proper form by The PNC Fund c/o PFPC, P.O. Box 8907,
Wilmington, Delaware 19899-8907. Proceeds from the redemption of Series B
Shares will be reduced by the amount of any applicable contingent deferred
sales charge. Payment for Shares redeemed is made by check mailed within seven
days after acceptance by PFPC of the request and any other necessary documents
in proper order. Such payment may be postponed or the right of redemption
suspended as provided by the rules of the SEC. If the Shares to be redeemed
have been recently purchased by check, the Fund's transfer agent may delay the
payment of redemption proceeds, which may be a period of up to 15 days after
the purchase date, pending a determination that the check has cleared.
INVESTOR PROGRAMS
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EXCHANGE PRIVILEGE
After appropriate authorization, a shareholder may exchange, without a
sales charge, Series A Investor Shares and Series B Investor Shares of the
Portfolio for Series A Investor Shares and Series B Investor Shares,
respectively, of any other investment portfolio of the Fund at the net asset
value of each class of shares next determined after the transfer agent's
receipt of a request for an exchange. Series B Shares are exchangeable
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without the payment of any contingent deferred sales charge at the time the
exchange is made. In determining the holding period for calculating the
contingent deferred sales charge payable on redemptions of Series B Shares, the
holding period of the Series B Shares originally held will be added to the
holding period of the Series B Shares acquired through the exchange. Series B
Shares are exchangeable for Series B Investor Shares in the Fund's Money Market
Portfolio, but are not exchangeable for shares in the Fund's other money market
investment portfolios. No exchange fee is imposed by the Fund. The public
offering of Series B Investor Shares in certain investment portfolios of the
Fund may not commence on the date of this Prospectus. Prospectuses for the
other portfolios of the Fund and information on the availability of Series B
Investor Shares of such portfolios can be obtained by calling the Fund's
Distributor at (800) 422-6538.
A shareholder wishing to make an exchange may do so by sending a
written request to PFPC at the address given above in "How to Purchase
Shares--General." Shareholders are automatically provided with telephone
exchange privileges when opening an account, unless they indicate on the
Application that they do not wish to use this privilege. Shareholders holding
share certificates are not eligible to exchange Series A Shares by phone
because share certificates must accompany all exchange requests. To add this
feature to an existing account that previously did not provide for this option,
a Telephone Exchange Authorization Form must be filed with PFPC. This form is
available from PFPC. Once this election has been made, the shareholder may
simply contact PFPC by telephone at (800) 441-7762 (in Delaware call collect
(302) 791-1194) to request the exchange. During periods of substantial
economic or market change, telephone exchanges may be difficult to complete and
shareholders may have to submit exchange requests to PFPC in writing.
If the exchanging shareholder does not currently own shares of the
investment portfolio whose shares are being acquired, a new account will be
established with the same registration, dividend and capital gain options and
Authorized Dealer of record as the account from which shares are exchanged,
unless otherwise specified in writing by the shareholder with all signatures
guaranteed by an eligible guarantor institution as defined above. In order to
participate in the automatic investment program or establish a systematic
withdrawal plan for the new account, however, an exchanging shareholder must
file a specific written request. The exchange privilege may be modified or
terminated at any time, or from time to time, by the Fund on 60 days' notice to
affected Portfolio shareholders. THE FUND, THE ADMINISTRATORS AND THE
DISTRIBUTOR WILL NOT BE LIABLE FOR ANY LOSS, LIABILITY, COST OR EXPENSE FOR
ACTING UPON TELEPHONE INSTRUCTIONS THAT ARE REASONABLY BELIEVED TO BE GENUINE.
IN ATTEMPTING TO CONFIRM THAT
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TELEPHONE INSTRUCTIONS ARE GENUINE, THE FUND WILL USE SUCH PROCEDURES AS ARE
CONSIDERED REASONABLE, INCLUDING RECORDING THOSE INSTRUCTIONS AND REQUESTING
INFORMATION AS TO ACCOUNT REGISTRATION (SUCH AS THE NAME IN WHICH AN ACCOUNT IS
REGISTERED, THE ACCOUNT NUMBER, RECENT TRANSACTIONS IN THE ACCOUNT, AND THE
ACCOUNT HOLDER'S SOCIAL SECURITY NUMBER, ADDRESS AND/OR BANK).
In establishing a new account by exchange, the dollar value of shares
acquired must equal or exceed the investment portfolio's minimum for a new
account; if making an exchange to an existing account, the dollar value must
equal or exceed the Fund's minimum for subsequent investments. If any amount
remains in the investment portfolio from which the exchange is being made, such
amount must not drop below the minimum account value required by the Fund.
AUTOMATIC INVESTING
Investments in Shares may be made automatically by authorizing the
Fund's transfer agent to withdraw funds from your bank account. An initial
minimum investment of $50 per Portfolio, and subsequent investments of at least
$50, are required. Investors desiring to participate in the automatic
investing program should call PFPC at (800) 441-7762 (in Delaware call collect
(302) 791-1194) to obtain the appropriate forms.
RETIREMENT PLANS
Portfolio Shares may be purchased in conjunction with individual
retirement accounts ("IRAs") and rollover IRAs where PNC Bank or any of its
affiliates acts as custodian. For further information as to applications and
annual fees, contact the Distributor or an Authorized Dealer. To determine
whether the benefits of an IRA are available and/or appropriate, a shareholder
should consult with a tax adviser.
SYSTEMATIC WITHDRAWAL PLAN
If your account in the Portfolio has a value of at least $10,000, you
may establish a Systematic Withdrawal Plan with respect to the Portfolio and
receive regular periodic payments. A request to establish a Systematic
Withdrawal Plan must be submitted in writing to The PNC Fund c/o PFPC, P.O.
Box 8907, Wilmington, Delaware 19899-8907. Shareholders holding Series A Share
certificates are not eligible to establish a Systematic Withdrawal Plan because
Series A Share certificates must accompany all withdrawal requests. Each
withdrawal redemption may, at the shareholder's election, be processed either
monthly, every other month, quarterly, three times a year, semi-annually or
annually on or about the 25th of the month and mailed as soon as possible
thereafter. There are no service charges for maintenance; the minimum amount
that you may withdraw each period
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is $100. (This is merely the minimum amount allowed and should not be mistaken
for a recommended amount.) THE AMOUNT OF REGULAR PERIODIC PAYMENTS SPECIFIED
BY HOLDERS OF SERIES B SHARES PURSUANT TO A SYSTEMATIC WITHDRAWAL PLAN WILL BE
REDUCED BY ANY APPLICABLE DEFERRED SALES CHARGE. The holder of a Systematic
Withdrawal Plan will have any income dividends and any capital gains
distributions reinvested in full and fractional Shares at net asset value. To
provide funds for payment, Shares of the Portfolio will be redeemed in such
amount as is necessary to make the payment. Redemption of Shares may reduce or
possibly exhaust the Shares in your account, particularly in the event of a
market decline. As with other redemptions, a redemption to make a withdrawal
payment is a sale for Federal income tax purposes. Payments made pursuant to a
Systematic Withdrawal Plan cannot be considered as actual yield or income since
part of such payments may be a return of capital.
The maintenance of a Systematic Withdrawal Plan for the Portfolio
concurrently with purchases of additional Shares of the Portfolio may be
disadvantageous because of the sales commission involved in the additional
purchases. You will ordinarily not be allowed to make additional investments
of less than the aggregate annual withdrawals under the Systematic Withdrawal
Plan during the time you have the Systematic Withdrawal Plan in effect and,
while a Systematic Withdrawal Plan is in effect, you may not make periodic
investments under Automatic Investing. THE MAINTENANCE OF A SYSTEMATIC
WITHDRAWAL PLAN MAY ALSO BE DISADVANTAGEOUS FOR HOLDERS OF SERIES B SHARES DUE
TO THE EFFECT OF THE CONTINGENT DEFERRED SALES CHARGE. You will receive a
confirmation of each transaction showing the sources of the payment and the
Share and cash balance remaining in your Systematic Withdrawal Plan. The
Systematic Withdrawal Plan may be terminated on written notice by the
shareholder or by the Fund with respect to the Portfolio and it will terminate
automatically if all Shares are liquidated or withdrawn from the account or
upon the death or incapacity of the shareholder. You may change the amount and
schedule of withdrawal payments or suspend such payments by giving written
notice to PFPC at least seven business days prior to the end of the month
preceding a scheduled payment.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The net asset value for each Series A Share and the Series B Share of
the Portfolio is calculated as of the close of trading on the NYSE (currently
4:00 p.m. Eastern Time) on each Business Day by adding the value of all its
securities, cash and other assets allocable to its Series A and Series B
Shares, respectively, subtracting the liabilities allocable to its Series A and
Series B Shares, respectively, and dividing by the respective total number of
Series A and Series B Shares
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outstanding. The net asset values per Series A Share and per Series B Share of
the Portfolio are determined independently of the Portfolio's other classes and
independently of the Fund's other portfolios. Because the operating expenses
of Series B Shares are higher than those associated with Series A Shares, the
net asset value per Series A Share of the Portfolio will generally be higher
than the net asset value per Series B Share of the Portfolio.
Valuation of securities held by the Portfolio is as follows:
securities traded on a national securities exchange or on the NASDAQ National
Market System are valued at the last reported sale price that day; securities
traded on a national securities exchange or on the NASDAQ National Market
System for which there were no sales on that day and securities traded on other
over-the-counter markets for which market quotations are readily available are
valued at the mean of the bid and asked prices; an option or futures contract
is valued at the last sales price prior to 4:00 p.m. (Eastern Time), as quoted
on the principal exchange or board of trade on which such option or contract is
traded, or in the absence of a sale, the mean between the last bid and asked
prices prior to 4:00 p.m. (Eastern Time); and securities for which market
quotations are not readily available are valued at fair market value as
determined in good faith by or under the direction of the Fund's Board of
Trustees. The amortized cost method of valuation will also be used with
respect to debt obligations with sixty days or less remaining to maturity
unless the investment adviser and/or sub-adviser under the supervision of the
Board of Trustees determines such method does not represent fair value.
The Portfolio may use a pricing service, bank or broker/dealer
experienced in such matters to value the Portfolio's securities. A more
detailed discussion of net asset value and security valuation is contained in
the Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
- --------------------------------------------------------------------------------
The Portfolio will distribute substantially all of its net investment
income and net realized capital gains, if any, to shareholders. For dividend
purposes, the Portfolio's investment income available for distribution to
holders of Investor Shares is reduced by accrued expenses directly attributable
to the Portfolio and the general expenses of the Fund prorated to the Portfolio
on the basis of its relative net assets. The Portfolio's net investment income
available for distribution to the holders of Series A Shares and Series B
Shares will be reduced by the amount of other expenses allocated to such
respective series of the Portfolio's Investor Shares, including
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fees payable under the Fund's Plan. All distributions are reinvested at net
asset value in the form of additional full and fractional Shares of the
Portfolio unless an Institution elects otherwise. Such election, or any
revocation thereof, must be made in writing to PFPC, and will become effective
with respect to dividends paid after its receipt by PFPC. The net investment
income of the Portfolio is declared daily as a dividend to investors who are
Shareholders of the Portfolio at, and whose payment for Share purchases are
available to the Portfolio in Federal funds by, the close of business on the
day of declaration. All such dividends are paid within ten days after the end
of each month and within seven days after redemption of all of a shareholder's
Shares in the Portfolio. Net realized capital gains (including net short-term
capital gains), if any, will be distributed by the Portfolio at least annually.
TAXES
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The following discussion is only a brief summary of some of the
important tax considerations generally affecting the Portfolio and its
shareholders and is not intended as a substitute for careful tax planning.
Accordingly, investors in the Portfolio should consult their tax advisers with
specific reference to their own tax situation.
The Portfolio will elect to be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. So long
as the Portfolio qualifies for this tax treatment, it generally will be
relieved of Federal income tax on amounts distributed to shareholders, but
shareholders, unless otherwise exempt, will pay income or capital gains taxes
on amounts so distributed (except distributions that are treated as a return of
capital), regardless of whether such distributions are paid in cash or
reinvested in additional Shares.
Distributions paid out of the "net capital gain" (the excess of net
long-term capital gain over net short-term capital loss), if any, of the
Portfolio will be taxed to shareholders as long-term capital gain, regardless
of the length of time a shareholder has held his Shares and whether such gain
was reflected in the price paid for the Shares. All other distributions, to
the extent they are taxable, are taxed to shareholders as ordinary income.
The Fund will send written notices to shareholders annually regarding
the tax status of distributions made by the Portfolio. Dividends declared in
October, November or December of any year payable to shareholders of record on
a specified date in those months will be deemed to have been received by the
shareholders
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on December 31 of such year, if the dividends are paid during January of the
following year.
An investor considering buying shares of the Portfolio on or just
before the record date of a taxable dividend should be aware that the amount of
the forthcoming dividend payment, although in effect a return of capital, will
be taxable to him.
A taxable gain or loss may be realized by a shareholder upon his
redemption, transfer or exchange of Portfolio Shares depending upon the tax
basis of such Shares and their price at the time of redemption, transfer or
exchange.
Future legislative or administrative changes or court decisions may
materially affect the tax consequences of investing in one or more Portfolios
of the Fund. Shareholders are also urged to consult their tax advisers
concerning the application of state and local income taxes to investments in
the Fund which may differ from the Federal income tax consequences described
above. Shareholders who are nonresident alien individuals, foreign trusts or
estates, foreign corporations or foreign partnerships may be subject to
different U.S. Federal income tax treatment and should consult their tax
advisers.
DESCRIPTION OF SHARES
- --------------------------------------------------------------------------------
The Fund was organized as a Massachusetts business trust on December
22, 1988 and is registered under the 1940 Act as an open-end management
investment company. The Declaration of Trust authorizes the Board of Trustees
to classify and reclassify any unissued shares into one or more classes of
shares. Pursuant to such authority, the Board of Trustees has authorized the
issuance of an unlimited number of shares in each of 109 classes (22 classes of
"Series B Investor Shares" and 29 classes each of "Institutional Shares,"
"Service Shares" and "Series A Investor Shares") representing interests in the
Fund's investment portfolios. This Prospectus describes the Core Fixed Income
Portfolio, which is classified as a diversified company under the 1940 Act.
For information regarding other portfolios of the Fund, contact the Distributor
by phone at (800) 998-7633 or at the address listed in "Purchase and Redemption
of Shares--Distributor."
Each share of an investment portfolio has a par value of $.001,
represents an equal proportionate interest in the portfolio and is entitled to
such dividends and distributions earned on the portfolio's assets as are
declared in the discretion of the Board of Trustees. The Fund's shareholders
are entitled to one vote for each full share held and proportionate fractional
votes for fractional shares held, and will vote in the
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aggregate and not by class, except where otherwise required by law or when the
Board of Trustees determines that the matter to be voted upon affects only the
interests of the shareholders of a particular class or investment portfolio.
Under Massachusetts law, the Fund's state of organization, and the Fund's
Declaration of Trust and Code of Regulations, the Fund is not required and does
not currently intend to hold annual meetings of shareholders for the election
of trustees (except as required under the 1940 Act). For a further discussion
of the voting rights of shareholders, see "Additional Information Concerning
Shares" in the Statement of Additional Information.
Holders of Investor Shares bear the fees described under "Distribution
of Shares" that are paid under the Plan. Similarly, holders of a Portfolio's
Service Shares bear the expense of fees described in the prospectus for such
shares that are paid under the Fund's Plan. Payments under the Plan with
respect to Service Shares will cover expenses relating to the support services
provided to beneficial owners of Service Shares by certain institutions. Such
services are intended to supplement the services provided by the Fund's
Administrators and transfer agent to the Fund's shareholders of record. In
consideration for payment of up to .15% (on an annualized basis) of the average
daily net asset value of Service Shares owned beneficially by their customers,
institutions may provide one or more of the following services to such
customers: processing purchase and redemption requests from customers and
placing orders with the Fund's transfer agent or the Distributor; processing
dividend payments from the Fund on behalf of customers; providing
sub-accounting with respect to Service Shares beneficially owned by customers
or the information necessary for sub-accounting; and other similar services.
In consideration for payment of a service fee of up to a separate .15% (on an
annualized basis) of the average daily net asset value of Service Shares owned
beneficially by their customers, institutions may provide one or more of these
additional services to such customers: responding to customer inquiries
relating to the services performed by the institution and to customer inquiries
concerning their investments in Service Shares; providing information
periodically to customers showing their positions in Service Shares; and other
similar shareholder liaison services. Institutional Shares bear no shareholder
servicing or distribution fees. As a result of these different fees, the net
asset value and the net yields on the Fund's Institutional Shares will
generally be higher than those on the Fund's Service Shares, the net asset
value and the net yields on the Fund's Service Shares will generally be higher
than those on the Fund's Series A Investor Shares, and the net asset value and
the net yields on the Fund's Series A Investor Shares will generally be higher
than those on the Fund's Series B Investor Shares if payments by the Portfolios
under the Plan are made at the maximum rates. Standardized total return and
yield
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quotations will be computed separately for each class of Shares. Series A and
Series B Investor Shares are exchangeable at the option of the holder for
Series A and Series B Investor Shares, respectively, in the Fund's other
investment portfolios. Series B Investor Shares are exchangeable for Series B
Investor Shares in the Fund's Money Market Portfolio, but are not exchangeable
for shares in the Fund's other money market investment portfolios. Series A
Investor Shares of the Portfolio are offered to the public at the net asset
value per share plus a maximum sales charge of 4.50% of the offering price on
single purchases of less than $50,000; the sales charge is reduced on a
graduated scale on single purchases of $50,000 or more and certain exemptions
from the sales charge may apply. The sales charge does not apply to exchanges
of Series A Investor Shares among the Portfolios. Series B Investor Shares are
subject to a maximum contingent deferred sales charge of 5.0%. The deferred
sales charge decreases over time. Series B Investor Shares may be exchanged
for Series B Investor Shares of another investment portfolio of the Fund
without the payment of any deferred sales charge at the time the exchange is
made. Because Service Shares and Institutional Shares are sold without a sales
charge, holders of Service Shares and Institutional Shares have no such
exchange privileges.
On September 29, 1995, PNC Bank held of record approximately 79% of
the Fund's outstanding shares, and may be deemed a controlling person of the
Fund under the 1940 Act. PNC Bank is a subsidiary of PNC Bank Corp., a
multi-bank holding company.
THIS PROSPECTUS AND THE STATEMENT OF ADDITIONAL INFORMATION
INCORPORATED HEREIN BY REFERENCE RELATE PRIMARILY TO THE FUND'S INVESTOR SHARES
AND DESCRIBE ONLY THE INVESTMENT OBJECTIVES, POLICIES, OPERATIONS, CONTRACTS
AND OTHER MATTERS PERTAINING TO THE INVESTOR SHARES.
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OTHER INFORMATION
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REPORTS AND INQUIRIES
Shareholders will receive unaudited semi-annual financial statements
and annual financial statements audited by independent accountants.
Shareholder inquiries should be addressed to the Fund c/o PFPC, P.O. Box 8950,
Wilmington, Delaware 19885-9628, toll-free (800) 441-7764 (in Delaware call
collect (302) 791-1104).
PERFORMANCE INFORMATION
From time to time, total return and yield data for Series A Shares and
Series B Shares of the Portfolio may be quoted in advertisements or in
communications to shareholders. Total return will be calculated on an average
annual total return basis for various periods. Average annual total return
reflects the average annual percentage change in value of an investment in
Shares of the Portfolio over the measuring period. This method of calculating
total return assumes that dividends and capital gain distributions made by the
Portfolio during the period relating to Shares are reinvested in Shares of the
same series, and also reflects the maximum sales load charged by the Portfolio.
When, however, the Portfolio compares the total return of Shares to that of
other funds or relevant indexes, such total return may also be computed without
reflecting the sales load so long as the sales load is stated separately in
connection with the comparison.
The yield of Shares of the Portfolio are computed based on the net
income of the Portfolio allocated to such Shares during a 30-day (or one month)
period, which period will be identified in connection with the particular yield
quotation. More specifically, the yield of Shares of the Portfolio is computed
by dividing the Portfolio's net income per share allocated to such Shares
during a 30-day (or one month) period by the net asset value per share on the
last day of the period and annualizing the result on a semi-annual basis.
Performance data of Shares of the Portfolio may be compared to those
of other mutual funds with similar investment objectives and to other relevant
indexes or to ratings or rankings prepared by independent services or other
financial or industry publications that monitor the performance of mutual
funds. In addition, certain indexes may be used to illustrate historic
performance of select asset classes. For example, the total return and/or
yield of Shares of the Portfolio may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Weisenberger
Investment Company Service, and with the performance of the Lehman Brothers
Aggregate Index,
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<PAGE> 439
the T-Bill Index and the "stocks, bonds and inflation Index" published annually
by Ibbotson Associates. Performance information may also include evaluations
of the Portfolio and their Shares published by nationally recognized ranking
services and information as reported by financial publications such as Business
Week, Fortune, Institutional Investor, Money Magazine, Forbes, Barron's, The
Wall Street Journal and The New York Times, or in publications of a local or
regional nature.
In addition to providing performance information that demonstrates the
actual yield or returns of Series A Shares and Series B Shares of the Portfolio
over a particular period of time, the Portfolio may provide certain other
information demonstrating hypothetical investment returns. Such information
may include, but is not limited to, illustrating the compounding effects of a
dividend in a dividend reinvestment plan or the impact of tax-deferred
investing.
Performance quotations of Shares of the Portfolio represent past
performance and should not be considered as representative of future results.
The investment return and principal value of an investment in Shares of the
Portfolio will fluctuate so that a shareholder's Shares, when redeemed, may be
worth more or less than their original cost. Since performance will fluctuate,
performance data for Shares of the Portfolio cannot necessarily be used to
compare an investment in such Shares with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that
performance is generally a function of the kind and quality of the instruments
held in the portfolio, portfolio maturity, operating expenses and market
conditions. Any fees charged by Service Organizations directly to their
customer accounts in connection with investments in Shares will not be included
in the Portfolio's calculations of yield and total return.
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APPENDIX A
PORTFOLIO BENCHMARK
LEHMAN BROTHERS AGGREGATE INDEX. The Lehman Brothers Aggregate Index
is made up of the Lehman Brothers Government/Corporate Bond Index, the Lehman
Brothers Mortgage-Backed Securities Index and the Lehman Brothers Asset-Backed
Securities Index and is intended to be representative of the investment grade,
publicly issued, fixed-rate, U.S. fixed income market. These indices include
fixed-rate debt issues rated investment grade or higher by Moody's, S&P or
Fitch Investor's Service. All issues have at least one year to maturity and an
outstanding par value of $100 million for U.S. Government issues and $50
million for all others. The Lehman Brothers Government/Corporate Bond Index
includes the Lehman Brothers Government Bond Index and the Lehman Brothers
Corporate Bond Index. The Lehman Brothers Government Bond Index is made up of
all public obligations of the U.S. Treasury, U.S. Government agencies and
quasi-governmental corporations, and corporate debt guaranteed by the U.S.
Government. The Lehman Brothers Corporate Bond Index includes all publicly
issued, fixed-rate, non-convertible investment grade domestic corporate debt,
as well as Yankee bonds which are dollar denominated, Securities and Exchange
Commission registered, public, non-convertible debt obligations issued or
guaranteed by foreign sovereign governments, municipalities or governmental or
international agencies. The Lehman Brothers Mortgage-Backed Securities Index
is comprised of all fixed-rate securities backed by mortgage pools of the GNMA,
FNMA and FHLMC. Graduated Payment Mortgages ("GPMs") are included, but
Graduated Equity Mortgages ("GEMs") are not. The Lehman Brothers Asset-Backed
Securities Index includes all publicly issued, non-callable fixed-rate
asset-backed securities (excluding subordinated trenches) backed by automobile,
credit card and fixed-rate home equity loans. At December 31, 1994, the
Aggregate Index was comprised of 4,854 issues with a market value of $3.9
trillion. It had a duration of 4.67 years as of that date. On a market value
basis, the Government, Corporate, Mortgage-Backed and Asset-Backed Indices
accounted for 53.85%, 16.03%, 28.89% and 1.23% of the Aggregate Index,
respectively.
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APPENDIX B
CORPORATE BOND, MORTGAGE-BACKED SECURITY
AND COMMERCIAL PAPER RATINGS
CORPORATE BONDS AND MORTGAGE-BACKED SECURITIES
MOODY'S. Bonds rated Aa by Moody's are judged by Moody's to be of
high quality by all standards. Together with bonds rated Aaa (Moody's highest
rating), they comprise what are generally known as high-grade bonds. Aa bonds
are rated lower than Aaa bonds because margins of protection may not be as
large as those of Aaa bonds, or fluctuations of protective elements may be of
greater amplitude, or there may be other elements present which make the
long-term risks appear somewhat larger than those applicable to Aaa securities.
Bonds that are rated A by Moody's possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some time in the future.
Bonds rated Baa by Moody's are considered by Moody's to be 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. Baa bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
S&P. Bonds rated AA by S&P are judged by S&P to have a very strong
capacity to pay interest and repay principal and differ only in a small degree
from issues rated AAA. Bonds rated AAA have the highest rating assigned by
S&P, and the capacity to pay interest and repay principal is extremely strong.
Bonds rated A by S&P have a strong capacity to pay interest and repay
principal, although they are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions. Bonds rated BBB by S&P
are regarded by S&P as having an adequate capacity to pay interest and repay
principal. Whereas BBB bonds normally exhibit adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
The process of determining ratings for Mortgage-Backed securities by
Moody's and S&P includes consideration of the credit quality of the underlying
collateral, including any credit support providers, structural and legal
aspects associated with the securities, and the likelihood that the payment
stream on the mortgage pool is adequate to make payments that investors are
entitled to under the securities. Neither of such ratings represents an
assessment of the likelihood that principal prepayments will be made by
mortgagors or the degree to which such prepayments may differ from that
originally anticipated, nor does it address the possibility that investors may
suffer a lower
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than anticipated yield or that investors in such securities may fail to recoup
fully their initial investment due to prepayments.
COMMERCIAL PAPER
MOODY'S. Moody's employs the Prime rating for investment grade senior
short-term debt obligations. Issuers within the Prime category are given
ratings 1, 2 or 3, depending on the relative strengths of certain factors.
Issuers rated Prime-1, the highest category, have a superior ability for
repayment which will often be evidenced by many of the following
characteristics: (1) leading market positions in well established industries;
(2) high rates of return on funds employed; (3) conservative capitalization
structure with moderate reliance on debt and ample asset protection; (4) broad
margins in earnings coverage of fixed financial charges and high internal cash
generation; and (5) well established access to a range of financial markets and
assured sources of alternative liquidity.
S&P. Ratings are graded into four categories, ranging from A for the
highest quality obligations to D for the lowest. Issues rated A are regarded
as having the greatest capacity for timely payment. Issues in this category
are further refined with the designations 1, 2 and 3 to indicate the relative
degree of safety. Issues rated A-1, the highest category, have a strong degree
of safety regarding timely payment.
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<PAGE> 443
APPENDIX C
GENERAL CHARACTERISTICS AND RISKS OF HEDGING TRANSACTIONS
PUT AND CALL OPTIONS
A put option gives the purchaser of the option the right to sell and
the writer the obligation to buy the underlying security at the exercise price
during the option period. The purchase of a put option on a debt security
would generally be designed to protect the Portfolio's holdings in a security
against a substantial decline in market value. A call option gives the
purchaser of the option the right to buy and the writer the obligation to sell
the underlying security at the exercise price during the option period. The
purchase of a call option on a security would generally be intended to protect
the Portfolio against an increase in the price of a security that it intended
to purchase in the future. The Portfolio may also write put and call options.
The premium that the Portfolio receives for writing the option will serve as a
partial hedge, in the amount of the option premium, against changes in the
value of the securities in its portfolio. The Portfolio is authorized to
purchase exchange listed options and over-the-counter options ("OTC Options").
Listed options are issued by the Options Clearing Corporation ("OCC"), which
guarantees the performance of the obligations of the parties to such options.
The Portfolio's ability to close out its position as a purchaser or
seller of an exchange-listed put or call option is dependent upon the existence
of a liquid secondary market on option exchanges. Among the possible reasons
for the absence of a liquid secondary market on an exchange are: (i)
insufficient trading interest in certain options; (ii) restrictions on
transactions imposed by an exchange; (iii) trading halts, suspensions or other
restrictions imposed with respect to particular classes or series of options or
underlying securities; (iv) interruption of the normal operations on an
exchange; (v) inadequacy of the facilities of an exchange or OCC to handle
current trading volume; or (vi) a decision by one or more exchanges 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
on that exchange that had been listed by the OCC as a result of trades on that
exchange would generally continue to be exercisable in accordance with their
terms.
OTC Options are purchased from or sold to dealers or financial
institutions which have entered into direct agreements with the Portfolios.
With OTC Options, such variables as expiration date, exercise price and premium
will be agreed upon between the Portfolio and the transacting dealer, without
the intermediation of a third party such as the OCC. If the transacting dealer
fails to make or take delivery of the securities underlying an option it has
written, in accordance with the terms of that option, the Portfolio would lose
the premium paid for the option as well as any anticipated benefit of
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the transaction. The Portfolio will engage in OTC Option transactions only
with primary United States government securities dealers recognized by the
Federal Reserve Bank in New York.
The hours of trading for options on debt securities may not conform to
the hours during which the underlying securities are traded. To the extent
that the option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying markets
that will not be reflected in the option markets.
FUTURES CONTRACTS AND RELATED OPTIONS
The Portfolio may purchase and sell exchange-traded financial futures
contracts or purchase and sell put and call options of such futures as a hedge
against anticipated interest rate or currency changes. The sale of a futures
contract creates an obligation by the Portfolio, as seller, to deliver the
specific type of financial instrument called for in the contract at a specified
future time for a specified price. Options on futures contracts are similar to
options on securities except that 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 (a long position if the option is a call and a short position
if the option is a put).
Typically, investment in futures contracts requires the Portfolio to
deposit with a financial intermediary as security for its obligations an amount
of cash or other specified debt securities which initially is 1% to 5% of the
face amount of the contract (but may be higher in some circumstances) and which
thereafter fluctuates on a periodic basis as the value of the contract
fluctuates. Investment in options involves payment of a premium for the option
without any further obligation on the part of the Portfolio. Accordingly, the
daily deposit requirements in futures contracts create an ongoing greater
potential financial risk than do options transactions, where the exposure is
limited to the cost of the initial premium. Transactions may be settled by
entering into an offsetting transaction, and are subject to the risk that the
position may not be able to be closed if no offsetting transaction can be
arranged.
The Portfolio will not engage in transactions in futures contracts or
related options for speculative purposes but only as a hedge against changes
resulting from market conditions in the values of securities in its portfolio.
In addition, the Portfolio will not enter into a futures contract or related
option (except for closing transactions) if, immediately thereafter, the sum of
its annual deposits and premiums on open contracts and options would exceed 5%
of the Portfolio's total assets (taken at current value); provided, however,
that in the case of an option that is in-the-money at the time of the purchase,
the in-the-money amount may be excluded in calculating the 5% limitation.
Also, assets consisting of cash, U.S. Government securities or other liquid
high-grade debt obligations
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will be segregated with the custodian and marked to market in an amount equal
to the market value of the contract.
GENERAL RISKS OF HEDGING TRANSACTIONS
Hedging Transactions present certain additional risks. In particular,
the variable degree of correlation between price movements of hedging
instruments and price movements in the position being hedged creates the
possibility that losses on the hedge may be greater than gains in the value of
the Portfolio's position. In addition, certain hedging instruments and markets
may not be liquid in all circumstances. As a result, in volatile markets, the
Portfolio may not be able to close out a transaction without incurring losses
substantially greater than the initial deposit. Although the contemplated use
of these instruments should tend to minimize the risk of loss due to a decline
in the value of the hedged position, at the same time they tend to limit any
potential gain which might result from an increase in the value of such
position. Losses due to Hedging Transactions will reduce net asset value. The
ability of the Portfolio to hedge successfully will depend on BlackRock's
ability to predict pertinent market movements, which cannot be assured. The
Portfolio's ability to enter into Hedging Transactions may be limited by the
Internal Revenue Code's requirements for qualification as a regulated
investment company. See "Taxes, Dividends and Distributions" in the Statement
of Additional Information.
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<TABLE>
<S> <C> <C>
The Core Fixed
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR Income
MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS Portfolio
PROSPECTUS, OR IN THE STATEMENT OF ADDITIONAL INFORMATION
INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE Investor
FUND OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH Class
OFFERING MAY NOT LAWFULLY BE MADE.
------------------- Prospectus
</TABLE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . ______________, 1995
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . .
Investment Policies . . . . . . . . . . . . . . . . . . . . . . . .
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase and Redemption Shares . . . . . . . . . . . . . . . . . .
Net Asset Value . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends and Distributions . . . . . . . . . . . . . . . . . . . .
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Description of Shares . . . . . . . . . . . . . . . . . . . . . . .
Other Information . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
INVESTMENT ADVISER
PNC Asset Management Group, Inc.
Philadelphia, Pennsylvania
SUB-ADVISER
BlackRock Financial Management Inc.
New York, New York
CO-ADMINISTRATOR
PNC Mutual Fund Company
New York, New York
CO-ADMINISTRATOR AND TRANSFER AGENT
PFPC Inc.
Wilmington, Delaware
CO-ADMINISTRATOR AND DISTRIBUTOR
Provident Distributors, Inc.
Radnor, Pennsylvania
COUNSEL
Drinker Biddle & Reath
Philadelphia, Pennsylvania
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand, L.L.P.
Philadelphia, Pennsylvania
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THE PNC(R) FUND
STATEMENT OF ADDITIONAL INFORMATION
CORE FIXED INCOME PORTFOLIO
This Statement of Additional Information provides supplementary
information pertaining to shares ("Shares") representing interests in the Core
Fixed Income Portfolio (the "Portfolio") of The PNC Fund (the "Fund"). This
Statement of Additional Information is not a prospectus, and should be read
only in conjunction with the Prospectus of the Fund relating to the Portfolio
dated ____________, as amended from time to time (the "Prospectus"). The
Prospectus may be obtained from the Fund's distributor by calling toll-free
(800) 441-7379. This Statement of Additional Information is dated
____________. Capitalized terms used herein and not otherwise defined have the
same meanings as are given to them in the Prospectus.
CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
THE FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INVESTMENT POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TRUSTEES AND OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INVESTMENT ADVISORY, ADMINISTRATION,
DISTRIBUTION AND SERVICING ARRANGEMENTS . . . . . . . . . . . . . . . . . . . . . .
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PURCHASE AND REDEMPTION INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . .
VALUATION OF PORTFOLIO SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . .
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ADDITIONAL INFORMATION CONCERNING SHARES . . . . . . . . . . . . . . . . . . . . . .
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
APPENDIX A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS STATEMENT OF ADDITIONAL INFORMATION OR
THE PROSPECTUS IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE FUND OR ITS DISTRIBUTOR. THE PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY THE FUND OR BY THE FUND'S DISTRIBUTOR IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
<PAGE> 448
THE FUND
The Fund was organized on December 22, 1988 as a Massachusetts business
trust. The Portfolio originally commenced operations on December 9, 1992 as a
separate investment portfolio (the "Predecessor Portfolio") of The BFM
Institutional Trust, which was organized as a Maryland corporation. On
______________, 1995 the assets and liabilities of the Predecessor Portfolio
were transferred to the Portfolio, which had no prior operating history.
The Fund also offers other investment portfolios which are described in
separate Prospectuses and Statements of Additional Information. For
information concerning these other portfolios contact the distributor at the
telephone number stated on the cover page of this Statement of Additional
Information.
INVESTMENT POLICIES
The following supplements information contained in the Prospectus
concerning the Portfolio's investment policies. A description of applicable
credit ratings is set forth in Appendix A hereto. The information below
relates only to the Portfolio.
U.S. GOVERNMENT SECURITIES
U.S. Government securities include:
(1) U.S. Treasury bills (maturities of one year or less), U.S.
Treasury notes (maturities of one to ten years) and U.S. Treasury
bonds (generally maturities of greater than ten years), all of which
are direct obligations of the U.S Government and, as such, are backed
by the "full faith and credit" of the United States.
(2) Securities issued by agencies and instrumentalities of the
U.S. Government which are backed by the full faith and credit of the
United States. Among the agencies and instrumentalities issuing such
obligations are the Federal Housing Administration, the Government
National Mortgage Association ("GNMA"), the Department of Housing and
Urban Development, the Export-Import Bank, the Farmers Home
Administration ("FHA"), the General Services Administration, the
Maritime Administration and the Small Business Administration. The
maturities of such obligations range from three months to 30 years.
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(3) Securities issued by agencies and instrumentalities which are
not backed by the full faith and credit of the United States, but whose
issuing agency or instrumentality may borrow, to meet its obligations,
from the U.S. Treasury. Among the agencies and instrumentalities
issuing such obligations are the Tennessee Valley Authority, the
Federal National Mortgage Association ("FNMA"), the Federal Home Loan
Mortgage Corporation ("FHLMC") and the U.S. Postal Service.
(4) Securities issued by agencies and instrumentalities which are
not backed by the full faith and credit of the United States, but which
are backed by the credit of the issuing agency or instrumentality.
Among the agencies and instrumentalities issuing such obligations are
the Federal Farm Credit System and the Federal Home Loan Bank.
Neither the value nor the yield of the Portfolio's shares or of the
U.S. Government securities which may be invested in by the Portfolio are
guaranteed by the U.S. Government. Such value and yield will fluctuate with
changes in prevailing interest rates and other factors. Generally, as
prevailing interest rates rise, the value of any U.S. Government securities
held by the Portfolio will fall. Such securities with longer maturities
generally tend to produce higher yields and are subject to greater market
fluctuation as a result of changes in interest rates than debt securities with
shorter maturities.
The Portfolio may also purchase "zero coupon" Treasury securities.
These are U.S. Treasury bills, notes and bonds which have been stripped of
their unmatured interest coupons or which are certificates representing
interests in such stripped debt obligations. Such securities are purchased at
a discount from their face amount giving the purchaser the right to receive
their full value at maturity. A zero coupon security pays no interest to its
holder during its life. Its value to an investor consists of the difference
between its face value at the time of maturity and the price for which it was
acquired, which is generally an amount significantly less than its face value
(sometimes referred to as a "deep discount" price).
The interest rate on such securities is automatically compounded and
paid out at maturity. While such compounding at a constant rate eliminates
the risk of receiving lower yields upon reinvestment of interest if prevailing
interest rates decline, the owner of a zero coupon security will be unable to
participate in higher yields upon reinvestment of interest received if
prevailing interest rates rise. For this reason, zero coupon securities are
subject to substantially greater market price fluctuations during periods of
changing prevailing interest rates than are comparable debt securities which
make
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current distributions of interest. Current federal tax law requires that a
holder (such as the Portfolio) of a zero coupon security accrue a portion of
the discount at which the security was purchased as income each year even
though the Portfolio receives no interest payments in cash on the security
during the year.
Currently the only U.S. Treasury security issued without coupons is the
Treasury bill. However, a number of banks and brokerage firms have separated
(stripped) the principal portions from the coupon portions of U.S. Treasury
bonds and notes and sold them separately in the form of receipts or
certificates representing undivided interests in these instruments. These
instruments are generally held by a bank in a custodial or trust account.
MORTGAGE-BACKED SECURITIES
As discussed in the Prospectus, the Mortgage-Backed securities
purchased by the Portfolio evidence an interest in a specific pool of
mortgages. Such securities are issued by GNMA, FNMA and FHLMC and by private
issuers, such as depository institutions, mortgage banks, investment banks and
special purpose subsidiaries of the foregoing.
GNMA CERTIFICATES. GNMA is a wholly-owned corporate instrumentality of
the United States within the Department of Housing and Urban Development. The
National Housing Act of 1934, as amended (the "Housing Act"), authorized GNMA
to guarantee the timely payment of the principal of and interest on
certificates that are based on and backed by a pool of mortgage loans insured
by the Federal Housing Administration under the Housing Act, or Title V of the
Housing Act of 1949 ("FHA Loans"), or guaranteed by the Veterans'
Administration under the Servicemen's Readjustment Act of 1944, as amended ("VA
Loans"), or by pools of other eligible mortgage loans. The Housing Act
provides that the full faith and credit of the U.S. Government is pledged to
the payment of all amounts that may be required to be paid under the guarantee.
In order to meet its obligations under such guarantee, GNMA is authorized to
borrow from the U.S. Treasury with no limitations as to amount.
The GNMA certificates will represent a pro-rata interest in one or more
pools of the following types of mortgage loans: (i) fixed rate level payment
mortgage loans; (ii) fixed rate graduated payment mortgage loans; (iii) fixed
rate growing equity mortgage loans; (iv) fixed rate mortgage loans secured by
manufactured (mobile) homes; (v) mortgage loans on multifamily residential
properties under construction; (vi) mortgage loans on completed multifamily
projects; (vii) fixed rate mortgage loans as to which escrowed funds are used
to reduce the borrower's
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monthly payments during the early years of the mortgage loans ("buydown"
mortgage loans); (viii) mortgage loans that provide for adjustments in payments
based on periodic changes in interest rates or in other payment terms of the
mortgage loans; and (ix) mortgage- backed serial notes. All of these mortgage
loans will be FHA Loans or VA Loans and, except as otherwise specified above,
will be fully-amortizing loans secured by first liens on one-to four-family
housing units.
FNMA CERTIFICATES. FNMA is a federally chartered and privately owned
corporation organized and existing under the Federal National Mortgage
Association Charter Act. FNMA was originally established in 1938 as a U.S.
Government agency to provide supplemental liquidity to the mortgage market and
was transformed into a stockholder owned and privately managed corporation by
legislation enacted in 1968. FNMA provides funds to the mortgage market
primarily by purchasing home mortgage loans from local lenders, thereby
replenishing their funds for additional lending. FNMA acquires funds to
purchase home mortgage loans from many capital market investors that may not
ordinarily invest in mortgage loans directly, thereby expanding the total
amount of funds available for housing.
Each FNMA certificate will entitle the registered holder thereof to
receive amounts representing such holder's pro-rata interest in scheduled
principal payments and interest payments (at such FNMA certificate's
pass-through rate, which is net of any servicing and guarantee fees on the
underlying mortgage loans), and any principal prepayments on the mortgage loans
in the pool represented by such FNMA certificate and such holder's
proportionate interest in the full principal amount of any foreclosed or
otherwise finally liquidated mortgage loan. The full and timely payment of
principal of and interest on each FNMA certificate will be guaranteed by FNMA,
which guarantee is not backed by the full faith and credit of the U.S.
Government.
Each FNMA certificate will represent a pro-rata interest in one or more
pools of FHA Loans, VA Loans or conventional mortgage loans (i.e., mortgage
loans that are not insured or guaranteed by any governmental agency) of the
following types: (i) fixed rate level payment mortgage loans; (ii) fixed rate
graduated payment mortgage loans; and (iii) adjustable rate mortgage loans.
FHLMC CERTIFICATES. FHLMC is a corporate instrumentality of the United
States created pursuant to the Emergency Home Finance Act of 1970, as amended
(the "FHLMC Act"). FHLMC was established primarily for the purpose of
increasing the availability of mortgage credit for the financing of needed
housing. The principal activity of FHLMC currently consists of the purchase of
first lien, conventional, residential mortgage loans and participation
interests in such mortgage loans and the resale of
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the mortgage loans so purchased in the form of mortgage securities, primarily
FHLMC certificates.
FHLMC guarantees to each registered holder of a FHLMC certificate the
timely payment of interest at the rate provided for by such FHLMC certificate,
whether or not received. FHLMC also guarantees to each registered holder of a
FHLMC certificate ultimate collection of all principal of the related mortgage
loans, without any offset or deduction, but does not, generally, guarantee the
timely payment of scheduled principal. FHLMC may remit the amount due on
account of its guarantee of collection of principal at any time after default
on an underlying mortgage loan, but not later than 30 days following (i)
foreclosure sale, (ii) payment of a claim by any mortgage insurer or (iii) the
expiration of any right of redemption, whichever occurs later, but in any event
no later than one year after demand has been made upon the mortgagor for
accelerated payment of principal. The obligations of FHLMC under its guarantee
are obligations solely of FHLMC and are not backed by the full faith and credit
of the U.S. Government.
FHLMC certificates represent a pro-rata interest in a group of mortgage
loans (a "FHLMC certificate group") purchased by FHLMC. The mortgage loans
underlying the FHLMC certificates will consist of fixed rate or adjustable rate
mortgage loans with original terms to maturity of between ten and thirty years,
substantially all of which are secured by first liens on one- to four-family
residential properties or multifamily projects. Each mortgage loan must meet
the applicable standards set forth in the FHLMC Act. A FHLMC certificate group
may include whole loans, participation interests in whole loans and undivided
interests in whole loans and participations comprising another FHLMC
certificate group.
COLLATERALIZED MORTGAGE OBLIGATIONS. In reliance on a Securities and
Exchange Commission ("SEC") interpretation, the Portfolio's investments in
certain qualifying collateralized mortgage obligations ("CMOs"), including CMOs
that are treated as Real Estate Mortgage Investment Conduits ("REMICs"), are
not subject to the limitations in the Investment Company Act of 1940 (the "1940
Act") on acquiring interests in other investment companies. In order to be
able to rely on the SEC's interpretation, the CMOs must be unmanaged,
fixed-asset issuers, that (a) invest primarily in mortgage-backed securities,
(b) do not issue redeemable securities, (c) operate under general exemptive
orders exempting them from all provisions of the 1940 Act, and (d) are not
registered or regulated under the 1940 Act as investment companies. To the
extent that the Portfolio selects CMOs that do not meet the above requirements,
the Portfolio will be subject to the limitations on acquiring
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interests in other investment companies described in "Investment Restrictions"
below.
ILLIQUID SECURITIES
The Portfolio may not invest more than 15% of its net assets in
repurchase agreements which have a maturity of longer than seven days or in
other illiquid securities, including securities that are illiquid by virtue of
the absence of a readily available market or legal or contractual restrictions
on resale. Repurchase agreements subject to demand are deemed to have a
maturity equal to the notice period.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities Act").
Securities which have not been registered under the Securities Act are referred
to as private placements or restricted securities and are purchased directly
from the issuer or in the secondary market. Mutual funds, like the Portfolio,
do not typically hold a significant amount of these 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.
In recent years, a large institutional market has developed for certain
securities that are not registered under the Securities Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities, and corporate bonds and notes. Institutional investors depend on
an efficient institutional market in which the unregistered security can be
readily resold or on an issuer's ability to honor a demand for repayment. The
fact that there are contractual or legal restrictions on resale to the general
public or to certain institutions may not be indicative of the liquidity of
such investments.
The SEC has adopted Rule 144A which allows for a broader institutional
trading market for securities otherwise subject to restrictions on resale to
the general public. Rule 144A establishes a "safe harbor" from the
registration requirements of the Securities Act for resales of certain
securities to qualified institutional buyers.
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Under guidelines adopted by the Board of Trustees pursuant to
requirements established by the SEC, BlackRock may determine that restricted
securities issued pursuant to Rule 144A under the Securities Act may be liquid.
BlackRock will monitor the liquidity of such restricted securities subject to
the supervision of the Board of Trustees. In reaching liquidity decisions,
BlackRock will 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 (e.g., the time needed to dispose of the security,
the method of soliciting offers and the mechanics of the transfer).
OTHER INVESTMENT STRATEGIES
INTEREST RATE TRANSACTIONS
The Portfolio may enter into interest rate swaps, caps and floors on
either an asset-based or liability-based basis, depending on whether it is
hedging its assets or its liabilities, and will usually enter into interest
rate swaps on a net basis, i.e., the two payment streams are netted out, with
the Portfolio receiving or paying, as the case may be, only the net amount of
the two payments. The Portfolio will accrue the net amount of the excess, if
any, of its obligations over its entitlements with respect to each interest
rate swap on a daily basis and will deliver an amount of cash, U.S. Government
securities or liquid high-grade debt securities having an aggregate net asset
value at least equal to the accrued excess to a custodian that satisfies the
requirements of the 1940 Act.
The Portfolio will enter into interest rate swap, cap and floor
transactions only with institutions deemed the creditworthy by BlackRock. If
there is a default by the other party to such a transaction, the Portfolio will
have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals
and as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Caps and floors are more recent
innovations for which standardized documentation has not yet been developed
and, accordingly, they are less liquid than swaps.
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OPTIONS AND FUTURES TRANSACTIONS
PUT AND CALL OPTIONS. The Portfolio may purchase listed and
over-the-counter call and put options ("OTC options") in amounts equaling up to
10% of its total assets. The Portfolio may purchase put options on securities
which it holds (or has the right to acquire) in its portfolio to protect itself
against a decline in the value of the securities. If the value of the
underlying security were to fall below the exercise price of the put purchased
in an amount greater than the premium paid for the option, the Portfolio would
incur no additional loss. In addition, the Portfolio may sell a put option
which it has previously purchased prior to the sale of the securities
underlying such option. Such a sale would result in a net gain or loss
depending on whether the amount received on the sale is more or less than the
premium and other transaction costs paid on the put option which is sold. Any
such gain or loss could be offset in whole or in part by a change in the market
value of the underlying security. If a put option purchased by the Portfolio
expired without being sold or exercised, the premium would be lost.
Because trading interest in options written on Treasury bonds and notes
tends to center mostly on the most recently auctioned issues, the exchanges on
which such securities trade will not continue indefinitely to introduce options
with new expirations to replace expiring options on particular issues.
Instead, the expirations introduced at the commencement of options trading on a
particular issue will be allowed to run their course, with the possible
addition of a limited number of new expirations as the original ones expire.
Options trading on each issue of bonds or notes will thus be phased out as new
options are listed on more recent issues, and options representing a full range
of expirations will not ordinarily be available for every issue on which
options are traded.
In the event of the bankruptcy of a broker through which the Portfolio
engages in options transactions, the Portfolio could experience delays and/or
losses in liquidating open positions purchased or sold through the broker
and/or incur a loss of all or part of its margin deposits with the broker.
Transactions are entered into by the Portfolio only with brokers or financial
institutions deemed creditworthy by BlackRock.
OTC Options pose risks not associated with exchange-traded options. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of
time. Moreover, because performance of an OTC option is not guaranteed by the
Options Clearing Corporation ("OCC") or any other settlement agency, there is a
risk of counterparty default. In the event of the
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bankruptcy of the writer of an OTC option purchased by the Portfolio, the
Portfolio could experience a loss of all or part of the value of the option.
Exchange-traded options involve certain risks not present in an OTC
market. For example, exchanges could impose limits governing the maximum
number of positions on the same side of a market or involving the same
underlying instrument that may be held by a single investor, whether acting
alone or in concert with others (regardless of whether such positions are held
or written on the same or different exchanges or held or written in one or more
accounts or through one or more brokers).
FUTURES CONTRACTS. As a purchaser of an interest rate futures contract
(futures contract), the Portfolio incurs an obligation to take delivery of a
specified amount of the obligation underlying the futures contract at a
specified time in the future for a specified price. As a seller of a futures
contract, the Portfolio incurs an obligation to deliver the specified amount of
the underlying obligation at a specified time in return for an agreed upon
price.
The Portfolio may purchase or sell futures contracts for the purpose of
hedging its portfolio (or anticipated portfolio) securities against changes in
prevailing interest rates. If BlackRock anticipates that interest rates may
rise and, concomitantly, the price of U.S. Government or other debt securities
may fall, the Portfolio may sell a futures contract. If declining interest
rates are anticipated, the Portfolio may purchase a futures contract to protect
against a potential increase in the price of U.S. Government or other debt
securities the Portfolio intends to purchase. In addition, futures contracts
may be bought or sold in order to close out a short or long position in a
corresponding futures contract.
Although most futures contracts call for actual delivery or acceptance
of securities, the contracts usually are closed out before the settlement date
without the making or taking of delivery. A futures contract sale is closed
out by effecting a futures contract purchase for the same aggregate amount of
the specific type of security and the same delivery date. If the sale price
exceeds the offsetting purchase price, the seller would be paid the difference
and would realize a gain. If the offsetting purchase price exceeds the sale
price, the seller would pay the difference and would realize a loss.
Similarly, a futures contract purchase is closed out by effecting a futures
contract sale for the same aggregate amount of the specific type of security
and the same delivery date. If the offsetting sale price exceeds the purchase
price, the purchaser would realize a gain, whereas if the purchase price
exceeds the offsetting sale price, the purchaser would realize a loss. There
is no assurance
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that the Portfolio will be able to enter into a closing transaction.
When the Portfolio enters into a futures contract it is initially
required to deposit with the custodian, in a segregated account in the name of
the broker performing the transaction, an "initial margin" of cash or U.S.
Government securities equal to approximately 1 to 5% of the contract amount.
Initial margin requirements are established by the exchanges on which futures
contracts trade and may change from time to time. In addition, brokers may
establish margin deposit requirements in excess of those required by the
exchanges.
Initial margin in futures transactions is different from margin in
securities transactions in that initial margin does not involve the borrowing
of funds by a broker's client but is, rather, a good faith deposit on the
futures contract which will be returned to the Portfolio upon the proper
termination of the futures contract. The margin deposits made are marked to
market daily and the Portfolio may be required to make subsequent deposits into
the segregated account, maintained at the custodian for that purpose, of cash,
U.S. Government securities or other liquid high-grade debt obligations, called
"variation margin," in the name of the broker, which are reflective of price
fluctuations in the futures contract. Upon the expiration of the futures
contract or the execution of an opposite position by the Portfolio (which will
operate to terminate the position in the futures contract), a final
determination of variation margin is made. Additional cash is then required to
be paid to or released by the broker, and the Portfolio realizes a gain or a
loss.
OPTIONS ON FUTURES CONTRACTS. The Portfolio may purchase options on
futures contracts for similar purposes to those set forth above for the
purchase of a futures contract (purchase of a call option or sale of a put
option) and the sale of a futures contract (purchase of a put option or sale of
a call option), or upon exercise to close out a long or short position in
futures contracts. If, for example, BlackRock wished to protect against an
increase in interest rates and the resulting negative impact on the value of a
portion of its U.S. Government securities portfolio, it might purchase a put
option on an interest rate futures contract, the underlying security of which
correlates with the portion of the portfolio the Adviser seeks to hedge.
CERTAIN RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS.
The Portfolio is authorized to enter into futures contracts and related options
only for bona fide hedging and duration management purposes. For this purpose,
the Commodity Futures Trading Commission ("CFTC") generally defines bona fide
hedging as a transaction or position that (i) represents a substitute for a
transaction to be made in a
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physical market, (ii) is economically appropriate to the reduction of risk,
(iii) arises from a potential change in the value of assets owned or to be
acquired, and (iv) is intended to offset price risks incidental to cash
positions. In addition, with respect to anticipatory long positions, bona fide
hedging is defined to mean that either: (1) a substantial majority (i.e.,
approximately 75%) of all anticipatory hedge transactions (transactions in
which the Portfolio does not own at the time of the transaction, but expects to
acquire, the securities underlying the futures contract) involving the purchase
of futures contracts will be completed by the purchase of securities which are
the subject of the hedge, or (2) the underlying value of all long positions in
futures contracts will not exceed the total value of (a) short-term debt
obligations and cash set aside by the Portfolio; (b) cash proceeds due to the
Portfolio on investments within thirty days; (c) the margin deposited on the
contracts; and (d) any unrealized appreciation in the value of the contracts.
The Portfolio may sell a futures contract to protect against the
decline in the value of U.S. Government securities and other debt securities
held by the Portfolio. It is possible that the futures market may advance and
the value of securities held by the Portfolio may decline. If this were to
occur, the Portfolio would lose money on the futures contract and also
experience a decline in value in its portfolio securities.
If the Portfolio purchases a futures contract to hedge against the
increase in value of U.S. Government securities it intends to buy, and the
value of such securities decreases, then the Portfolio may determine not to
invest in the securities as planned and will realize a loss on the futures
contract that is not offset by a reduction in the price of the securities.
If the Portfolio maintains a short position in a futures contract, it
will cover this position by holding, in a segregated account maintained at the
custodian, cash, U.S. Government securities or other liquid high grade debt
obligations equal in value (when added to any initial or variation margin on
deposit) to the market value of the securities underlying the futures contract.
Such a position may also be covered by owning the securities underlying the
futures contract, or by holding a call option permitting the Portfolio to
purchase the same contract at a price no higher than the price at which the
short position was established.
In addition, if the Portfolio holds a long position in a futures
contract, it will hold cash, U.S. Government securities or other liquid high
grade debt obligations equal to the purchase price of the contract (less the
amount of initial or variation margin on deposit) in a segregated account
maintained for the
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Portfolio by the custodian. Alternatively, the Portfolio could cover its long
position by purchasing a put option on the same futures contract with an
exercise price as high or higher than the price of the contract held by the
Portfolio.
Exchanges limit the amount by which the price of a futures contract may
move on any day. If the price moves equal the daily limit on successive days,
then it may prove impossible to liquidate a futures position until the daily
limit moves have ceased. In the event of adverse price movements, the
Portfolio would continue to be required to make daily cash payments of
variation margin on open futures positions. In such situations, if the
Portfolio has insufficient cash, it may be disadvantageous to do so. The
ability to close out options and futures positions could also have an adverse
impact on the Portfolio's ability to effectively hedge its portfolio.
The Portfolio may be required to take or make delivery of the
instruments underlying interest rate futures contracts it holds at a time when
it is disadvantageous to do so. In addition, the CFTC and various markets have
established limits, referred to as "speculative position limits," on the
maximum net long or net short positions that any person may hold or control in
a futures contract or related option. An exchange may order the liquidation of
positions found to be in violation of these limits and it may impose other
sanctions and restrictions.
In the event of the bankruptcy of a broker through which the Portfolio
engages in transactions in futures or options thereon, the Portfolio could
experience delays and/or losses in liquidating open positions purchased or sold
through the broker and/or incur a loss of all or part of its margin deposits
with the broker. Transactions are entered into by the Portfolio only with
brokers or financial institutions deemed creditworthy by BlackRock.
While the futures contracts and options transactions to be engaged in
by the Portfolio for the purpose of hedging the Portfolio's securities are not
speculative in nature, there are risks inherent in the use of such instruments.
There may exist an imperfect correlation between the price movements of futures
contracts purchased by the Portfolio and the movements in the prices of the
securities which are the subject of the hedge. Another risk is that prices of
interest rate futures contracts may not move in tandem with the changes in
prevailing interest rates against which the Portfolio seeks a hedge. A
correlation may also be distorted by the fact that the futures market is
dominated by short-term traders seeking to profit from the difference between a
contract or security price objective and their cost of borrowed funds.
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If participants in the futures market elect to close out their
contracts through offsetting transactions rather than meet margin deposit
requirements, distortions in the normal relationships between the debt
securities and futures market could result. Price distortions could also
result if investors in futures contracts elect to make or take delivery of
underlying securities rather than engage in closing transactions due to the
resultant reduction in the liquidity of the futures market. In addition, due
to the fact that, from the point of view of speculators, the deposit
requirements in the futures markets are less onerous than margin requirements
in the cash market, increased participation by speculators in the futures
market could cause temporary price distortions. Due to the possibility of
price distortion in the futures market and because of the imperfect correlation
between movements in the prices of U.S. Government securities and movements in
the prices of futures contracts, a correct forecast of interest rate trends by
BlackRock may still not result in a successful hedging transaction.
Compared to the purchase or sale of futures contracts, the purchase of
call or put options on futures contracts involves less potential risk to the
Portfolio because the maximum amount at risk is the premium paid for the
options (plus transaction costs). However, there may be circumstances when the
purchase of a call or put option on a futures contract would result in a loss
to the Portfolio notwithstanding that the purchase or sale of a futures
contract would not result in a loss, as in the instance where there is no
movement in the prices of the futures contracts or underlying U.S. Government
securities.
REPURCHASE AGREEMENTS
The Portfolio may invest temporarily, without limitation, in repurchase
agreements, which are agreements pursuant to which securities are acquired from
a third party with the understanding that they will be repurchased by the
seller at a fixed price on an agreed date. These agreements may be made with
respect to any of the securities in which the Portfolio is authorized to
invest. Repurchase agreements may be characterized as loans by the Portfolio
which are secured by the underlying securities. The Portfolio may enter into
repurchase agreements with (i) member banks of the Federal Reserve System
having total assets in excess of $500 million and (ii) securities dealers,
provided that such banks or dealers meet the creditworthiness standards
established by the Board of Trustees ("Qualified Institutions"). BlackRock
will monitor the continued creditworthiness of Qualified Institutions, subject
to the supervision of the Board of Trustees. The repurchase price reflects the
purchase price plus an agreed upon market rate of interest which is unrelated
to the
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coupon rate or date of maturity of the purchased security. The collateral is
marked to market daily.
The use of repurchase agreements involves certain risks. For example,
if the seller of securities under a repurchase agreement defaults on its
obligation to repurchase the underlying securities, as a result of its
bankruptcy or otherwise, the Portfolio will seek to dispose of such securities,
which action could involve costs or delays. If the seller becomes insolvent
and subject to liquidation or reorganization under applicable bankruptcy or
other laws, the Portfolio's ability to dispose of the underlying securities may
be restricted. In addition, it is possible that the Portfolio may not be able
to substantiate its interest in the underlying securities. To help minimize
this risk, the securities underlying the repurchase agreement will be held by
the custodian at all times in an amount at least equal to the repurchase price,
including accrued interest. If the seller fails to repurchase the securities,
the Portfolio may suffer a loss to the extent proceeds from the sale of the
underlying securities are less than the repurchase price.
SECURITIES LENDING
The Portfolio may lend its portfolio securities to Qualified
Institutions. By lending its portfolio securities, the Portfolio attempts to
increase its income through the receipt of interest on the loan. Any gain or
loss in the market price of the securities loaned that may occur during the
term of the loan will be for the account of the Portfolio. The Portfolio may
lend its portfolio securities so long as the terms and the structure of such
loans are not inconsistent with the 1940 Act, which currently requires, among
other things, that (a) the borrower pledge and maintain with the Portfolio
collateral consisting of cash or securities issued or guaranteed by the U.S.
Government having a value at all times that is at least equal to the value of
the securities loaned, (b) the borrower add to such collateral whenever the
price of the securities loaned rises (i.e., the value of the loan is "marked to
the market" on a daily basis), (c) the loan be made subject to termination by
the Portfolio at any time and (d) the Portfolio receive reasonable interest on
the loan (which may include the Portfolio's investing any cash collateral in
interest bearing short-term investments), any distributions on the loaned
securities and any increase in their market value. The Portfolio will not lend
portfolio securities if, as a result, the aggregate of such loans exceeds 33
1/3% of the value of the Portfolio's total assets (including such loans). Loan
arrangements made by the Portfolio will comply with all other applicable
regulatory requirements, including the rules of the New York Stock Exchange,
which rules presently require the borrower, after notice, to redeliver the
securities within the normal settlement time of five business days.
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<PAGE> 462
All relevant facts and circumstances, including the creditworthiness of
the Qualified Institution, will be monitored by BlackRock, and will be
considered in making decisions with respect to lending of securities, subject
to review by the Board of Trustees. If the borrower fails to deliver the
loaned securities after receipt of notice, the Portfolio could use the
collateral to replace the securities while holding the borrower liable for any
excess of replacement cost over collateral. As with any extensions of credit,
there are risks of delay in recovery and in some cases even loss of rights in
the collateral should the borrower of the securities fail financially.
The Portfolio may pay reasonable negotiated fees in connection with
loaned securities, so long as such fees are set forth in a written contract and
approved by the Board of Trustees. In addition, voting rights may pass with
the loaned securities, but if a material event were to occur affecting such
securities, the loan must be called and the securities voted.
ADDITIONAL INVESTMENT LIMITATIONS
The Portfolio is subject to the investment limitations enumerated in
this subsection which may be changed only by a vote of the holders of a
majority of the Portfolio's outstanding shares (as defined below under
"Miscellaneous").
The Portfolio may not:
1. Purchase securities on margin (but the Portfolio may obtain
such short-term credits as may be necessary for the clearance of transactions);
provided that the deposit or payment by the Portfolio of initial or variation
margin in connection with options or futures contracts is not considered the
purchase of a security on margin.
2. Make short sales, except that the Portfolio may make short
sales "against-the box."
3. Issue senior securities, borrow money or pledge its assets,
except that the Portfolio may borrow from banks or enter into reverse
repurchase agreements or dollar rolls up to 33 1/3% of the value of its total
assets (calculated when the loan is made) to take advantage of investment
opportunities and may pledge up to 33 1/3% of the value of its total assets to
secure such borrowings. The Portfolio is also authorized to borrow an
additional 5% of its total assets without regard to the foregoing limitations
for temporary purposes such as clearance of portfolio transactions and share
redemptions. For purposes of these restrictions, the purchase or sale of
securities on a "when-issued", delayed delivery or forward commitment basis,
the purchase and sale of options and futures contracts and collateral
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<PAGE> 463
arrangements with respect thereto are not deemed to be the issuance of a senior
security, a borrowing or a pledge of assets.
4. Purchase any security (other than obligations of the U.S.
Government, its agencies and instrumentalities) if as a result: (i) with
respect to 75% of its total assets, more than 5% of the Portfolio's total
assets would then be invested in securities of a single issuer or (ii) 25% or
more of the Portfolio's total assets would be invested in one or more issuers
having their principal business activities in the same industry.
5. Buy or sell real estate or interests in real estate, except
that the Portfolio may purchase and sell Mortgage-Backed securities, securities
collateralized by mortgages, securities which are secured by real estate,
securities of companies which invest or deal in real estate.
6. Act as underwriter except to the extent that, in connection
with the disposition of portfolio securities, it may be deemed to be an
underwriter under certain federal securities laws.
7. Make investments for the purpose of exercising control or
management.
8. Invest in interests in oil, gas or other mineral exploration
or development programs, except that the Portfolio may invest in the securities
of companies which invest in or sponsor such programs.
9. Make loans, except through (i) repurchase agreements and (ii)
loans of portfolio securities limited to 50% of the value of the Portfolio's
total assets.
10. Purchase more than 10% of all outstanding voting securities of
any one issuer.
11. Buy or sell commodities contracts, except that the Portfolio
may purchase and sell futures contracts and options thereon.
Whenever any fundamental investment policy or investment restriction
states a maximum percentage of the Portfolio's assets, it is intended that if
the percentage limitation is met at the time the investment is made, a later
change in percentage resulting from changing total or net asset value will not
be considered a violation of such policy.
In addition, the 1940 Act prohibits the Portfolio from investing its
assets in more than 3% or, together with other investment companies having the
same investment adviser, more
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<PAGE> 464
than 10%, of the outstanding voting stock of any closed-end investment company,
more than 5% of its total value in any closed-end investment company, or more
than 10% of its total value in closed-end companies as a group, unless the
investment is acquired pursuant to a plan of reorganization or a SEC approved
offer of exchange.
TRUSTEES AND OFFICERS
The trustees and executive officers of the Fund, and their business
addresses and principal occupations during the past five years, are:
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<PAGE> 465
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH FUND DURING PAST FIVE YEARS
- ---------------- ------------------ ----------------------
<S> <C> <C>
Philip E. Coldwell Trustee Economic Consultant;
Coldwell Financial Chairman, Coldwell
Consultants Financial Consultants;
3330 Southwestern Blvd. Director, Maxus Energy
Dallas, TX 75225 Corporation (energy
Age: 72 products) from 1989 to
1993; Director or Trustee of
Temporary Investment Fund,
Inc., Trust for Federal
Securities, and Municipal
Fund for Temporary
Investment.
Robert R. Fortune Trustee Financial consultant;
2920 Ritter Lane Chairman, President and
Allentown, PA 18104 Chief Executive Officer,
Age: 78 Associated Electric & Gas
Insurance Services Limited
from 1984 to 1993; Member of
the Financial Executives
Institute and American
Institute of Certified Public
Accountants; Director,
Trustee or Managing General
Partner of a number of
investment companies advised
by PIMC; Director, Prudential
Utility Fund, Inc.,
Prudential Structured
Maturity Fund, Inc. and
Prudential Income Vertible
Fund, Inc.
Rodney D. Johnson Trustee President, Fairmount
Fairmont Capital Capital Advisors, Inc.
Advisers, Inc. (financial advisers)
1435 Walnut Street since 1987; Treasurer,
Philadelphia, PA 19102 North Philadelphia Health
Age: 53 System (formerly Girard
Medical Center) from 1988 to
1992; Member, Board of
Education, School District of
Philadelphia, 1983 to 1988;
Treasurer, Cascade Aphasia
Center,
</TABLE>
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<PAGE> 466
<TABLE>
<S> <C> <C>
1984 to 1988; Director or
Trustee of Temporary
Investment Fund, Inc., Trust
for Federal Securities,
Municipal Fund for Temporary
Investment, Municipal Fund
for California Investors,
Inc. and Municipal Fund for
New York Investors, Inc.
G. Willing Pepper(1) Chairman of Retired; Chairman of the
128 Springton the Board Board, Specialty
Lake Road and President Composites Corporation
Media, PA 19063 until May 1984;
Age: 86 Chairman of the Board, The
Institute for Cancer Research
until 1979; Director,
Philadelphia National Bank
until 1978; President, Scott
Paper Company from 1971 to
1973; Director, Marmon Group,
Inc. until April 1986;
Director, Trustee or Managing
General Partner of a number
of investment companies
advised by PIMC.
Anthony M. Santomero Trustee Deputy Dean from
310 Keithwood Road 1990 to 1994, Richard
Wynnewood, PA 19096 K. Mellon Professor
Age: 48 of Finance since April 1984,
and Dean's Advisory Council
Member since July 1984, The
Wharton School, University of
Pennsylvania; Associate
Editor, Journal of Banking
and Finance since June 1978;
Associate
</TABLE>
- --------------------
1.This trustee may be deemed an "interested person" of the Fund
as defined in the 1940 Act.
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<PAGE> 467
<TABLE>
<S> <C> <C>
Editor, Journal of Economics
and Business since October
1979; Associate Editor,
Journal of Money, Credit and
Banking since January 1980;
Research Associate, New York
University Center for
Japan-U.S. Business and
Economic Studies since July
1989; Editorial Advisory
Board, Open Economics Review
since November 1990;
Director, The Zweig Fund and
The Zweig Total Return Fund;
Director or Trustee of
Temporary Investment Fund,
Inc., Trust for Federal
Securities, Municipal Fund
for Temporary Investment, and
Municipal Fund for California
Investors, Inc.
David R. Wilmerding, Jr. Vice-Chairman President, Gates,
One Aldwyn Center of the Board Wilmerding, Carper &
Villanova, PA 19085 Rawlings, Inc.
Age: 60 (investment advisers)
since February 1989;
Director, Beaver Management
Corporation; Until September
1988, President, Treasurer
and Trustee, The Mutual
Assurance Company; Until
September 1988, Chairman,
President Treasurer and
Director, The Green Tree
Insurance Company (a
wholly-owned subsidiary of
The Mutual Assurance
Company); Until September
1988, Director, Keystone
State Life Insurance Company;
Director, Trustee or Managing
General Partner of a number
of investment
</TABLE>
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<PAGE> 468
<TABLE>
<S> <C> <C>
companies advised by PIMC.
Edward J. Roach Treasurer Certified Public
400 Bellevue Parkway and Vice- Accountant; Partner of
Suite 100 President the accounting firm of
Wilmington, DE 19809 Main Hurdman until 1981;
Age: 71 Vice Chairman of the Board,
Fox Chase Cancer Center;
Trustee Emeritus,
Pennsylvania School for the
Deaf; Trustee Emeritus,
Immaculata College;
President, Vice President
and/or Treasurer of a number
of investment companies
advised by PIMC.
Morgan R. Jones Secretary Partner in the law
Philadelphia National firm of Drinker Biddle &
Bank Building Reath, Philadelphia,
1345 Chestnut Street Pennsylvania.
Philadelphia, PA 19107-3496
Age: 55
</TABLE>
The Fund pays trustees who are not affiliated with PNC Asset Management
Group, Inc. ("PAMG") or Provident Distributors, Inc. ("PDI" or the
"Distributor") $5,500 annually and $500 per meeting of the Board or any
committee thereof that is not held in conjunction with a Board meeting (subject
to a cap of $6,000 per year for such meeting fees), and pays the Chairman an
additional $5,000 annually. Trustees who are not affiliated with PAMG or the
Distributor are reimbursed for any expenses incurred in attending meetings of
the Board of Trustees or any committee thereof. No officer, director or
employee of PAMG, Provident Capital Management, Inc. ("PCM"), PNC Bank,
National Association ("PNC Bank"), BlackRock Financial Management Inc.
("BlackRock"), PNC Equity Advisors Company ("PEAC"), PNC Mutual Fund Company
("PMFCO"), PFPC Inc. ("PFPC"), Provident Distributors, Inc. (formerly, MFD
Group, Inc.) ("PDI" and, collectively with PFPC, the "Administrators") or the
Distributor currently receives any compensation from the Fund. Drinker Biddle
& Reath, of which Mr. Jones is a partner, receives legal fees as counsel to the
Fund. As of the date of this Statement of Additional Information, the trustees
and officers of the Fund, as a group, owned less than 1% of the outstanding
shares of each Portfolio.
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<PAGE> 469
The table below sets forth the compensation actually received from the
Fund Complex of which the Portfolio is a part by the trustees for the period
ended September 30, 1995:
<TABLE>
<CAPTION>
Pension or Total Compensation
Aggregate Retirement Benefits Estimated Annual from Registrant and
Name of Person, Compensation from Accrued as Part of Benefits upon Fund Complex(1) Paid
Position Registrant Fund Expenses Retirement to Trustees
--------------- ---------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Philip E. Coldwell, Trustee $_____ n/a n/a (3) (2) $_____
Robert R. Fortune, Trustee $_____ n/a n/a (4) (2) $_____
Rodney D. Johnson, Trustee $_____ n/a n/a (5) (2) $_____
G. Willing Pepper, Chairman $_____ n/a n/a (6) (2) $_____
of the Board and President
Anthony M. Santomero, $_____ n/a n/a (4) (2) $_____
Trustee
David R. Wilmerding, Jr., $_____ n/a n/a (5) (2) $_____
Trustee
</TABLE>
SHAREHOLDER AND TRUSTEE LIABILITY. Under Massachusetts law,
shareholders of a business trust may, under certain circumstances, be held
personally liable as partners for the obligations of the trust. However, the
Fund's Declaration of Trust provides that shareholders shall not be subject to
any personal liability in connection with the assets of the Fund for the acts
or obligations of the Fund, and that every note, bond, contract, order or other
undertaking made by the Fund shall contain a provision to the effect that the
shareholders are not personally liable thereunder. The Declaration of Trust
provides for indemnification out of the trust property of any shareholder held
personally liable solely by reason of his being or having
- --------------------
1. A Fund Complex means two or more investment companies that hold themselves
out to investors as related companies for purposes of investment and
investor services, or have a common investment adviser or have an
investment adviser that is an affiliated person of the investment adviser
of any of the other investment companies.
2. Total number of such other investment companies trustee serves on within
the Fund Complex.
-23-
<PAGE> 470
been a shareholder and not because of his acts or omissions or some other
reason. The Declaration of Trust also provides that the Fund shall, upon
request, assume the defense of any claim made against any shareholder for any
act or obligation of the Fund, and shall satisfy any judgment thereon.
The Declaration of Trust further provides that all persons having any
claim against the trustees or Fund shall look solely to the trust property for
payment; that no trustee of the Fund shall be personally liable for or on
account of any contract, debt, tort, claim, damage, judgment or decree arising
out of or connected with the administration or preservation of the trust
property or the conduct of any business of the Fund; and that no trustee shall
be personally liable to any person for any action or failure to act except by
reason of his own bad faith, willful misfeasance, gross negligence or reckless
disregard of his duties as a trustee. With the exception stated, the
Declaration of Trust provides that a trustee is entitled to be indemnified
against all liabilities and expenses reasonably incurred by him in connection
with the defense or disposition of any proceeding in which he may be involved
or with which he may be threatened by reason of his being or having been a
trustee, and that the Fund will indemnify officers, representatives and
employees of the Fund to the same extent that trustees are entitled to
indemnification.
INVESTMENT ADVISORY, ADMINISTRATION,
DISTRIBUTION AND SERVICING ARRANGEMENTS
ADVISORY AND SUB-ADVISORY AGREEMENTS. The advisory and sub-advisory
services provided by PAMG and BlackRock and the fees received by each of them
for such services are described in the Prospectus. As stated in the
Prospectus, PIMC may from time to time voluntarily waive its advisory fees with
respect to the Portfolio and may voluntarily reimburse the Portfolio for
expenses. In addition, if the total expenses borne by the Portfolio in any
fiscal year exceed the expense limitations imposed by applicable state
securities regulations, PAMG and the Administrators will bear the amount of
such excess to the extent required by such regulations in proportion to the
fees otherwise payable to them for such year. Such amount, if any, will be
estimated and accrued daily and paid on a monthly basis. As of the date of
this Statement of Additional Information, to the knowledge of the Fund, there
were no state expense limitations more restrictive than the following: 2 1/2%
of the first $30 million of average annual net assets, 2% of the next $70
million of average annual net assets, and 1 1/2% of average annual net assets
in excess of $100 million.
-24-
<PAGE> 471
PAMG renders advisory services to the Portfolio pursuant to an
Investment Advisory Agreement. BlackRock renders sub-advisory services to the
Portfolio pursuant to a Sub-Advisory Agreement. The Advisory and Sub-Advisory
Agreements are collectively referred to as the "Advisory Contracts."
Under the Advisory Contracts, PAMG and BlackRock are not liable for any
error of judgment or mistake of law or for any loss suffered by the Fund or the
Portfolio in connection with the performance of the Advisory Contracts, except
a loss resulting from willful misfeasance, bad faith or gross negligence on the
part of PAMG or BlackRock in the performance of their respective duties or from
reckless disregard of their respective duties and obligations thereunder. Each
of the Advisory Contracts is terminable as to the Portfolio by vote of the
Board of Trustees or by the holders of a majority of the outstanding voting
securities of the Portfolio, at any time without penalty, on 60 days' written
notice to PIMC or BlackRock, as the case may be. PAMG or BlackRock may also
terminate their advisory relationship with respect to the Portfolio, on 60
days' written notice to the Fund. Each of the Advisory Contracts terminates
automatically in the event of its assignment.
The Predecessor Portfolio was also advised by BlackRock. For the
fiscal years ended June 30, 1995 and 1994 and for the period December 9, 1992
(commencement of operations) through June 30, 1993, the BlackRock waived its
entire investment advisory fees in the amounts of $56,894, $34,010 and $24,761,
respectively, and reimbursed expenses amounting to $137,364, $137,179 and $0,
respectively.
ADMINISTRATION AGREEMENTS. The Fund has entered into a
Co-Administration Agreement with PMFCO and a separate Administration Agreement
with PFPC and PDI (the "Administration Agreements"). The Administrators have
agreed to maintain office facilities for the Fund, furnish the Fund with
statistical and research data, clerical, accounting, and bookkeeping services,
and certain other services required by the Fund.
The Administration Agreements provide that the Administrators will not
be liable for any error of judgment or mistake of law or for any loss suffered
by the Fund or the Portfolio in connection with the performance of the
Administration Agreements, except a loss resulting from willful misfeasance,
bad faith or gross negligence in the performance of their respective duties or
from reckless disregard of their respective duties and obligations thereunder.
The Predecessor Portfolio received administrative services from State
Street Bank and Trust Company ("State Street"). During the fiscal years ended
June 30, 1995 and 1994 and for the
-25-
<PAGE> 472
period December 9, 1992 (commencement of operations) through June 30, 1993, the
Predecessor Portfolio paid $73,257, $_______ and $_______, respectively, in
administrative fees to State Street pursuant to the prior administration
agreement. In addition, during the fiscal year ended June 30, 1994 and for the
period December 9, 1992 (commencement of operations) through June 30, 1993,
State Street waived $32,500 and $3,701, respectively, in administrative fees.
CUSTODIAN AND TRANSFER AGENCY AGREEMENTS. PNC Bank is custodian of the
Fund's assets pursuant to a custodian agreement (the "Custodian Agreement").
Under the Custodian Agreement, PNC Bank or a sub-custodian (i) maintains a
separate account or accounts in the name of the Portfolio, (ii) holds and
transfers portfolio securities on account of the Portfolio, (iii) accepts
receipts and makes disbursements of money on behalf of the Portfolio, (iv)
collects and receives all income and other payments and distributions on
account of the Portfolio's securities and (v) makes periodic reports to the
Board of Trustees concerning the Portfolio's operations. PNC Bank is
authorized to select one or more banks or trust companies to serve as
sub-custodian on behalf of the Fund, provided that, with respect to
sub-custodians other than sub-custodians for foreign securities, PNC Bank
remains responsible for the performance of all its duties under the Custodian
Agreement and holds the Fund harmless from the acts and omissions of any
sub-custodian. The Chase Manhattan Bank, N.A., State Street Bank and Trust
Company and Barclays Bank PLC serve as the Fund's sub-custodians.
For its services to the Fund under the Custodian Agreement, PNC Bank
receives a fee which is calculated based upon the Portfolio's average gross
assets, with a minimum monthly fee of $1,000 per investment portfolio. PNC
Bank is also entitled to out-of- pocket expenses and certain transaction
charges.
PFPC, an affiliate of PNC Bank, serves as the transfer and dividend
disbursing agent for the Fund pursuant to a Transfer Agency Agreement (the
"Transfer Agency Agreement"), under which PFPC (i) issues and redeems Service,
Investor, and Institutional classes of shares in the Portfolio, (ii) addresses
and mails all communications by the Portfolio to record owners of its shares,
including reports to shareholders, dividend and distribution notices and proxy
materials for its meetings of shareholders, (iii) maintains shareholder
accounts and, if requested, sub-accounts and (iv) makes periodic reports to the
Board of Trustees concerning the operations of the Portfolio. PFPC may, on 30
days' notice to the Fund, assign its duties as transfer and dividend disbursing
agent to any other affiliate of PNC Bank Corp. For its services with respect
to the Fund's Institutional and Service Shares under the Transfer Agency
Agreement, PFPC receives fees at the annual rate of .03% of the average net
asset
-26-
<PAGE> 473
value of outstanding Institutional and Service Shares in the Portfolio, plus
per account fees and disbursements. For its services under the Transfer Agency
Agreement with respect to Investor Shares, PFPC receives per account fees, with
minimum annual fees of $24,000 for the Portfolio, plus disbursements.
DISTRIBUTOR AND DISTRIBUTION AND SERVICE PLAN. The Fund has entered
into a distribution agreement with the Distributor under which the Distributor,
as agent, offers shares of the Portfolio on a continuous basis. The
Distributor has agreed to use appropriate efforts to effect sales of the
shares, but it is not obligated to sell any particular amount of shares.
The Distributor and PMFCO are entitled to payments by each class of
Series A Investor Shares and Series B Investor Shares. The Fund's Amended and
Restated Distribution and Service Plan ("the Plan") provides, among other
things, that: (i) the Distributor shall submit quarterly reports to the Board
of Trustees regarding the amounts expended under the Plan and the purposes for
which such expenditures were made; (ii) the Plan will continue in effect for so
long as its continuance is approved at least annually by the Board of Trustees;
(iii) any material amendment thereto must be approved by the Board of Trustees,
including the trustees who are not "interested persons" of the Fund (as defined
in the 1940 Act) and who have no direct or indirect financial interest in the
operation of the Plan or any agreement entered into in connection with the Plan
("12b-1 Trustees"), acting in person at a meeting called for said purpose; (iv)
any amendment to increase materially the costs which any class of shares may
bear for distribution pursuant to the Plan shall be effective only upon
approval by a vote of a majority of the outstanding shares of such class; and
(v) while the Plan remains in effect, the selection and nomination of the
Fund's trustees who are not "interested persons" of the Fund shall be committed
to the discretion of such non-interested trustees.
The Plan is terminable as to any class of Shares without penalty at any
time by a vote of a majority of the 12b-1 Trustees, or by vote of the holders
of a majority of the shares of such respective classes. Similarly, any
agreement entered into pursuant to the Plan with a Service Organization is
terminable as to a class without penalty, at any time, by the Fund or by the
Service Organization upon written notice to the other. Each such agreement
will terminate automatically in the event of its assignment.
Amounts payable under the Plan may be used to pay commissions and other
fees payable to Service Organizations and other broker/dealers who sell Shares.
-27-
<PAGE> 474
Service Organizations and other broker/dealers receive commissions for
selling Series B Shares, which are paid at the time of the sale. These
commissions approximate the commissions payable with respect to sales of Series
A Shares. A portion of the fees payable under the Plan (at an annual rate of
.75% of the average daily net asset value of the Portfolio's outstanding Series
B Shares) are intended to cover the expense to the Distributor of paying such
up-front commissions, and the contingent deferred sales charge is calculated to
charge the investor with any shortfall that would occur if Series B Shares are
redeemed prior to the expiration of the six year period, after which Series B
Shares automatically convert to Series A Shares. To provide funds for the
payment of up-front sales commissions, the Distributor has entered into an
agreement with PNC Investment Corp. ("PNCIC"), an affiliate of the Fund's
adviser, which provides funds for the payment of commissions and other fees
payable to Service Organizations and broker/dealers who sell Series B Shares.
Under the terms of that agreement, the Distributor has sold and assigned to
PNCIC the fees which may be payable from time to time to the Distributor under
the Series B Distribution Plan and the contingent deferred sales charges
payable to the Distributor with respect to Series B Shares.
Service Organizations may charge their clients additional fees for
account services.
As stated in the Prospectus the Fund intends the Portfolio to enter
into service agreements with institutions pursuant to which institutions will
render certain support services to their customers who are the beneficial
owners of Shares ("Customers"). Such services will be provided to Customers
who are the beneficial owners of Shares and are intended to supplement the
services provided by the Fund's Administrators and transfer agent to the Fund's
shareholders of record. In consideration for payment of up to .15% (on an
annualized basis) of the average daily net asset value of Shares owned
beneficially by their Customers, institutions may provide one or more of the
following services to such Customers: processing purchase and redemption
requests from Customers and placing orders with the Fund's transfer agent or
the Distributor; processing dividend payments from the Fund on behalf of
Customers; providing sub- accounting with respect to Shares beneficially owned
by Customers or the information necessary for sub-accounting; and other similar
services. In consideration for payment of a service fee, on an annual basis,
of up to a separate .15% (.25% for Series A and Series B Investor Shares) of
the average daily net asset value of Shares owned beneficially by their
Customers, institutions may provide one or more of these additional services to
such Customers: responding to Customer inquiries relating to the services
performed by the institution and to Customer inquiries concerning their
investments in Service Shares;
-28-
<PAGE> 475
providing information periodically to Customers showing their positions in
Shares; and other similar shareholder liaison services. Customers who are
beneficial owners of Shares should read the Prospectus in light of the terms
and fees governing their accounts with institutions.
PORTFOLIO TRANSACTIONS
In executing portfolio transactions, the adviser and sub-adviser seek
to obtain the best price and execution for the Portfolio, 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 the adviser and sub-adviser generally
seek 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. Payments of commissions to brokers who
are affiliated persons of the Fund (or affiliated persons of such persons) will
be made in accordance with Rule 17e-1 under the 1940 Act.
The Portfolio has no obligation to deal with any broker or group of
brokers in the execution of portfolio transactions. The adviser and
sub-adviser may, consistent with the interests of the Portfolio, select brokers
on the basis of the research, statistical and pricing services they provide to
the Portfolio and the adviser's or sub-adviser's other clients. Information
and research received from such brokers will be in addition to, and not in lieu
of, the services required to be performed by the adviser and sub-adviser under
their 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 the adviser or sub-adviser determines in good
faith that such commission is reasonable in terms either of the transaction or
the overall responsibility of the adviser or sub-adviser to the Portfolio and
its other clients and that the total commissions paid by the Portfolio will be
reasonable in relation to the benefits to the Portfolio over the long-term. In
addition, the adviser or sub-adviser may take into account the sale of shares
of the Fund in allocating purchase and sale orders for portfolio securities to
brokers (including brokers that are affiliated with them or Distributor).
For the fiscal years ended June 30, 1995 and 1994 and for the period
December 9, 1992 (commencement of operations) through June 30, 1993, the
Predecessor Portfolio paid no brokerage commissions.
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<PAGE> 476
Over-the-counter issues, including U.S. Government securities, are
normally traded on a "net" basis without a stated commission, through dealers
acting for their own account and not as brokers. The Portfolio will primarily
engage in transactions with these dealers or deal directly with the issuer
unless a better price or execution could be obtained by using a broker. Prices
paid to a dealer will generally include a "spread," which is the difference
between the prices at which the dealer is willing to purchase and sell the
specific security at the time, and includes the dealer's normal profit.
Purchases of money market instruments by the Portfolio are made from
dealers, underwriters and issuers. The Portfolio does not currently expect to
incur any brokerage commission expense on such transactions because money
market instruments are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission. The price of the
security, however, usually includes a profit to the dealer.
Securities purchased in underwritten offerings include a fixed amount
of compensation to the underwriter, generally referred to as the underwriter's
concession or discount. When securities are purchased or sold directly from or
to an issuer, no commissions or discounts are paid. It is the policy of the
Portfolio to give primary consideration to obtaining the most favorable price
and efficient execution of transactions involving money market instruments. In
seeking to implement this policy of the Portfolio, the adviser and sub-adviser
will effect transactions involving money market instruments with those dealers
they believe provide the most favorable prices and are capable of providing
efficient executions.
The adviser or sub-adviser may seek to obtain an undertaking from
issuers of commercial paper or dealers selling commercial paper to consider the
repurchase of such securities from the Portfolio prior to maturity at their
original cost plus interest (sometimes adjusted to reflect the actual maturity
of the securities), if it believes that the Portfolio's anticipated need for
liquidity makes such action desirable. Any such repurchase prior to maturity
reduces the possibility that the Portfolio would incur a capital loss in
liquidating commercial paper, especially if interest rates have risen since
acquisition of the particular commercial paper.
Investment decisions for the Portfolio and for other investment
accounts managed by the adviser or sub-adviser are made independently of each
other in the light of differing conditions. 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 in a manner
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<PAGE> 477
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 the
Portfolio is concerned, in other cases it could be beneficial to the Portfolio.
The Portfolio will not purchase securities during the existence of any
underwriting or selling group relating to such securities of which PIMC,
BlackRock, PNC Bank, PCM, PEAC, the Administrators, Distributor or any
affiliated person (as defined in the 1940 Act) thereof is a member except
pursuant to procedures adopted by the Board of Trustees in accordance with Rule
10f-3 under the 1940 Act. In no instance will portfolio securities be
purchased from or sold to PIMC, BlackRock, PNC Bank, PCM, PEAC, the
Administrators, Distributor or any affiliated person of the foregoing entities
except as permitted by SEC exemptive order or by applicable law.
The portfolio turnover rate of the Portfolio is calculated by dividing
the lesser of the Portfolio's annual sales or purchases of portfolio securities
(exclusive of purchases or sales of securities whose maturities at the time of
acquisition were one year or less) by the monthly average value of the
securities held by the Portfolio during the year. For the fiscal years ended
June 30, 1995 and 1994, the portfolio turnover rates for the Predecessor
Portfolio were 435% and 722%, respectively.
The Fund is required to identify any securities of its regular brokers
or dealers (as defined in Rule 10b-1 under the 1940 Act) or their parents held
by the Fund as of the end of its most recent fiscal year. As of September 30,
1994, the following Portfolios held the following securities: (a) Money Market
Portfolio: variable rate obligations of Goldman Sachs Group L.P., Lehman
Brothers Holdings, Inc. and Morgan Stanley Group in the principal amounts of
$47,000,000, $50,000,000 and $29,998,328, respectively; medium-term note of
Morgan Stanley Group in the principal amount of $15,000,000; and repurchase
agreements with Kidder, Peabody & Co., Morgan Stanley & Co. and PaineWebber
Group in the principal amounts of $100,000,000, $65,000,000 and $10,000,000,
respectively; (b) Government Money Market Portfolio: repurchase agreements with
Kidder, Peabody & Co. and Morgan Stanley & Co. in the principal amounts of
$9,058,000 and $70,000,000, respectively; (c) Managed Income Portfolio:
corporate bonds and variable rate obligations of Morgan Stanley Group in the
principal amounts of $4,925,000 and $10,000,000, respectively; medium-term note
of Salomon Brothers, Inc. in the principal amount of $3,730,680; (d) Short-Term
Bond Portfolio: corporate bonds of Lehman Brothers, Inc. and Merrill Lynch Co.,
Inc. in the principal amounts of $992,500 and $956,250, respectively;
medium-term note of Salomon Brothers, Inc. in the principal amount of $932,670;
Intermediate-Term Bond Portfolio: corporate bonds of Lehman Brothers Holdings,
Inc. in the principal amount of $975,000; and Index Equity Portfolio: common
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<PAGE> 478
stock of Merrill Lynch & Co., Inc. and Salomon, Inc. in the principal amounts
of $380,875 and $280,450, respectively.
PURCHASE AND REDEMPTION INFORMATION
COMPUTATION OF PUBLIC OFFERING PRICE FOR SERIES A INVESTOR SHARES OF
THE PORTFOLIO. An illustration of the computation of the public offering price
per Series A Investor Share of the Portfolio, based on the value of the
Predecessor Portfolio's net assets as of June 30, 1995 follows:
<TABLE>
<CAPTION>
CORE FIXED
INCOME
PORTFOLIO
---------
<S> <C>
Net Assets . . . . . . . . . . . . . . . . . . . . $32,190,804
Outstanding
Shares. . . . . . . . . . . . . . . . . . . . . . 3,267,452
===========
Net Asset Value
Per Share . . . . . . . . . . . . . . . . . . . . $ 9.85
Maximum Sales Charge,
4.50% of offering price
(4.71% of net asset
value per share). . . . . . . . . . . . . . . . . $ 0.46
----------
Offering to Public . . . . . . . . . . . . . . . . $ 10.31
===========
</TABLE>
Series B Investor Shares of the Portfolio are sold at the net asset
value per share next determined after a purchase order is received. Series B
Investor Shares of the Portfolio are subject to a contingent deferred sales
charge which is payable on redemption of such Series B Investor Shares.
Service and Institutional Shares of the Portfolio are sold at the net
asset value per share next determined after a purchase order is received.
EXCHANGE PRIVILEGE. By use of the exchange privilege, the investor
authorizes the Fund's transfer agent to act on telephonic or written exchange
instructions from any person representing himself to be the investor and
believed by the Fund's transfer agent to be genuine. The records of the Fund's
transfer agent pertaining to such instructions are binding. The exchange
privilege may be modified or terminated at any time upon 60 days' notice to
affected shareholders. The exchange privilege is only available in states
where the exchange may legally be made.
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<PAGE> 479
A front-end sales charge or a contingent deferred sales charge will be
imposed (unless an exemption from either sales charge applies) when Investor
Shares of a Money Market Portfolio are redeemed and the proceeds are used to
purchase Series A Investor Shares and Series B Investor Shares, respectively,
of the Portfolio.
INVESTMENTS OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES.
Investors may purchase Series A Shares of the Portfolio at net asset value,
without a sales charge, with the proceeds from the redemption of shares of any
other investment company which were sold with a sales charge or commission in
accordance with the terms set forth in the Prospectus. This does not include
shares of an affiliated mutual fund which were or would be subject to a
contingent deferred sales charge upon redemption. For purposes of this
restriction, the term "affiliated mutual fund" means:
i) any Portfolio of the Fund; and
ii) any other investment company, if such company and the Fund
hold themselves out to investors as related companies for
purposes of investment and investor services, and if:
a) that company and the Fund have a common investment
adviser or distributor; or
b) the investment adviser or distributor of such company
or the Fund is an "affiliated person" (as defined in
Section 2(a)(3) of the 1940 Act) of the investment
adviser or distributor of the Fund or the company,
respectively.
MISCELLANEOUS. The Fund reserves the right, if conditions exist which
make cash payments undesirable, to honor any request for redemption or
repurchase of the Portfolio's shares by making payment in whole or in part in
securities chosen by the Fund and valued in the same way as they would be
valued for purposes of computing the Portfolio's net asset value. If payment
is made in securities, a shareholder may incur transaction costs in converting
these securities into cash. The Fund has elected, however, to be governed by
Rule 18f-1 under the 1940 Act so that the Portfolio 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 Portfolio.
Under the 1940 Act, the Portfolio may suspend the right to redemption
or postpone the date of payment upon redemption for any period during which the
New York Stock Exchange (the "NYSE") is closed (other than customary weekend
and holiday closings), or during which trading on the NYSE is restricted, or
during which
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(as determined by the SEC by rule or regulation) an emergency exists as a
result of which disposal or valuation of portfolio securities is not reasonably
practicable, or for such other periods as the SEC may permit. (The Portfolio
may also suspend or postpone the recordation of the transfer of its shares upon
the occurrence of any of the foregoing conditions.)
In addition to the situations described in the Prospectus, the Fund may
redeem shares involuntarily to reimburse the Portfolio 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.
VALUATION OF PORTFOLIO SECURITIES
In determining the approximate market value of portfolio investments,
the Fund may employ outside organizations, which may use, without limitation, a
matrix or formula method that takes into consideration market indexes,
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 the Fund's books at their face
value. Other assets, if any, are valued at fair value as determined in good
faith under the supervision of the Board of Trustees.
PERFORMANCE INFORMATION
TOTAL RETURN. For purposes of quoting and comparing the performance of
shares of the Portfolio to the performance of other mutual funds and to stock
or other relevant indexes in advertisements or in communications to
shareholders, performance may be stated in terms of total return. The total
return for each class of the Portfolio will be calculated independently of the
other classes within the Portfolio. Under the rules of the SEC, funds
advertising performance must include total return quotes calculated according
to the following formula:
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<PAGE> 481
1/n
ERV
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value at the end of the
period covered by the computation of a
hypothetical $1,000 payment made at the
beginning of the period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed
in terms of years.
In calculating the ending redeemable value for Series A Investor Shares
of the Portfolio, the maximum front-end sales charge is deducted from the
initial $1,000 payment and all dividends and distributions by the Portfolio are
assumed to have been reinvested at net asset value as described in the
Prospectus on the reinvestment dates during the period. In calculating the
ending redeemable value for Series B Investor Shares of the Portfolio, the
maximum contingent deferred sales charge is deducted at the end of the period
and all dividends and distributions by the Portfolio are assumed to have been
reinvested at net asset value as described in the Prospectus on the
reinvestment dates during the period. Total return, or "T" in the formula
above, is computed by finding the average annual compounded rates of return
over the specified periods that would equate the initial amount invested to the
ending redeemable value.
The Predecessor Portfolio offered and sold only one class of shares.
Based on the foregoing calculation, the average annual total return for the
Predecessor Portfolio for periods ended June 30, 1995 were as follows:
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<PAGE> 482
<TABLE>
<CAPTION>
Average Annual Total Return
----------------------------
For the Year For the 5
ended years ended Since commencement of
Portfolio 6/30/95 6/30/95 operations (1)
--------- ------- ------- --------------------
<S> <C> <C> <C>
Predecessor Portfolio 12.44% N/A 7.17%
</TABLE>
- -------------------------------
(1) Commenced operations on December 9, 1992.
Each class of the Portfolio may also from time to time include in
advertisements and communications to shareholders a total return figure that is
not calculated according to the formula set forth above in order to compare
more accurately the performance of each class of the Portfolio's shares with
other performance measures. For example, in comparing the total return of the
Portfolio's shares with data published by Lipper Analytical Services, Inc., CDA
Investment Technologies, Inc. or Weisenberger Investment Company Service, or
with the performance of the Standard & Poor's 500 Stock Index, EAFE, the Dow
Jones Industrial Average or the Lehman Brothers Aggregate Index, as
appropriate, the Portfolio may calculate the aggregate total return for its
shares of a certain class for the period of time specified in the advertisement
or communication by assuming the investment of $10,000 in the Portfolio's
shares and assuming the reinvestment of each dividend or other distribution at
net asset value on the reinvestment date. Percentage increases are determined
by subtracting the initial value of the investment from the ending value and by
dividing the remainder by the beginning value. The Portfolio does not, for
these purposes, deduct from the initial value invested or the ending value any
amount representing front-end or deferred sales charges, respectively, charged
to purchasers of Series A and Series B Investor Shares, respectively. The
Series A and Series B Investor classes of the Portfolio will, however, disclose
the maximum applicable sales charge and will also disclose that the performance
data does not reflect sales charges and that inclusion of sales charges would
reduce the performance quoted.
YIELD. The Portfolio may advertise its yield on its Service, Series A
Investor, Series B Investor and Institutional Shares. Under the rules of the
SEC, the Portfolio must calculate yield using the following formula:
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<PAGE> 483
a-b 6
YIELD = 2[(----- +1) - 1]
cd
Where: a = dividends and interest earned during the
period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares
outstanding during the period that
were entitled to receive dividends.
d = the maximum offering price per share on the
last day of the period.
For the purpose of determining net investment income earned during the
period (variable "a" in the formula), dividend income on equity securities held
by the Portfolio is recognized by accruing 1/360th of the stated dividend rate
of the security each day that the security is in the Portfolio. Except as
noted below, interest earned on any debt obligations held by the Portfolio is
calculated by computing the yield to maturity of each obligation held by the
Portfolio based on the market value of the obligation (including actual accrued
interest) at the close of business on the last business day of each month, or,
with respect to obligations purchased during the month, the purchase price
(plus actual accrued interest) and dividing the result by 360 and multiplying
the quotient by the market value of the obligation (including actual accrued
interest) in order to determine the interest income on the obligation for each
day of the subsequent month that the obligation is held by the Portfolio. For
purposes of this calculation, it is assumed that each month contains 30 days.
The maturity of an obligation with a call provision is the next call date on
which the obligation reasonably may be expected to be called or, if none, the
maturity date.
With respect to debt obligations purchased at a discount or premium,
the formula generally calls for amortization of the discount or premium.
With respect to mortgage or other receivables-backed obligations which
are expected to be subject to monthly payments of principal and interest ("pay
downs"), (a) gain or loss attributable to actual monthly pay downs are
accounted for as an increase or decrease to interest income during the period;
and (b) the Portfolio may elect either (i) to amortize the discount and premium
on the remaining security, based on the cost of the
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<PAGE> 484
security, to the weighted-average maturity date, if such information is
available, or to the remaining term of the security, if any, if the
weighted-average maturity date is not available, or (ii) not to amortize
discount or premium on the remaining security. The amortization schedule will
be adjusted monthly to reflect changes in the market values of debt
obligations.
Undeclared earned income will be subtracted from the maximum offering
price per share (variable "d" in the formula). Undeclared earned income is the
net investment income which, at the end of the base period, has not been
declared as a dividend, but is reasonably expected to be and is declared and
paid as a dividend shortly thereafter. In the case of Series A Investor Shares
of the Portfolio, the Portfolio's maximum offering price per share for purposes
of the formula includes the maximum front-end sales charge imposed by the
Portfolio -- currently 4.50% of the per share offering price.
The annualized yield information for the 30-day period ended June 30,
1995 for the Predecessor Portfolio was as follows:
<TABLE>
<CAPTION>
Portfolio Yield
<S> <C>
Predecessor Portfolio 6.63%
</TABLE>
OTHER INFORMATION REGARDING INVESTMENT RETURNS. In addition to
providing performance information that demonstrates the total return or yield
of shares of a particular class of the Portfolio over a specified period of
time, the Fund may provide certain other information demonstrating hypothetical
investment returns. Such information may include, but is not limited to,
illustrating the compounding effects of a dividend in a dividend reinvestment
plan. As illustrated below, the Fund may demonstrate, using certain specified
hypothetical data, the compounding effect of dividend reinvestment on
investments in the Portfolio.
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<PAGE> 485
MISCELLANEOUS. Yields on shares of the Portfolio may fluctuate daily
and do not provide a basis for determining future yields. Because such yields
will fluctuate, they cannot be compared with yields on savings account or other
investment alternatives that provide an agreed to or guaranteed fixed yield for
a stated period of time. In comparing the yield of one fund to another,
consideration should be given to each fund's investment policies, including the
types of investments made, lengths of maturities of the portfolio securities,
and whether there are any special account charges which may reduce the
effective yield. The fees which may be imposed by Authorized Dealers, Service
Organizations and other institutions on their customers are not reflected in
the calculations of total returns or yields for the Portfolio.
The Fund may also from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on an investment
in the Portfolio are reinvested by being paid in additional Portfolio shares,
any future income or capital appreciation of the Portfolio would increase the
value, not only of the original investment in the Portfolio, but also of the
additional Portfolio shares received through reinvestment. The Fund may also
include discussions or illustrations of the potential investment goals of a
prospective investor, investment management techniques, policies or investment
suitability of the Portfolio, economic conditions, the effects of inflation
and historical performance of various asset classes, including but not limited
to, stocks, bonds and Treasury bills. From time to time advertisements or
communications to shareholders may summarize the substance of information
contained in shareholder reports (including the investment composition of the
Portfolio), as well as the views of the Portfolio's adviser and/or sub-adviser
as to current market, economy, trade and interest rate trends, legislative,
regulatory and monetary developments, investment strategies and related matters
believed to be of relevance to the Portfolio. The Fund may also include in
advertisements charts, graphs or drawings which illustrate the potential risks
and rewards of investment in various investment vehicles, including but not
limited to, stocks, bonds, treasury bills and shares of the Portfolio. In
addition, advertisement or shareholder communications may include a discussion
of certain attributes or benefits to be derived by an investment in the
Portfolio. Such advertisements or communicators may include symbols, headlines
or other material which highlight or summarize the information discussed in
more detail therein.
TAXES
The following is only a summary of certain additional tax
considerations generally affecting the Portfolio and its
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<PAGE> 486
shareholders that are not described in the Prospectus. No attempt is
made to present a detailed explanation of the tax treatment of the Portfolio or
its shareholders, and the discussion here and in the Prospectuses is not
intended as a substitute for careful tax planning. Investors are urged to
consult their tax advisers with specific reference to their own tax situation.
The Portfolio will elect to be taxed as a regulated investment company
under Part I of Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"). As a regulated investment company, the Portfolio generally is
exempt from Federal income tax on its net investment income and realized
capital gains that it distributes to shareholders, provided that it distributes
an amount equal to at least the sum of (a) 90% of its investment company
taxable income (net investment income and the excess of net short-term capital
gain over net long-term capital loss, if any, for the year) and (b) 90% of its
net tax-exempt interest income, if any, for the year (the "Distribution
Requirement") and satisfies certain other requirements of the Code that are
described below. Distributions of investment company taxable income and net
tax-exempt interest income made during the taxable year or, under specified
circumstances, within twelve months after the close of the taxable year will
satisfy the Distribution Requirement.
In addition to satisfaction of the Distribution Requirement, the
Portfolio must derive at least 90% of its gross income from dividends,
interest, certain payments with respect to securities loans and gains from the
sale or other disposition of stock or securities or foreign currencies
(including, but not limited to, gains from forward foreign currency exchange
contacts), or from other income derived with respect to its business of
investment in such stock, securities, or currencies (the "Income Requirement")
and derive less than 30% of its gross income from the sale or other disposition
of stock, securities and certain other investments (including securities and
forward foreign currency exchange contracts, but only to the extent that such
contracts are not directly related to the Portfolio's principal business of
investing in stock or securities) held for less than three months (the
"Short-Short Gain Test"). Future Treasury regulations may provide that foreign
currency gains that are not "directly related" to the Portfolio's principal
business of investing in stock or securities will not satisfy the Income
Requirement. Interest (including original issue discount and "accrued market
discount") received by the Portfolio at maturity or upon disposition of a
security held for less than three months will not be treated as gross income
derived from the sale or other disposition of such security held for less than
three months for purposes of the Short-Short Gain Test. However, any other
income that is attributable to realized market appreciation
-40-
<PAGE> 487
will be treated as gross income from the sale or other disposition of
securities for this purpose.
In addition to the foregoing requirements, at the close of each quarter
of its taxable year, at least 50% of the value of the Portfolio's assets must
consist of cash and cash items, U.S. government securities, securities of other
regulated investment companies, and securities of other issuers (as to which
the Portfolio has not invested more than 5% of the value of its total assets in
securities of such issuer and as to which the Portfolio does not hold more than
10% of the outstanding voting securities of such issuer), and no more than 25%
of the value of the Portfolio's total assets may be invested in the securities
of any one issuer (other than U.S. Government securities and securities of
other regulated investment companies), or in two or more issuers which such
Portfolio controls and which are engaged in the same or similar trades or
businesses.
Distributions of investment company taxable income will be taxable
(other than the possible allowance of the dividends received deduction
described below) to shareholders as ordinary income, regardless of whether such
distributions are paid in cash or are reinvested in shares. Shareholders
receiving any taxable distribution from the Portfolio in the form of additional
shares will be treated as receiving a taxable distribution in an amount equal
to the fair market value of the shares received, determined as of the
reinvestment date.
The Portfolio intends to distribute to shareholders any of its excess
of net long-term capital gain over net short-term capital loss ("net capital
gain") for each taxable year. Such gain is distributed as a capital gain
dividend and is taxable to shareholders as long-term capital gain, regardless
of the length of time the shareholder has held his shares, whether such gain
was recognized by the Portfolio prior to the date on which a shareholder
acquired shares of the Portfolio and whether the distribution was paid in cash
or reinvested in shares.
In the case of corporate shareholders, distributions (other than
capital gain dividends) from the Portfolio for any taxable year generally
qualify for the dividends received deduction to the extent of the gross amount
of "qualifying dividends" received by the Portfolio for the year. Generally, a
dividend will be treated as a "qualifying dividend" if it has been received
from a domestic corporation. Distributions of net investment income from debt
securities and of net realized short-term capital gains will be taxable to
shareholders as ordinary income and will not be treated as "qualifying
dividends" for purposes of the dividends received deduction.
Ordinary income of individuals will be taxable at a maximum nominal
rate of 39.6%, but because of limitations on itemized
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<PAGE> 488
deductions otherwise allowable and the phase-out of personal exemptions, the
maximum effective marginal rate of tax for some taxpayers may be higher. An
individual's long-term capital gains will be taxable at a maximum rate of 28%.
Capital gains and ordinary income of corporate taxpayers are both taxed at a
maximum nominal rate of 35%, but at marginal rates of 39% for taxable income
between $100,000 and $335,000. Investors should be aware that any loss
realized upon the sale, exchange or redemption of shares held for six months or
less will be treated as a long-term capital loss to the extent any capital gain
dividends have been paid with respect to such shares.
Generally, futures contracts held by the Portfolio at the close of the
Portfolio's taxable year will be treated for Federal income tax purposes as
sold for their fair market value on the last business day of such year, a
process known as "mark-to-market." Forty percent of any gain or loss resulting
from such constructive sale will be treated as short-term capital gain or loss
and 60% of such gain or loss will be treated as long-term capital gain or loss
without regard to the length of time the Portfolio holds the futures contract
("the 40-60 rule"). The amount of any capital gain or loss actually realized
by the Portfolio in a subsequent sale or other disposition of those futures
contracts will be adjusted to reflect any capital gain or loss taken into
account by the Portfolio in a prior year as a result of the constructive sale
of the contracts. With respect to futures contracts to sell, which will be
regarded as parts of a "mixed straddle" because their values fluctuate
inversely to the values of specific securities held by the Portfolio, losses as
to such contracts to sell will be subject to certain loss deferral rules which
limit the amount of loss currently deductible on either part of the straddle to
the amount thereof which exceeds the unrecognized gain (if any) with respect to
the other part of the straddle, and to certain wash sales regulations. Under
short sales rules, which also will be applicable, the holding period of the
securities forming part of the straddle will (if they have not been held for
the long-term holding period) be deemed not to begin prior to termination of
the straddle. With respect to certain futures contracts, deductions for
interest and carrying charges will not be allowed. Notwithstanding the rules
described above, with respect to futures contracts to sell which are properly
identified as such, the Portfolio may make an election which will exempt (in
whole or in part) those identified futures contracts from being treated for
Federal income tax purposes as sold on the last business day of the Fund's
taxable year, but gains and losses will be subject to such short sales, wash
sales, loss deferral rules and the requirement to capitalize interest and
carrying charges. Under temporary regulations, the Portfolio would be allowed
(in lieu of the foregoing) to elect either (1) to offset gains or losses from
portions which are part of a mixed straddle by separately identifying each
mixed straddle to which such treatment applies,
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<PAGE> 489
or (2) to establish a mixed straddle account for which gains and losses would
be recognized and offset on a periodic basis during the taxable year. Under
either election, the 40-60 rule will apply to the net gain or loss attributable
to the futures contracts, but in the case of a mixed straddle account election,
not more than 50% of any net gain may be treated as long-term and no more than
40% of any net loss may be treated as short-term. Options on futures contracts
generally receive Federal tax treatment similar to that described above.
Under the Federal income tax provisions applicable to regulated
investment companies, less than 30% of a company's gross income for a taxable
year must be derived from gains realized on the sale or other disposition of
securities held for less than three months. The Internal Revenue Service has
issued a private letter ruling with respect to certain other investment
companies to the following effect: gains realized from a futures contract to
purchase or to sell will be treated as being derived from a security held for
three months or more regardless of the actual period for which the contract is
held if the gain arises as a result of a constructive sale of the contract at
the end of the taxable year as described above, and will be treated as being
derived from a security held for less than three months only if the contract is
terminated (or transferred) during the taxable year (other than by reason of
mark-to-market) and less than three months elapses between the date the
contract is acquired and the termination date. Although private letter rulings
are not binding on the Internal Revenue Service with respect to the Portfolio,
the Fund believes that the Internal Revenue Service would take a comparable
position with respect to the Portfolio. In determining whether the 30% test is
met for a taxable year, increases and decreases in the value of the Portfolio's
futures contracts and securities that qualify as part of a "designated hedge,"
as defined in the Code, may be netted.
If for any taxable year the Portfolio does not qualify as a regulated
investment company, all of its taxable income will be subject to tax at regular
corporate rates without any deduction for distributions to shareholders, and
all distributions will be taxable as ordinary dividends to the extent of the
Portfolio's current and accumulated earnings and profits. Such distributions
will be eligible for the dividends received deduction in the case of corporate
shareholders.
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute specified percentages of their
ordinary taxable income and capital gain net income (excess of capital gains
over capital losses). The Portfolio intends to make sufficient distributions
or deemed distributions of its ordinary taxable income and any capital gain net
income prior to the end of the each calendar year to avoid liability for this
excise tax.
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The Fund will be required in certain cases to withhold and remit to the
United States Treasury 31% of dividends and gross sale proceeds paid to any
shareholder (i) who has provided either an incorrect tax identification number
or no number at all, (ii) who is subject to backup withholding by the Internal
Revenue Service for failure to report the receipt of interest or dividend
income properly, or (iii) who has failed to certify to the Fund that he is not
subject to backup withholding or that he is an "exempt recipient."
Shareholders will be advised annually as to the Federal income tax
consequences of distributions made by the Portfolio each year.
The foregoing general discussion of Federal income tax consequences is
based on the Code and the regulations issued thereunder as in effect on the
date of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.
Although the Portfolio expects to qualify as a "regulated investment
company" and to be relieved of all or substantially all Federal income taxes,
depending upon the extent of its activities in states and localities in which
its offices are maintained, in which its agents or independent contractors are
located or in which it is otherwise deemed to be conducting business, the
Portfolio may be subject to the tax laws of such states or localities.
Shareholders should consult their tax advisors about state and local tax
consequences, which may differ from the Federal income tax consequences
described above.
ADDITIONAL INFORMATION CONCERNING SHARES
Shares of the Fund have noncumulative voting rights and, accordingly,
the holders of more than 50% of the Fund's outstanding shares (irrespective of
class) may elect all of the trustees. Shares have no preemptive rights and
only such conversion and exchange rights as the Board may grant in its
discretion. When issued for payment as described in the Prospectus, shares
will be fully paid and non-assessable by the Fund.
There will normally be no meetings of shareholders for the purpose of
electing trustees unless and until such time as required by law. At that time,
the trustees then in office will call a shareholders' meeting to elect
trustees. Except as set forth above, the trustees shall continue to hold
office and may appoint successor trustees. The Fund's Declaration of Trust
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provides that meetings of the shareholders of the Fund shall be called by the
trustees upon the written request of shareholders owning at least 10% of the
outstanding shares entitled to vote.
The Funds' Declaration of Trust authorizes the Board of Trustees,
without shareholder approval (unless otherwise required by applicable law), to:
(i) sell and convey the assets belonging to a class of shares to another
management investment company for consideration which may include securities
issued by the purchaser and, in connection therewith, to cause all outstanding
shares of such class to be redeemed at a price which is equal to their net
asset value and which may be paid in cash or by distribution of the securities
or other consideration received from the sale and conveyance; (ii) sell and
convert the assets belonging to one or more classes of shares into money and,
in connection therewith, to cause all outstanding shares of such class to be
redeemed at their net asset value; or (iii) combine the assets belonging to a
class of shares with the assets belonging to one or more other classes of
shares if the Board of Trustees reasonably determines that such combination
will not have a material adverse effect on the shareholders of any class
participating in such combination and, in connection therewith, to cause all
outstanding shares of any such class to be redeemed or converted into shares of
another class of shares at their net asset value. However, the exercise of
such authority may be subject to certain restrictions under the 1940 Act. The
Board of Trustees may authorize the termination of any class of shares after
the assets belonging to such class have been distributed to its shareholders.
MISCELLANEOUS
COUNSEL. The law firm of Drinker Biddle & Reath, 1345 Chestnut Street,
Philadelphia, Pennsylvania 19107-3496, serves as the Fund's counsel.
INDEPENDENT ACCOUNTANTS. Coopers & Lybrand, L.L.P., 2400 Eleven Penn
Center, Philadelphia, Pennsylvania 19103, serves as the Fund's independent
accountants.
FIVE PERCENT OWNERS. The name, address and percentage ownership of
each person that on September 29, 1995 owned of record or beneficially 5% or
more of the outstanding shares of the Portfolio was as follows:
Money Market Portfolio: BHC Securities, 2005 Market St., Phila., PA 19103,
6.0%; PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113, 85.1%; Government
Money Market Portfolio: PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113,
76.5%; PNC Bank Pittsburgh, 960 Ft. Duquesne Blvd., Pittsburgh, PA 15222, 5.0%;
Municipal Money Market Portfolio: PNC Bank Pittsburgh, 960 Ft.
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Duquesne Blvd., Pittsburgh, PA 15222, 12.1%; PNC Bank Ohio, 201 E.
Fifth St., Cincinnati, OH 45202, 8.1%; PNC Bank, Saxon and Co., 200 Stevens
Dr., Suite 260, Lester, PA 19113, 73.1%; Ohio Municipal Money Market Portfolio:
BHC Securities, 2005 Market St., Phila., PA 19103, 26.4%; PNC Bank, 200 Stevens
Dr., Suite 260, Lester, PA 19113, 58.9%; North Carolina Municipal Money Market
Portfolio: Branch Banking & Trust Company, P.O. Box 1847, Wilson, N.C. 27893,
5.6%; Centura Bank, P.O. Box 1220, Rocky Mount, NC 27802, 13.1%; United
Carolina Bank Whiteville, P.O. Drawer 632, Whiteville, NC 28472, 22.3%; First
Charter National Bank, P.O. Box 228, Concord, NC 28926, 13.1%; McWood & Co.,
First Citizens Bank, P.O. Box 29522, Raleigh, NC 27626, 13.0%; North Carolina
Trust Co., 301 North Elm St., Greensboro, NC 27402, 17.0%; Pennsylvania
Municipal Money Market Portfolio: BHC Securities, 2005 Market St., Phila., PA
19103, 5.6%; PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113, 85.3%;
Virginia Municipal Money Market Portfolio: Oldom & Co., First Virginia Bank
Inc., 6400 Arlington Blvd., Falls Church, VA 22042, 77.4%; Warritrust &
Company, F&M Bank, P.O. Box 93, Warrenton, VA 22186, 5.8%; Piedmont Company,
Piedmont Trust Bank, P.O. Box 4751, Martinsville, VA 24115, 9.9%; Managed
Income Portfolio: PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113, 92.3;
Tax-Free Income Portfolio: BHC Securities, 2005 Market St., Phila., PA 19103,
15.5%; PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113, 41.5%; Ohio
Tax-Free Income Portfolio: BHC Securities, 2005 Market St., Phila., PA 19103,
32.3%; PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113, 60.6%;
Pennsylvania Tax-Free Income: BHC Securities, 100 N. 20th St., Phila., PA
19103, 46.4%; PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113, 24.9%;
Intermediate Government Portfolio: PNC Bank, 200 Stevens Dr., Suite 260,
Lester, PA 19113, 91.2%; Short-Term Bond Portfolio: Medical Practice Account,
1020 Walnut St., Phila., PA 19107, 14.3%; PNC Bank, 200 Stevens Dr., Suite 260,
Lester, PA 19113, 83.7%; Intermediate-Term Bond Portfolio: PNC Bank, 200
Stevens Dr., Suite 260, Lester, PA 19113, 92.9%; Government Income Portfolio:
BHC Securities, 100 N. 20th St., Phila., PA 19103, 20.3%; International
Emerging Markets Portfolio: First Charter National Bank, P.O. Box 228, Concord,
NC 28026, 5.6%; PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113, 88.7%;
Growth Equity Portfolio: PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA
19113, 96.4%; Index Equity Portfolio: PNC Bank, 200 Stevens Dr., Suite 260,
Lester, PA 19113, 91.5%; Small Cap Value Equity Portfolio: BHC Securities, 100
N. 20th St., Phila., PA 19103, 5.0%; PNC Bank, 200 Stevens Dr., Suite 260,
Lester, PA 19113, 81.6%; International Equity Portfolio: PNC Bank, 200 Stevens
Dr., Suite 260, Lester, PA 19113, 91.6%; Balanced Portfolio: BHC Securities,
100 N. 20th St., Phila., PA 19103, 24.9%; PNC Bank, 200 Stevens Dr., Suite 260,
Lester, PA 19113, 60.5%; Value Equity Portfolio: PNC Bank, 200 Stevens Dr.,
Suite 260, Lester, PA 19113, 91.1%; Small Cap Growth Equity Portfolio: PNC
Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113, 90.1%; and Core Equity
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Portfolio: PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113, 98.1%.
On September 29, 1995, PNC Bank held of record approximately 79% of the
Fund's outstanding shares, and may be deemed a controlling person of the Fund
under the 1940 Act. PNC Bank is a national bank organized under the laws of
the United States. All of the capital stock of PNC Bank is owned by PNC
Bancorp, Inc. All of the capital stock of PNC Bancorp, Inc. is owned by PNC
Bank Corp., a publicly-held bank holding company.
BANKING LAWS. Banking laws and regulations currently prohibit a bank
holding company registered under the Federal Bank Holding Company Act of 1956
or any bank or non-bank affiliate thereof from sponsoring, organizing,
controlling or distributing the shares of a registered, open-end investment
company continuously engaged in the issuance of its shares, and prohibit banks
generally from underwriting securities, but such banking laws and regulations
do not prohibit such a holding company or affiliate or banks generally from
acting as investment adviser, administrator, transfer agent or custodian to
such an investment company, or from purchasing shares of such a company as
agent for and upon the order of customers. PIMC, BlackRock, PCM, PEAC, PMFCO,
PFPC and PNC Bank are subject to such banking laws and regulations.
PIMC, BlackRock, PCM, PEAC, PMFCO, PFPC and PNC Bank believe they may
perform the services for the Fund contemplated by their respective agreements
with the Fund without violation of applicable banking laws or regulations. It
should be noted, however, that there have been no cases deciding whether bank
and non-bank subsidiaries of a registered bank holding company may perform
services comparable to those that are to be performed by these companies, and
future changes in either Federal or state statutes and regulations relating to
permissible activities of banks and their subsidiaries or affiliates, as well
as further judicial or administrative decisions or interpretations of present
and future statutes and regulations, could prevent these companies from
continuing to perform such services for the Fund. If such were to occur, it is
expected that the Board of Trustees would recommend that the Fund enter into
new agreements or would consider the possible termination of the Fund. Any new
advisory or sub-advisory agreement would be subject to shareholder approval.
SHAREHOLDER APPROVALS. As used in this Statement of Additional
Information and in the Prospectus, a "majority of the outstanding shares" of a
class, series or Portfolio means, with respect to the approval of an investment
advisory agreement, a distribution plan or a change in a fundamental investment
policy, the lesser of (1) 67% of the shares of the particular class, series or
Portfolio represented at a meeting at which the holders
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of more than 50% of the outstanding shares of such class, series or Portfolio
are present in person or by proxy, or (2) more than 50% of the outstanding
shares of such class, series or Portfolio.
THE FUND'S NAME. PNC Bank Corp. is the owner of the registered service
mark "PNC." The Fund has entered into a licensing agreement with respect to
its non-exclusive use of "PNC," under which it has agreed not to claim any
interest to the name "PNC" except under the agreement. The license will
terminate if it is breached by the Fund or if neither PIMC nor any of PNC Bank
Corp.'s affiliates continues as the investment adviser or manager of the Fund.
FINANCIAL STATEMENTS
The audited financial statements for the Predecessor Portfolio
contained in its Annual Report to Shareholders dated June 30, 1995 are
incorporated by reference in this Statement of Additional Information. No
other parts of the Annual Report are incorporated by reference herein.
Additional copies of the 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.
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APPENDIX A
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current
assessment of the likelihood of timely payment of debt considered short-term in
the relevant market. The following summarizes the rating categories used by
Standard and Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory.
However, the relative degree of safety is not as high as for issues designated
"A-1."
"A-3" - Issue has an adequate capacity for timely payment. It
is, however, somewhat more vulnerable to the adverse effects of changes and
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are
considered to have a superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity will normally be evidenced by the
following characteristics: leading market positions in well established
industries; high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad
margins in earning coverage of fixed financial charges and high internal cash
generation; and well established access to a range of financial markets and
assured sources of alternate liquidity.
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"Prime-2" - Issuer or related supporting institutions are
considered to have a strong capacity for repayment of short- term promissory
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics,
while still appropriate, may be more affected by external conditions. Ample
alternative liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime
rating categories.
The three rating categories of Duff & Phelps for investment
grade commercial paper and short-term debt are "D-1," "D- 2" and "D-3." Duff &
Phelps employs three designations, "D-1+," "D-1" and "D-1-," within the highest
rating category. The following summarizes the rating categories used by Duff &
Phelps for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
"D-3" - Debt possesses satisfactory liquidity, and other
protection factors qualify issue as investment grade. Risk
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factors are larger and subject to more variation. Nevertheless, timely payment
is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch short-term ratings apply to debt obligations that are
payable on demand or have original maturities of up to three years. The
following summarizes the rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit
quality. Issues assigned this rating are regarded as having the strongest
degree of assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues
assigned this rating have a satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as the "F-1+" and "F-1"
categories.
"F-3" - Securities possess fair credit quality. Issues
assigned this rating have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues
assigned this rating have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term
ratings to indicate that the rating is based upon a letter of credit issued by
a commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of
an untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one
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year or less which is issued by United States commercial banks, thrifts and
non-bank banks; non-United States banks; and broker- dealers. The following
summarizes the ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's
highest rating category and indicates a very high degree of likelihood that
principal and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of
safety regarding timely payment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment
grade category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is regarded
as non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1+" - Obligations supported by the highest capacity for
timely repayment.
"A1" - Obligations are supported by the highest capacity for
timely repayment.
"A2" - Obligations are supported by a satisfactory capacity
for timely repayment, although such capacity may be susceptible to adverse
changes in business, economic or financial conditions.
"A3" - Obligations are supported by a satisfactory capacity
for timely repayment. Such capacity is more susceptible to adverse changes in
business, economic or financial conditions than for obligations in higher
categories.
"B" - Obligations for which the capacity for timely repayment
is susceptible to adverse changes in business, economic or financial
conditions.
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"C" - Obligations for which there is an inadequate capacity to
ensure timely repayment.
"D" - Obligations which have a high risk of default or which
are currently in default.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's
for corporate and municipal debt:
"AAA" - This designation represents the highest rating
assigned by Standard & Poor's to a debt obligation and indicates an extremely
strong capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to
pay interest and repay principal and differs from AAA issues only in small
degree.
"A" - Debt is considered to have a strong capacity to pay
interest and repay principal although such issues are somewhat more susceptible
to the adverse effects of changes in circumstances and economic conditions than
debt in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The
"BB" rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but
currently has the capacity to meet interest payments and
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principal repayments. Adverse business, financial or economic conditions will
likely impair capacity or willingness to pay interest and repay principal. The
"B" rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BB" or "BB-" rating.
"CCC" - Debt has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The "CCC"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated
to senior debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no
interest is being paid.
"D" - Debt is in payment default. This rating is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S & P believes such
payments will be made during such grace period. "D" rating is also used upon
the filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid,
and certain other obligations that S & P believes may experience high
volatility or high variability in expected returns due to non-credit risks.
Examples of such obligations are: securities whose principal or interest return
is indexed to equities, commodities, or currencies; certain swaps and options;
and interest only and principal only mortgage securities.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They
carry the smallest degree of investment risk and are
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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 risks appear somewhat larger than in
"Aaa" securities.
"A" - Bonds possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be
in default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which
some other limiting condition attaches. Parenthetical rating denotes probable
credit stature upon completion of construction or elimination of basis of
condition.
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" to "B" in its bond rating system. The modifier 1
indicates that the issuer ranks in the
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higher end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issuer ranks at the lower end of
its generic rating category.
The following summarizes the long-term debt ratings used by
Duff & Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but
such protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when
due. Debt rated "B" possesses the risk that obligations will not be met when
due. Debt rated "CCC" is well below investment grade and has considerable
uncertainty as to timely payment of principal, interest or preferred dividends.
Debt rated "DD" is a defaulted debt obligation, and the rating "DP" represents
preferred stock with dividend arrearages.
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major
categories.
The following summarizes the highest four ratings used by
Fitch for corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
"AA" - Bonds considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong
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as bonds rated "AAA." Because bonds rated in the "AAA" and "AA" categories are
not significantly vulnerable to foreseeable future developments, short-term
debt of these issuers is generally rated "F-1+."
"A" - Bonds considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Bonds that
possess one of these ratings are considered by Fitch to be speculative
investments. The ratings "BB" to "C" represent Fitch's assessment of the
likelihood of timely payment of principal and interest in accordance with the
terms of obligation for bond issues not in default. For defaulted bonds, the
rating "DDD" to "D" is an assessment of the ultimate recovery value through
reorganization or liquidation.
To provide more detailed indications of credit quality, the
Fitch ratings from and including "AA" to "C" may be modified by the addition of
a plus (+) or minus (-) sign to show relative standing within these major
rating categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long- term debt ratings:
"AAA" - Obligations for which there is the lowest expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
A-9
<PAGE> 504
"A" - Obligations for which there is a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial conditions
may lead to increased investment risk.
"BBB" - Obligations for which there is currently a low
expectation of investment risk. Capacity for timely repayment of principal and
interest is adequate, although adverse changes in business, economic or
financial conditions are more likely to lead to increased investment risk than
for obligations in higher categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one
of these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree
of speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating
to denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term debt
and preferred stock which are issued by United States commercial banks, thrifts
and non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the rating categories used by Thomson BankWatch for long-term debt
ratings:
"AAA" - This designation represents the highest category
assigned by Thomson BankWatch to long-term debt and indicates that the ability
to repay principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to
repay principal and interest on a timely basis with limited incremental risk
compared to issues rated in the highest category.
"A" - This designation indicates that the ability to repay
principal and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB"
A-10
<PAGE> 505
are, however, 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 BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC"
may include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
MUNICIPAL NOTE RATINGS
A Standard and Poor's rating reflects the liquidity concerns
and market access risks unique to notes due in three years or less. The
following summarizes the ratings used by Standard & Poor's Ratings Group for
municipal notes:
"SP-1" - The issuers of these municipal notes exhibit very
strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics are given a plus (+)
designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit
speculative capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable Moody's Investment Grade
("VMIG"). Such ratings recognize the differences between short-term credit
risk and long-term risk. The following summarizes the ratings by Moody's
Investors Service, Inc. for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the
best quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
A-11
<PAGE> 506
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high
quality, with margins of protection ample although not so large as in the
preceding group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of
favorable quality, with all security elements accounted for but lacking the
undeniable strength of the preceding grades. Liquidity and cash flow
protection may be narrow and market access for refinancing is likely to be less
well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of
adequate quality, carrying specific risk but having protection commonly
regarded as required of an investment security and not distinctly or
predominantly speculative.
"SG" - Loans bearing this designation are of speculative
quality and lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
A-12
<PAGE> 507
EXHIBIT (17)(v)
THE BFM INSTITUTIONAL TRUST INC.
- --------------------------------------------------------------------------------
ANNUAL REPORT
JUNE 30, 1995
<PAGE> 508
THE BFM INSTITUTIONAL TRUST INC.
THE SHORT DURATION PORTFOLIO
<TABLE>
PORTFOLIO OF INVESTMENTS
JUNE 30, 1995
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
PRINCIPAL
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG-TERM INVESTMENTS - 98.5%
MORTGAGE PASS-THROUGHS - 51.1%
Federal Home Loan Mortgage Corporation,
$ 916 6.11%, 05/01/24, 1 year CMT (ARM)......................................... $ 925,247
980 7.00%, 08/01/99 - 04/01/00................................................ 989,801
726 7.25%, 10/01/03 - 06/01/08................................................ 728,249
358 7.38%, 03/01/06, Multi-family............................................. 358,738
1,625 8.00%, 11/01/03 - 10/01/17................................................ 1,672,998
244 8.25%, 06/01/03 - 02/01/08................................................ 250,975
380 8.75%, 01/04/13........................................................... 400,052
147 8.80%, 07/03/95, 3 year CMT (ARM)......................................... 148,810
1,335 9.25%, 12/01/08........................................................... 1,420,386
Federal National Mortgage Association,
987 5.81%, 01/01/25, 6 month LIBOR (ARM)...................................... 989,465
996 6.10%, 02/01/25, 6 month CD (ARM)......................................... 1,017,501
1,086 6.25%, 01/01/21, 1 year CMT (ARM)......................................... 1,080,020
2,212 6.00%, 11/01/02........................................................... 2,174,673
1,065 6.58%, 07/03/95, 1 year CMT (ARM)......................................... 1,070,492
967 6.61%, 12/01/24, 1 year CMT (ARM)......................................... 987,375
900 7.61%, Trust 1995-W2, Class A1, 05/25/22.................................. 910,125
232 7.85%, 05/01/18, 3 year CMT (ARM)......................................... 234,614
Government National Mortgage Association,
735 6.50%, 05/20/25, 1 Year CMT (ARM)......................................... 743,498
3,211 6.75%, 06/20/22, 1 year CMT (ARM)......................................... 3,277,512
3,288 7.50%, 03/20/25, 1 year CMT (ARM)......................................... 3,369,212
-----------
22,749,743
-----------
MULTIPLE CLASS MORTGAGE PASS-THROUGHS -23.0%
357 Collateralized Mortgage Securities Corporation,
Collateralized Mortgage Obligation, Series 1, Class 2, 05/01/13......... 362,487
Federal National Mortgage Association,
1,663 Trust 1989-18, Class 18-B, 01/25/04...................................... 1,716,595
1,061 Trust 1990-60, Class 60-J, 06/25/17...................................... 1,067,932
1,500 Trust 1993-175, Class 175-PK, 02/25/95................................... 1,481,481
450 KP Mortgage Assets Trust,
Collateralized Mortgage Obligation, Series 14, Class 14B, 09/01/14....... 455,686
682 Nomura Asset Securities Corporation,
Mortgage Pass-Through Certificates, Series 1994-3,....................... 681,055
Class A-1, 07/25/24
1,350 Resolution Trust Corporation,
Series 1992-9, Class-A2B, 07/25/29....................................... 1,359,887
</TABLE>
See Notes to Financial Statements.
7
<PAGE> 509
THE BFM INSTITUTIONAL TRUST INC.
THE SHORT DURATION PORTFOLIO
<TABLE>
PORTFOLIO OF INVESTMENTS
JUNE 30, 1995
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
PRINCIPAL
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MULTIPLE CLASS MORTGAGE PASS-THROUGHS - (CONT.)
$ 436 Salomon Brothers Mortgage Securities VII Incorporated,
Series 1993-5, Class A2, 10/25/23........................................ $ 435,186
757 Security Mortgage Acceptance Corporation,
Series B, Class 3, 11/01/06.............................................. 770,425
Small Business Administration Guaranteed Loan,
937 03/25/16, (ARM)......................................................... 954,239
919 07/25/16, (ARM)......................................................... 935,470
-----------
10,220,443
-----------
ASSET-BACKED SECURITIES - 6.6%
1,500 Colonial Credit Card Trust,
Series 1992-A, Class A, 6.80%............................................. 1,507,500
600 First Chicago Master Trust,
Series 1991-D, Class A, 8.40%............................................. 611,250
800 National Credit Card Trust,
Series 1989-4, Class A, 9.45%............................................. 821,411
-----------
2,940,161
-----------
U.S. GOVERNMENT SECURITIES - 17.8%
U.S. Treasury Notes,
3,000 6.13%, 5/15/98............................................................ 3,019,681
3,500 (a) 6.25%, 5/31/00............................................................ 3,537,170
955 6.88%, 3/31/00............................................................ 988,425
365 7.75%, 12/31/99........................................................... 389,696
-----------
7,934,972
-----------
Total Investments -98.5%
(cost $43,661,417 )....................................................... 43,845,319
Other assets in excess of liabilities - 1.5% (b)........................... 640,913
-----------
NET ASSETS - 100%.......................................................... $44,486,232
===========
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Partial principal amount pledged as collateral for reverse repurchase
agreements.
(b) Partial principal amount of receivable for investments sold pledged as
collateral for reverse repurchase agreements.
- --------------------------------------------------------------------------------
KEY TO ABBREVIATIONS
ARM: Adjustable Rate Mortgage.
CD: Certificate of Deposit.
CMT: Constant Maturity Treasury.
LIBOR: London International Bank Offering Rate.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
8
<PAGE> 510
THE BFM INSTITUTIONAL TRUST INC.
THE CORE FIXED INCOME PORTFOLIO
<TABLE>
PORTFOLIO OF INVESTMENTS
JUNE 30, 1995
- -----------------------------------------------------------------------------------------------------------------------
<CAPTION>
PRINCIPAL
RATING* AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG-TERM INVESTMENTS - 96.7%
MORTGAGE PASS-THROUGHS - 39.5%
Federal Home Loan Mortgage Corporation,
$1,500 7.50%, 01/01/99..................................................... $ 1,504,680
616 7.55%, 09/01/23, 1 year CMT (ARM)................................... 628,556
2,139 8.00%, 11/01/15 - 06/01/25.......................................... 2,183,107
Federal Housing Administration,
99 East Point Chelsea, 10.23%, 05/01/33................................ 105,191
220 Greystone, Series 1994-1, 8.93%, 06/01/20........................... 231,459
Federal National Mortgage Association,
100 6.50% Series 1994-M1, Class B, Multi-family, 10/25/03.............. 98,969
333 7.50%, 02/01/09..................................................... 342,246
251 8.00%, 09/01/09 - 06/01/17.......................................... 260,488
1,210 9.00%, 06/01/24 - 02/01/25.......................................... 1,266,361
Government National Mortgage Association,
587 6.50%, 04/20/25, 1 year CMT (AMT)................................... 593,739
243 7.00%, 02/20/25, 1 year, CMT (ARM).................................. 247,625
2,646 7.50%, 01/15/23 - 05/15/25.......................................... 2,659,231
500 8.00%, 01/01/99..................................................... 511,875
646 8.50%, 01/15/10 - 04/15/17.......................................... 674,491
144 9.00%, 11/15/17..................................................... 151,963
486 9.00%, Project Pool 275130, 10/15/24................................ 504,025
621 9.50%, Project Pool 302733, 11/15/26................................ 651,184
44 10.50%, 01/15/16.................................................... 48,211
23 11.00%, 05/15/16 - 09/20/19......................................... 25,594
10 11.50%, 07/15/13.................................................... 10,988
12 12.00%, 01/15/13 - 03/15/15......................................... 13,146
2 12.50%, 04/15/13.................................................... 1,713
-----------
12,714,842
-----------
MULTIPLE CLASS MORTGAGE PASS-THROUGHS - 3.0%
Federal National Mortgage Association, REMIC
Pass-Through Certificates,
19 Trust 1992-87, Class 87-C, 08/25/16................................. 18,907
4 Trust 1991-01, Class 1L, 01/25/21, (I).............................. 118,529
97 First Boston Company Mortgage Securities Trust, Collateralized
Mortgage Obligation, Series 2, Class A3, 08/20/17................... 99,242
</TABLE>
See Notes to Financial Statements
9
<PAGE> 511
THE BFM INSTITUTIONAL TRUST INC.
THE CORE FIXED INCOME PORTFOLIO
<TABLE>
PORTFOLIO OF INVESTMENTS
JUNE 30, 1995
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
PRINCIPAL
RATING* AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MULTIPLE CLASS MORTGAGE PASS-THROUGHS - (CONT.)
$ 104 Salomon Brothers Mortgage Secs VII Incorporated,
Series 1994-9, Class A6, 07/25/24................................... $ 98,762
171 Salomon Brothers Mortgage Trust,
Series 1987-3, Class A , 10/23/17 (P)............................... 122,617
481 Smith Barney Mortgage Capital Trust IV,
Collateral Mortgage Obligation, Series 1,
Class 1Z, 09/01/18.................................................. 511,812
--------
969,869
-------
COMMERCIAL MORTGAGE-BACKED SECURITY - 0.4%
119 First Boston Mortgage Securities Corporation,
6.75%, Series 1993-M1, Class 1A, 09/25/06........................... 116,959
--------
CORPORATE BONDS - 15.0%
FINANCE - 8.9%
A+ 100 American Gen. Fin. Corporation,
8.50%, 8/15/98...................................................... 105,753
Associates Corp. of North America,
A+ 100 6.25%, 3/15/99...................................................... 99,360
AA- 60 6.75%, 7/15/97...................................................... 60,513
A+ 350 Ford Motor Credit Company,
7.75%, 3/15/05...................................................... 370,279
A- 100 ITT Financial Corporation,
8.85%, 7/15/05...................................................... 116,670
A+ 300 Liberty Mutual Capital Corporation,
8.50%, 5/15/25...................................................... 304,673
A+ 300 Morgan Stanley Group Incorporated, Debenture,
7.50%, 2/01/24...................................................... 280,350
BBB 275 Nabisco Incorporated,
7.55%, 6/15/15...................................................... 272,860
BBB+ 150 Paine Webber Group, Incorporated,
8.88%, 3/15/05...................................................... 163,399
A 400 Prudential Insurance Company of America,
8.30%, 7/01/25...................................................... 397,241
AA 350 Republic of Italy,
6.88%, 9/27/23...................................................... 312,277
BBB 100 Shawmut Bank of Connecticut NA,
8.63%, 2/15/05...................................................... 110,415
</TABLE>
See Notes to Financial Statements
10
<PAGE> 512
THE BFM INSTITUTIONAL TRUST INC.
THE CORE FIXED INCOME PORTFOLIO
<TABLE>
PORTFOLIO OF INVESTMENTS
JUNE 30, 1995
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
PRINCIPAL
RATING* AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCE - (CONT.)
Smith Barney Holdings, Incorporated,
A- $ 100 5.38%, 6/01/96...................................................... $ 99,112
A- 50 5.50%, 1/15/99...................................................... 48,276
A- 100 Southtrust Bank Atlanta Georgia N A, Tranche SB 00001,
7.74%, 5/15/25...................................................... 105,750
----------
2,846,928
----------
INDUSTRIALS - 3.2%
A 150 American Home Products Corporation,
7.90%, 2/15/05...................................................... 161,092
A 100 Caterpillar Financial Services,
8.72%, 7/21/97...................................................... 104,690
A3 50 CSX Corporation, Debenture,
8.63%, 5/15/22...................................................... 56,608
AA- 105 Du Pont E I De Nemours and Company,
7.50%, 3/01/33...................................................... 102,291
A 100 Ford Capital Bv.,
9.13%, 4/08/96...................................................... 102,038
General Motors Corporation,
BBB+ 150 5.70%, 12/22/97..................................................... 147,075
BBB+ 350 7.63%, 5/05/03.................................................... 362,890
----------
1,036,684
----------
UTILITY - 0.1%
BBB 50 Texas Utilities Electric Company, 1st Mortgage,
7.38%, 10/01/25..................................................... 47,503
----------
SOVEREIGN & PROVINCIAL - 2.8%
AA 100 African Development Bank,
9.50%, 12/15/95..................................................... 101,553
AA+ 100 British Columbia Hydro and Power,
15.50%, Series FF, 11/15/11......................................... 117,962
A+ 100 Hydro Quebec,
8.05%, 7/07/24...................................................... 108,440
BBB+ 200 Newfoundland and Labrador Province,
8.65%, 10/22/22..................................................... 220,863
A+ 350 Quebec Province Canada,
7.50%, 7/15/23...................................................... 340,185
----------
889,003
----------
</TABLE>
See Notes to Financial Statements
11
<PAGE> 513
THE BFM INSTITUTIONAL TRUST INC.
THE CORE FIXED INCOME PORTFOLIO
<TABLE>
PORTFOLIO OF INVESTMENTS
JUNE 30, 1995
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
RATING* AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSET-BACKED SECURITIES - 11.9%
$ 800 Community Program Loan Trust,
Series 1987-A, Class A4, 4.50%.................................... $ 675,000
439 EQCC Home Equity Loan Trust,
Series 1994-1, Class B, 5.75%..................................... 418,855
Green Tree Financial Corporation,
400 Series 1993-1, Class A-3, 6.90%................................... 400,500
200 Series 1994-5, Class A4, 7.95%.................................... 216,336
700 Series 1994-D, Class M2, 9.05%.................................... 754,031
500 MBNA Master Credit Card Trust II,
Series 1995 C, Class A, 6.45%..................................... 491,016
300 Merrill Lynch Mortgage Investors Incorporated,
Series 1993-A3, Class D, 7.75%.................................... 309,516
350 National Credit Card Trust,
Series 1989-4, Class A, 9.45%..................................... 359,367
200 Standard Credit Card Master Trust,
Series 1995-1, Class A, 8.25%..................................... 219,156
----------
3,843,777
----------
STRIPPED MORTGAGE-BACKED SECURITY - 1.2%
505 Federal National Mortgage Association,
Trust 1989-16, Class 16-B , 03/25/19 (P/O) 382,421
----------
U.S. GOVERNMENT SECURITIES - 25.7%
U.S. Treasury Bonds,
380 7.13%, 2/15/23.................................................... 400,364
530 7.50%, 11/15/24................................................... 587,306
305 7.63%, 2/15/25.................................................... 344,458
435 8.75%, 8/15/20.................................................... 540,148
U.S. Treasury Notes,
95 6.25%, 5/31/00.................................................... 96,009
330 6.63%, 3/31/97.................................................... 334,280
640 6.75%, 4/30/00.................................................... 659,399
425 7.25%, 11/30/96................................................... 433,037
225 7.25%, 2/15/98.................................................... 232,382
2,100 7.50%, 1/31/97.................................................... 2,152,164
100 7.50%, 11/15/01................................................... 107,344
1,432 7.50%, 2/15/05.................................................... 1,559,319
</TABLE>
See Notes to Financial Statements
12
<PAGE> 514
THE BFM INSTITUTIONAL TRUST INC.
THE CORE FIXED INCOME PORTFOLIO
<TABLE>
PORTFOLIO OF INVESTMENTS
JUNE 30, 1995
- -----------------------------------------------------------------------------------------------------------------------
<CAPTION>
PRINCIPAL
RATING* AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. GOVERNMENT SECURITIES - (CONT.)
U.S. Treasury Notes,
$ 270 7.75%, 1/31/00................................................... $ 288,479
495 7.88%, 11/15/04.................................................. 551,306
-----------
8,285,995
-----------
Total long-term Investments
(cost $30,728,604)............................................... 31,133,981
-----------
SHORT-TERM INVESTMENT - 13.8%
REPURCHASE AGREEMENT
4,430 Lehman Brothers Inc., 6.15%, dated 6/29/95, due 7/03/95 in the
amount of $4,432,270 (cost $4,430,000; collateralized by
$4,125,000 U.S. Treasury Bond, 7.88%, 11/15/07, value of
$4,561,670)...................................................... 4,430,000
Total Investments -110.5%
(cost $35,158,604 ).............................................. 35,563,981
Liabilities in excess of other assets - (10.5%)..................... (3,373,177)
-----------
NET ASSETS - 100%................................................... $32,190,804
===========
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Using the higher of Standard & Poor's or Moody's rating.
- --------------------------------------------------------------------------------
KEY TO ABBREVIATIONS
AMT: Alternative Minimum Tax.
ARM: Adjustable Rate Mortgage.
CMT: Constant Maturity Treasury.
I: Denotes a CMO with interest only characteristics.
P/O: Principal Only.
P: Denotes a CMO with principal only characteristics.
REMIC: Real Estate Mortgage Investment Conduit.
- --------------------------------------------------------------------------------
See Notes to Financial Statements
13
<PAGE> 515
THE BFM INSTITUTIONAL TRUST INC.
STATEMENTS OF ASSETS AND LIABILITIES
JUNE 30, 1995
<TABLE>
- -----------------------------------------------------------------------------------------------------
<CAPTION>
THE SHORT THE CORE FIXED
DURATION PORTFOLIO INCOME PORTFOLIO
------------------ ----------------
<S> <C> <C>
ASSETS
Investments, at value (cost $43,661,417 and
$35,158,604, respectively) (Note 1).................... $43,845,319 $35,563,981
Cash........................................................ 637,685 2,695
Receivable for investments sold............................. 13,361,558 --
Interest receivable......................................... 395,772 385,289
Deferred organization expenses and
other assets (Note 1).................................... 47,610 28,161
----------- -----------
58,287,944 35,980,126
----------- -----------
LIABILITIES
Reverse repurchase agreements (Note 4)...................... 11,213,775 --
Payable for investments purchased........................... 2,521,918 3,734,414
Custodian fee payable....................................... 12,481 5,431
Dividends payable........................................... 8,901 23,595
Other....................................................... 44,637 25,882
----------- -----------
13,801,712 3,789,322
----------- -----------
NET ASSETS.................................................. $44,486,232 $32,190,804
=========== ===========
Net assets were comprised of:
Common stock, at par (Note 5).......................... $ 452 $ 327
Paid-in capital in excess of par....................... 44,796,243 31,983,880
----------- -----------
44,796,695 31,984,207
Undistributed net investment income.................... 1,901 --
Accumulated net realized loss.......................... (496,266) (198,780)
Net unrealized appreciation
on investments..................................... 183,902 405,377
----------- -----------
Net assets, June 30, 1995.............................. $44,486,232 $32,190,804
=========== ===========
Net asset value per share................................... $ 9.83 $ 9.85
=========== ===========
Total shares outstanding at end of period................... 4,524,485 3,267,452
- -----------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
14
<PAGE> 516
THE BFM INSTITUTIONAL TRUST INC.
STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30, 1995
<TABLE>
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
THE SHORT THE CORE FIXED
DURATION PORTFOLIO INCOME PORTFOLIO
------------------ ----------------
<S> <C> <C>
NET INVESTMENT INCOME
Income
Interest (net of premium amortization of $47,371
and $26,160 and interest expense of $51,298
and $7,093, respectively)................................ $2,277,815 $1,165,125
---------- ----------
Expenses
Investment advisory......................................... 102,707 56,894
Administration.............................................. 69,234 73,257
Custodian................................................... 62,960 57,896
Transfer agent.............................................. 30,616 32,792
Registration................................................ 13,000 16,500
Amortization of deferred organization expenses.............. 23,112 11,512
Audit....................................................... 25,300 16,750
Legal....................................................... 10,200 4,500
Printing.................................................... 13,511 5,339
Directors................................................... 2,574 2,426
Miscellaneous............................................... 5,832 5,738
---------- ----------
Total expenses........................................... 359,046 283,604
---------- ----------
Expenses waived by the Adviser (Note 2).................. (102,707) (56,894)
Expenses reimbursed by the Adviser (Note 2).............. (61,195) (137,364)
---------- ----------
(163,902) (194,258)
---------- ----------
Net expenses............................................. 195,144 89,346
---------- ----------
Net investment income....................................... 2,082,671 1,075,779
---------- ----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS (NOTE 3)
Net realized gain (loss) on:
Investments................................................. 163,516 244,290
Options..................................................... -- (10,078)
---------- ----------
163,516 234,212
Net change in unrealized depreciation........................... 745,207 840,392
---------- ----------
Net gain on investments......................................... 908,723 1,074,604
---------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS....................................... $2,991,394 $2,150,383
========== ==========
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
15
<PAGE> 517
THE BFM INSTITUTIONAL TRUST INC.
STATEMENTS OF CASH FLOWS
<TABLE>
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
THE SHORT THE CORE FIXED
DURATION PORTFOLIO INCOME PORTFOLIO
------------------ ----------------
YEAR YEAR
ENDED ENDED
JUNE 30, 1995 JUNE 30, 1995
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH Cash flows used for operating activities:
Interest received ................................................ $ 2,242,198 $ 911,230
Expenses paid .................................................... (175,126) (79,160)
Interest expense paid ............................................ (46,084) (6,819)
Proceeds (purchase of) from disposition of short-term
portfolio investments, net .................................... 4,249,000 (3,131,000)
Purchase of long-term portfolio investments ...................... (244,114,502) (112,221,637)
Proceeds from disposition of long-term portfolio
investments.................................................... 217,008,819 96,522,130
------------- -------------
Net cash flows used for operating activities .................... (20,835,695) (18,005,256)
------------- -------------
Cash flows provided by financing activities:
Increase in reverse repurchase agreements......................... 11,213,775 --
Dividends paid (excluding reinvestment of dividends
of $1,972,138 and $995,146, respectively)...................... (149,314) (76,380)
Proceeds from Trust shares sold .................................. 35,832,684 18,993,483
Cost of Trust shares redeemed .................................... (25,500,008) (1,362,388)
------------- -------------
Net cash flows provided by financing activities .................. 21,397,137 17,554,715
------------- -------------
Net increase (decrease) in cash ...................................... 561,442 (450,541)
Cash at beginning of year............................................. 76,243 453,236
------------- -------------
Cash at end of year................................................... $ 637,685 $ 2,695
============= =============
RECONCILIATION OF NET INCREASE (DECREASE)
IN NET ASSETS RESULTING FROM OPERATIONS
TO NET CASH FLOWS PROVIDED BY (USED FOR)
OPERATING ACTIVITIES
Net increase in net assets resulting from operations ................. $ 2,991,394 $ 2,150,383
------------- -------------
Increase in investments .............................................. (12,225,986) (21,912,647)
Net realized gain .................................................... (163,516) (234,212)
Increase in unrealized appreciation .................................. (745,207) (840,392)
(Increase) decrease in receivable for investments sold ............... (9,996,073) 1,257,288
Increase in interest receivable ...................................... (122,314) (234,144)
Decrease in deferred organization expenses and other assets .......... 22,686 11,421
Decrease (increase) in payable for investments purchased ............. (599,521) 1,805,074
Increase (decrease) in accrued expenses and other liabilities......... 2,842 (8,027)
------------- -------------
Total adjustments ................................................ (23,827,089) (20,155,639)
------------- -------------
Net cash flows used for operating activities ......................... $ (20,835,695) $ (18,005,256)
============= =============
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
16
<PAGE> 518
THE BFM INSTITUTIONAL TRUST INC.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
THE SHORT DURATION PORTFOLIO
----------------------------
YEAR YEAR
ENDED ENDED
JUNE 30, 1995 JUNE 30, 1994
------------- -------------
<S> <C> <C>
INCREASE (DECREASE)
IN NET ASSETS
Operations:
Net investment income.......................................... $ 2,082,671 $ 1,725,504
Net realized gain ............................................. 163,516 107,050
Net change in unrealized appreciation (depreciation)........... 745,207 (854,281)
------------ -----------
Net increase in net assets resulting
from operations............................................. 2,991,394 978,273
------------ -----------
Dividends and distributions:
Net investment income.......................................... (2,092,080) (1,771,675)
Net realized gain.............................................. (27,706) --
------------ ------------
(2,119,786) (1,771,675)
------------ ------------
Capital share transactions:
Proceeds from shares subscribed................................ 35,832,684 36,449,281
Cost of shares redeemed........................................ (25,455,008) (57,608,135)
Net asset value of shares issued in
reinvestment of dividends.................................... 1,972,138 1,605,782
------------ ------------
Increase (decrease) in net assets from capital
share transactions........................................... 12,349,814 (19,553,072)
------------ ------------
Net increase (decrease).......................................... 13,221,422 (20,346,474)
NET ASSETS
Beginning of year.................................................. 31,264,810 51,611,284
------------ ------------
End of year........................................................ $ 44,486,232 $ 31,264,810
============ ============
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
17
<PAGE> 519
THE BFM INSTITUTIONAL TRUST INC.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
THE CORE FIXED INCOME PORTFOLIO
-------------------------------
YEAR YEAR
ENDED ENDED
JUNE 30, 1995 JUNE 30, 1994
------------- -------------
<S> <C> <C>
INCREASE (DECREASE)
IN NET ASSETS
Operations:
Net investment income....................................... $ 1,075,779 $ 544,253
Net realized gain (loss).................................... 234,212 (221,036)
Net change in unrealized appreciation
(depreciation) on investments............................ 840,392 (567,698)
----------- -----------
Net increase (decrease) in net assets resulting
from operations.......................................... 2,150,383 (244,481)
----------- -----------
Dividends and distributions:
Net investment income....................................... (1,083,760) (542,010)
Net realized gain........................................... (9,414) (292,003)
----------- -----------
(1,093,174) (834,013)
----------- -----------
Capital share transactions:
Proceeds from shares subscribed.......................... 18,993,483 9,073,497
Cost of shares redeemed.................................. (1,362,388) (4,087,689)
Net asset value of shares issued in
reinvestment of dividends and distributions............ 995,146 797,134
----------- -----------
Increase in net assets from capital
share transactions..................................... 18,626,241 5,782,942
----------- -----------
Net increase................................................ 19,683,450 4,704,448
NET ASSETS
Beginning of year............................................... 12,507,354 7,802,906
----------- -----------
End of year..................................................... $32,190,804 $12,507,354
=========== ===========
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
18
<PAGE> 520
THE BFM INSTITUTIONAL TRUST INC.
FINANCIAL HIGHLIGHTS
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
THE SHORT DURATION PORTFOLIO
----------------------------
YEAR YEAR JULY 17, 1992(a)
ENDED ENDED THROUGH
JUNE 30, 1995 JUNE 30, 1994 JUNE 30, 1993
------------- ------------- -------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period...................... $ 9.71 $ 9.96 $ 10.00
------- ------- -------
Net investment income (net of $.014, $.011 and
$.005 respectively, of interest expense) (b)........ 0.58 0.48 0.51
Net realized and unrealized loss on investments........ 0.13 (0.25) (0.06)
------- ------- -------
Net increase from investment operations................... 0.71 0.23 0.45
------- ------- -------
Dividends from net investment income...................... (0.58) (0.48) (0.49)
Distributions from net realized capital gains............. (0.01) -- --
------- ------- -------
Total dividends and distributions...................... (0.59) (0.48) (0.49)
------- ------- -------
Net asset value, end of period............................ $ 9.83 $ 9.71 $ 9.96
======= ======= =======
TOTAL INVESTMENT RETURN (c)............................... 6.99% 2.33% 4.63%
RATIOS TO AVERAGE NET ASSETS:
Expenses (b).............................................. 0.57% 0.57% 0.56%(d)
Net investment income (b)................................. 6.08% 4.70% 5.32%(d)
SUPPLEMENTAL DATA:
Average net assets (in thousands) ........................ $34,236 $36,686 $67,540
Portfolio turnover ....................................... 586% 455% 513%
Net assets, end of period (in thousands).................. $44,486 $31,265 $51,611
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Commencement of investment operations.
(b) The Adviser waived fees amounting to $102,707 and $110,232 and reimbursed
expenses amounting to $61,195 and $55,582, for the periods ended June
30, 1995 and June 30, 1994, respectively. For the period July 17, 1992
through June 30, 1993, the Administrator waived fees amounting to
$64,580. If the Fund had borne all expenses, the expense ratios would
have been 1.05%, 1.02% and 0.66% for the periods ended June 30, 1995,
June 30, 1994 and June 30, 1993, respectively. The net investment income
ratios would have been 5.60%, 4.25% and 5.22% for the periods ended June
30, 1995, June 30, 1994 and June 30, 1993, respectively. The net
investment income on a per share basis would have been $0.53, $0.43 and
$0.49 for the periods ended June 30, 1995, June 30, 1994 and June 30, 1993,
respectively.
(c) Total investment return is calculated assuming a purchase of common stock
at net asset value per share on the first day and a sale at net asset value
per share on the last day of the period reported. Dividends are assumed,
for purposes of this calculation, to be reinvested at the net asset value
per share on the payment date.
(d) Annualized.
The information above represents the audited operating performance based on
an average share of common stock outstanding, total investment return,
ratios to average net assets and other supplemental data, for each of the
periods indicated. This information has been determined based upon
financial information provided in the financial statements.
See Notes to Financial Statements.
19
<PAGE> 521
THE BFM INSTITUTIONAL TRUST INC.
FINANCIAL HIGHLIGHTS
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
THE CORE FIXED INCOME PORTFOLIO
-------------------------------
YEAR YEAR DECEMBER 9, 1992 (a)
ENDED ENDED THROUGH
JUNE 30, 1995 JUNE 30, 1994 JUNE 30, 1993
------------- ------------- -------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....................... $ 9.36 $ 10.37 $10.00
------- ------- ------
Net investment income (net of $.004, $.003 and
$.001, respectively, of interest expense) (b)........ 0.62 0.55 0.32
Net realized and unrealized gains on investments........ 0.50 (0.60) 0.37
------- ------- ------
Net (decrease) increase from investment operations......... 1.12 (0.05) 0.69
------- ------- ------
Dividends from net investment income....................... (0.62) (0.55) (0.32)
Distributions from net realized capital gains.............. (0.01) (0.41) --
------- ------- ------
Total dividends and distributions....................... (0.63) (0.96) (0.32)
------- ------- ------
Net asset value, end of period............................. $ 9.85 $ 9.36 $10.37
======= ======= ======
TOTAL INVESTMENT RETURN (c)................................ 11.79% (0.69)% 6.88%
RATIOS TO AVERAGE NET ASSETS:
Expenses (b)............................................... 0.55% 0.55% 0.55%(d)
Net investment income (b).................................. 6.62% 5.61% 5.57%(d)
SUPPLEMENTAL DATA:
Average net assets (in thousands) ........................ $16,247 $ 9,702 $6,622
Portfolio turnover ....................................... 435% 722% 354%
Net assets, end of period (in thousands) ................. $32,191 $12,507 $7,803
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Commencement of investment operations.
(b) The Adviser waived fees amounting to $56,894, $34,010 and $24,761 and
reimbursed expenses amounting to $137,364, $137,179 and $0 for the periods
ended June 30, 1995, June 30, 1994 and June 30, 1993, respectively. The
Administrator waived fees amounting to $32,500 and $3,701 for the periods
ended June 30, 1994 and June 30, 1993, respectively. For the period ended
June 30, 1993, the Custodian and the Transfer Agent waived fees amounting
to $24,272 and $17,283, respectively. If the Fund had borne all expenses,
the expense ratios would have been 1.75%, 2.65% and 2.44% for the periods
ended June 30, 1995, June 30, 1994 and June 30, 1993, respectively. The net
investment income ratios would have been 5.43%, 3.51% and 3.68% for the
periods ended June 30, 1995, June 30, 1994 and June 30, 1993, respectively.
The net investment income on a per share basis would have been $0.51, $0.34
and $0.22 for the periods ended June 30, 1995, June 30, 1994 and June 30,
1993, respectively.
(c) Total investment return is calculated assuming a purchase of common stock
at net asset value per share on the first day and a sale at net asset value
per share on the last day of the period reported. Dividends are assumed,
for purposes of this calculation, to be reinvested at the net asset value
per share on the payment date.
(d) Annualized.
The information above represents audited operating performance based on an
average share of common stock outstanding, total investment return, ratios
to average net assets and other supplemental data, for each of the periods
indicated. This information has been determined based upon financial
information provided in the financial statements.
See Notes to Financial Statements.
20
<PAGE> 522
THE BFM INSTITUTIONAL TRUST INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. ORGANIZATION AND ACCOUNTING POLICIES
The BFM Institutional Trust Inc. (the "Trust") is a no-load, open-end
management investment company organized as a Maryland corporation. The Articles
of Incorporation permit the Board of Directors to create an unlimited number of
series (or "Portfolios"), each of which issues a separate class of shares and
has its own investment objective and policies. The Trust was formed on November
27, 1991 and had no operations through June 18, 1992 other than those related to
organizational matters and the sale and issuance of 10,000 shares of The Short
Duration Portfolio to BlackRock Financial Management, Inc. ( the "Adviser") for
$100,000 on June 18, 1992. The Short Duration Portfolio and The Core Fixed
Income Portfolio commenced investment operations on July 17, 1992 and December
9, 1992, respectively. On October 6, 1994, The BFM Institutional Trust Inc.,
Multi-Sector Mortgage Securities Portfolio III commenced investment operations
and is being shown in a separate report.
The Adviser has advanced certain organizational and offering expenses of
the Trust and is to be reimbursed by the Trust. Organizational costs estimated
at $282,000 have been deferred. $115,250 and $57,500 have been allocated to The
Short Duration Portfolio and to The Core Fixed Income Portfolio, respectively,
and are being amortized over a period not to exceed 60 months from the date each
Portfolio commenced investment operations. In the event that any of the original
shares owned by the Adviser (or any subsequent holder) are repurchased by the
Trust prior to the end of the 60-month period, the proceeds from the repurchase
payable in respect of such shares shall be reduced by the pro rata share (based
on the proportionate share of the original shares repurchased to the total
number of original shares outstanding at the time of repurchase) of the
unamortized deferred organization expenses as of the date of such repurchase. In
the event that a Portfolio is liquidated prior to the end of the 60-month
period, the Adviser (or any subsequent holder) shall bear the remaining
unamortized deferred organization expenses.
The following is a summary of significant accounting policies followed by
the Trust.
SECURITIES VALUATION: The Trust values mortgage-backed, asset-backed and other
debt securities on the basis of current market quotations provided by dealers or
pricing services approved by the Trust's Board of Directors. In determining the
value of a particular security, pricing services may use certain information
with respect to transactions in such securities, quotations from dealers, market
transactions in comparable securities, various relationships observed in the
market between securities, and calculated yield measures based on valuation
technology commonly employed in the market for such securities. Exchange-traded
options are valued at their last sales price as of the close of options trading
on the applicable exchanges. In the absence of a last sale, options are valued
at the average of the quoted bid and asked prices as of the close of business. A
futures contract is valued at the last sale price as of the close of the
commodities exchange on which it trades unless the Trust's Board of Directors
determine that such price does not reflect its fair value, in which case it will
be valued at its fair value as determined by the Trust's Board of Directors. Any
securities or other assets for which such current market quotations are not
readily available are valued at fair value as determined in good faith under
procedures established by and under the general supervision and responsibility
of the Trust's Board of Directors.
Short-term securities which mature in more than 60 days are valued at
current market quotations. Short-term securities which mature in 60 days or less
are valued at amortized cost, if their term to maturity from date of purchase
was 60 days or less, or by amortizing their value on the 61st day prior to
maturity, if their original term to maturity from date of purchase exceeded 60
days.
In connection with transactions in repurchase agreements, the Trust's
custodian takes possession of the underlying collateral securities, the value of
which at least equals the principal amount of the repurchase transaction,
including accrued interest. To the extent that any repurchase transaction
exceeds one business day, the value of the collateral is marked-to-
21
<PAGE> 523
market on a daily basis to ensure the adequacy of the collateral. If the seller
defaults and the value of the collateral declines or if bankruptcy proceedings
are commenced with respect to the seller of the security, realization of the
collateral by the Trust may be delayed or limited.
OPTION SELLING/PURCHASING: When the Trust sells or purchases an option, an
amount equal to the premium received or paid by the Trust is recorded as a
liability or an asset and is subsequently adjusted to the current market value
of the option written or purchased. Premiums received or paid from writing or
purchasing options which expire unexercised are treated by the Trust on the
expiration date as realized gains or losses. The difference between the premium
and the amount paid or received on effecting a closing purchase or sale
transaction, including brokerage commissions, is also treated as a realized gain
or loss. If an option is exercised, the premium paid or received is added to the
proceeds from the sale or cost of the purchase in determining whether the Trust
has realized a gain or a loss on investment transactions. The Trust, as writer
of an option, may have no control over whether the underlying securities may be
sold (call) or purchased (put) and as a result bears the market risk of an
unfavorable change in the price of the security underlying the written option.
FINANCIAL FUTURES CONTRACTS: A futures contract is an agreement between two
parties to buy or sell a financial instrument for a set price on a future date.
Initial margin deposits are made upon entering into futures contracts and can be
either cash or securities. During the period that the futures contract is open,
changes in the value of the contract are recognized as unrealized gains or
losses by "marking-to-market" on a daily basis to reflect the market value of
the contract at the end of each day's trading. Variation margin payments are
made or received, depending upon whether unrealized gains or losses are
incurred. When the contract is closed, the Trust records a realized gain or loss
equal to the difference between the proceeds from (or cost of) the closing
transaction and the Trust's basis in the contract.
Financial futures contracts, when used by the Trust, help in maintaining a
targeted duration. Futures contracts can be sold to effectively shorten an
otherwise longer duration portfolio. Duration is a measure of the price
sensitivity of a security or a portfolio to relative changes in interest rates.
For instance, a duration of "one" means that a portfolio or a security's price
would be expected to change by approximately one percent with a one percent
change in interest rates, while a duration of "five" would imply that the price
would move approximately five percent in relation to a one percent change in
interest rates. In the same sense, futures contracts can be purchased to
lengthen a portfolio that is shorter than its duration target. Thus, by buying
or selling futures contracts, the Trust can effectively "hedge" more volatile
positions so that changes in interest do not change the duration of the
portfolio unexpectedly.
The Trust may invest in financial futures contracts primarily for the
purpose of hedging its existing portfolio securities or securities the Trust
intends to purchase against fluctuations in value caused by changes in
prevailing market interest rates, or for risk management, duration management or
other portfolio management purposes. Should interest rates move unexpectedly,
the Trust may not achieve the anticipated benefits of the financial futures
contracts and may realize a loss. The use of futures transactions involves the
risk of imperfect correlation in movements in the price of futures contracts,
interest rates and the underlying hedged assets. The Trust is also at risk of
not being able to enter into a closing transaction for the futures contract
because of an illiquid secondary market. In addition, since futures are used to
shorten or lengthen a portfolio's duration, there is a risk that the portfolio
may have temporarily performed better without the hedge or that the Trust may
lose the opportunity to realize appreciation in the market price of the
underlying positions.
SHORT SALES: The Trust may make short sales of securities as a method of hedging
to offset potential price declines in similar securities owned. The Trust may
only make short sales "against-the-box". In this type of short sale, at the time
of the sale, the Trust owns or has the immediate and unconditional right to
acquire the identical security at no additional cost. When selling short
"against-the-box", the Trust foregoes an opportunity for capital appreciation in
the security.
22
<PAGE> 524
SECURITIES LENDING: The Trust may lend its portfolio securities to qualified
institutions. The loans are secured by collateral at least equal, at all times,
to the market value of the securities loaned. The Trust may bear the risk of
delay in recovery of, or even loss of rights in, the securities loaned should
the borrower of the securities fail financially. The Trust receives compensation
for lending its securities in the form of interest on the loan. The Trust also
continues to receive interest on the securities loaned, and any gain or loss in
the market price of the securities loaned that may occur during the term of the
loan will be for the account of the Trust. The Trust did not engage in
securities lending during the year ended June 30, 1995.
SECURITY TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on the trade date. Realized and unrealized gains and losses are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis and the Trust accretes premium or amortizes discount on securities
purchased using the interest method.
TAXES: It is the Trust's intention to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to shareholders. Therefore,
no federal income or excise tax provision is required.
DIVIDENDS AND DISTRIBUTIONS: The Trust declares dividends daily and pays
dividends and distributions monthly first from net investment income, then from
net realized short-term capital gains and other sources, if necessary. Net
long-term capital gains, if any, in excess of loss carryforwards are distributed
at least annually. Dividends and distributions are recorded on the ex-dividend
date. Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatments for mortgage-backed securities.
DEFERRED ORGANIZATION EXPENSES: A total of $115,250 and $57,500 were incurred in
connection with the organization of The Short Duration Portfolio and The Core
Fixed Income Portfolio, respectively. These costs have been deferred and are
being amortized ratably over a period of 60 months from the date each Portfolio
commenced investment operations.
NOTE 2. AGREEMENTS
The Trust has an Investment Advisory Agreement with the Adviser which
provides that The Short Duration Portfolio and The Core Fixed Income Portfolio
will pay to the Adviser for its services a monthly fee in an amount equal to
.30% and .35%, respectively, of average daily net assets on an annualized basis.
The Adviser has agreed to reimburse expenses from The Short Duration Portfolio
to the extent that the expenses of the Portfolio exceed .57% of average daily
net assets. For the year ended June 30, 1995, the Adviser waived fees of
$102,707 and reimbursed expenses of $61,195 from The Short Duration Portfolio.
The Adviser has agreed to waive a portion of its advisory fee from The Core
Fixed Income Portfolio to the extent that the expenses of the Portfolio exceed
.55% of average daily net assets. For the year ended June 30, 1995, the Adviser
waived fees of $56,894 and reimbursed expenses of $137,364 from The Core Fixed
Income Portfolio. The Trust has also entered into an Administration Agreement
with State Street Bank and Trust Company ("State Street"). State Street will
receive an annual fee equal to .08% of each Portfolio's net asset value up to
$75 million, .06% of the next $75 million and .04% in excess of $150 million,
subject to certain minimum requirements.
Pursuant to the agreements, the Adviser provides continuous supervision of
the investment portfolio and pays the compensation of officers of the Trust, who
are affiliated persons of the Adviser. State Street pays occupancy and certain
clerical and accounting costs of the Trust. The Trust bears all other costs and
expenses. The Adviser has agreed that, in any fiscal year, it will reimburse the
Trust for expenses (including the fees of the Adviser and amortization of
organization expenses but excluding taxes, interest, brokerage fees,
commissions, litigation
23
<PAGE> 525
and indemnification expenses and other extraordinary expenses) that exceed the
most restrictive expense limitation imposed by state securities commissions. The
most restrictive expense limitation is 2 1/2% of the average value of the
Trust's net assets during the year up to $30 million, 2% of the next $70 million
of average net assets and 1 1/2% thereafter. Such expense reimbursement, if any,
will be estimated and accrued daily. No expense reimbursement was required due
to such limitation for the year ended June 30, 1995.
The Trust has entered into a Distribution Agreement with Provident
Distributors, Inc. (the "Distributor"). Pursuant to the terms of the
Distribution Agreement, the Distributor serves as the principal underwriter and
distributor of the Trust's shares, and in that capacity makes a continuous
offering of the Trust's shares and bears the costs and expenses of printing and
distributing any copies of any prospectuses and annual and interim reports for
the Trust (after such items have been prepared and set in type) which are used
in connection with the offering of shares to securities dealers or investors,
and the cost and expenses of preparing, printing and distributing any other
literature used by the Distributor or furnished by it for use by securities
dealers in connection with the offering of the shares for sale to the public.
There is no fee payable by the Trust pursuant to the Distribution Agreement, and
there is no sales or redemption charge. The Distribution Agreement provides for
indemnification by the Trust of the Distributor, its partners, employees, agents
and affiliates for liabilities incurred by them in connection with their
services to the Trust, subject to certain limitations and conditions. The
continuance of the Distribution Agreement must be approved in the same manner as
the Investment Advisory Agreement, and the Distribution Agreement will terminate
automatically if assigned by either party thereto and is terminable with respect
to any Portfolio at any time without penalty by the Rule 12b-1 Directors (as
defined below) or by vote of a majority of the outstanding shares of the
Portfolio (as such term is defined in the Investment Company Act) on not more
than 60 days' nor less than 30 days' written notice to the Distributor and by
the Distributor on like notice to the Trust.
The Trust has adopted a Distribution and Stockholder Servicing Plan (the
"Plan") pursuant to Rule 12b-1 under the Investment Company Act pursuant to
which the Adviser is permitted to use a portion of the advisory fee it receives
from the Trust to promote the distribution of the Trust's shares and to enhance
the provision of stockholder services. The Plan was approved by a majority of
(i) the directors of the Trust and (ii) the directors of the Trust who are not
interested persons of the Trust and who have no direct or indirect financial
interest in the operation of the Plan or in any agreement related to the Plan
(Rule 12b-1 Directors). The Plan permits the Adviser to pay fees to the
Distributor. The Trust is not required or permitted under the Plan to make
payments over and above the amount of the advisory fee to promote the sale of
its shares; the Plan merely permits the reallocation of a portion of the
advisory fee the Adviser receives to pay for distribution-related activities.
From amounts received by it under the Plan, the Distributor is authorized
to make payments to securities dealers with which the Distributor has entered
into solicitation fee agreements. The Distributor may also use a portion of the
fee it receives under the Plan to cover the Distributor's cost of marketing
services and advertising on behalf of the Portfolios and to compensate
institutions who perform support services that would otherwise be performed by
the Trust or its agent. These support services may include providing such office
space, equipment, telephone facilities and various personnel as may be necessary
or beneficial to establish and maintain stockholders' accounts and records,
process purchase and redemption transactions, answer routine client inquiries
and provide such other services to the Trust as may reasonably be requested.
The Plan will continue from year to year, provided that each such
continuance is approved at least annually by a vote of the Board of Directors,
including a majority vote of the Rule 12b-1 Directors, cast in person at a
meeting called for the purpose of voting on such continuance. The Plan may be
terminated with respect to any Portfolio at any time, without penalty, by the
vote of a majority of the Rule 12b-1 Directors or by the vote of the holders of
a majority of the outstanding shares of the Portfolio. The Plan may not be
amended materially without the approval of the Board of Directors, including a
majority of the Rule 12b-1 Directors, cast in person at a meeting called for
that purpose. Any modification to the Plan which would
24
<PAGE> 526
materially increase the amount of money to be spent by a Portfolio must also be
submitted to the stockholders of the Portfolio for approval.
Certain directors of the Trust who are not interested parties are paid a
fee for their services in the amount of $2,500 on an annual basis.
On February 28, 1995, the Adviser was acquired by PNC Bank, NA. Following
the acquisition, the Adviser has become a wholly-owned corporate subsidiary of
PNC Asset Management Group, Inc., the holding company for PNC's asset management
businesses. Additionally, on July 1, 1995, the transfer agent, custodial and
administration function for Trust were assumed by PFPC (a wholly-owned corporate
subsidiary of PNC Bank, NA) and PNC Bank NA.
25
<PAGE> 527
NOTE 3. PORTFOLIO SECURITIES
Purchases and sales of investment securities, other than short-term
investments and dollar rolls, for each Portfolio for the year ended June 30,
1995 were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
--------- -----
<S> <C> <C>
The Short Duration Portfolio ................... $223,262,351 $205,368,569
The Core Fixed Income Portfolio ................ 91,607,699 72,142,031
</TABLE>
The federal income tax basis of the investments of The Short Duration
Portfolio at June 30, 1995 was substantially the same as the basis for financial
reporting. The federal income tax basis of the investments of The Core Fixed
Income Portfolio at June 30, 1995 was $35,166,628. Accordingly, net unrealized
appreciation (depreciation) for federal income tax purposes were as follows:
<TABLE>
<CAPTION>
NET UNREALIZED
GROSS UNREALIZED APPRECIATION
APPRECIATION (DEPRECIATION) (DEPRECIATION)
------------ -------------- --------------
<S> <C> <C> <C>
The Short Duration Portfolio ................... $283,149 $ (99,247) $183,902
The Core Fixed Income Portfolio ................ 498,120 (100,767) 397,353
</TABLE>
For federal income tax purposes, The Short Duration Portfolio had a capital
loss carryforward at June 30, 1995 of $258,570 which will expire in 2002. The
Core Fixed Income Portfolio had a capital loss carryforward at June 30, 1995 of
$114,851 which will expire in 2003. Accordingly, no capital gains distribution
is expected to be paid to shareholders until net gains have been realized in
excess of such amounts. A tax election will be made to defer all losses incurred
in the post-October period of the current fiscal year to the fiscal year ended
June 30, 1996.
NOTE 4. REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
Reverse Repurchase Agreements: The Trust may enter into reverse repurchase
agreements with qualified, third party broker-dealers as determined by and under
the direction of the Trust's Board of Directors. Interest on the value of
reverse repurchase agreements issued and outstanding will be based upon
competitive market rates at the time of issuance. At the time the Trust enters
into a reverse repurchase agreement, it will establish and maintain a segregated
account with the lender containing liquid high grade securities having a value
not less than the repurchase price, including accrued interest, of the reverse
repurchase agreement.
The average daily balance of reverse repurchase agreements outstanding in
The Short Duration Portfolio during the year ended June 30, 1995 was
approximately $1,437,000 at a weighted average interest rate of approximately
5.86%. The maximum amount of reverse repurchase agreements outstanding at any
month-end during the year was $11,213,775 as of June 30, 1995 which was 19.24%
of total assets. The average daily balance of reverse repurchase agreements
outstanding in The Core Fixed Income Portfolio during the year ended June 30,
1995 was approximately $424,000 at a weighted average interest rate of
approximately 5.32%. The maximum amount of reverse repurchase agreements
outstanding at any month-end during the period was $509,975 as of March 31, 1995
which was 2.34% of total assets. There were no reverse repurchase agreements
outstanding at June 30, 1995.
Dollar Rolls: The Trust may enter into dollar rolls in which the Trust sells
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 the Trust forgoes principal and
interest paid on the securities. The Trust will be compensated by the interest
earned on the cash proceeds of the initial sale and by the lower repurchase
price at the future date.
26
<PAGE> 528
The average monthly balance of dollar rolls outstanding in The Short
Duration Portfolio during the year ended June 30, 1995 was $165,599. The maximum
amount of dollar rolls outstanding at any month-end during the year was $994,375
as of October 31, 1994, which was 0.52% of total assets. There were no dollar
rolls outstanding at June 30, 1995. The average monthly balance of dollar rolls
outstanding in The Core Fixed Income Portfolio during the year ended June 30,
1995 was $89,553 The maximum amount of dollar rolls outstanding at any month-end
during the year was $284,186 as of November 30, 1994, which was 2.02% of total
assets. There were no dollar rolls outstanding at June 30, 1995.
NOTE 5. CAPITAL
The Trust is authorized to issue 2 billion shares of $.0001 par value
capital stock in one or more classes or series. The Short Duration Portfolio and
The Core Fixed Income Portfolio are each authorized to issue 100 million shares.
Of the 4,524,485 shares of The Short Duration Portfolio outstanding at June 30,
1995, the Adviser owned 11,718 shares. Of the 3,267,452 shares of The Core Fixed
Income Portfolio outstanding at June 30, 1995, the Adviser owned 2 shares.
Transactions in shares were as follows:
<TABLE>
<CAPTION>
THE SHORT DURATION PORTFOLIO
----------------------------
YEAR YEAR
ENDED ENDED
JUNE 30, 1995 JUNE 30, 1994
------------- -------------
<S> <C> <C>
Shares subscribed .................................... 3,732,764 3,673,276
Shares issued in connection with
the reinvestment of dividends .................... 202,717 162,452
---------- ----------
3,935,481 3,835,728
Shares redeemed ...................................... (2,629,898) (5,800,442)
---------- ----------
Net increase (decrease)............................... 1,305,583 (1,964,714)
========== ==========
</TABLE>
<TABLE>
<CAPTION>
THE CORE FIXED INCOME PORTFOLIO
-------------------------------
YEAR YEAR
ENDED ENDED
JUNE 30, 1995 JUNE 30, 1994
------------- -------------
<S> <C> <C>
Shares subscribed .................................... 1,971,644 903,352
Shares issued in connection with the
reinvestment of dividends and distributions....... 104,932 80,352
--------- -------
2,076,576 983,704
Shares redeemed ...................................... (145,220) (399,930)
--------- --------
Net increase ......................................... 1,931,356 583,774
========= ========
</TABLE>
NOTE 6. DIVIDENDS
Subsequent to June 30, 1995 the Board of Directors of the Trust declared a
dividend from undistributed earnings of $0.05304 and $0.05613 per share for The
Short Duration Portfolio and The Core Fixed Income Portfolio, respectively,
payable July 31, 1995 to shareholders of record on July 31, 1995.
27
<PAGE> 529
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
The Shareholders and Board of Directors of
The BFM Institutional Trust Inc.:
We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments, of The Short Duration Portfolio and The Core
Fixed Income Portfolio of The BFM Institutional Trust Inc. as of June 30, 1995
and the related statements of operations and of cash flows for the year then
ended, the statements of changes in net assets for the years ended June 30, 1995
and 1994, and financial highlights for the years ended June 30, 1995 and 1994,
and (i) the period July 17, 1992 (commencement of investment operations) to June
30, 1993 for The Short Duration Portfolio and (ii) the period December 9, 1992
(commencement of investment operations) to June 30, 1993 for The Core Fixed
Income Portfolio. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at June 30,
1995 by correspondence with the custodian and brokers; where replies were not
received from brokers, we performed other auditing procedures. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of The Short Duration
Portfolio and The Core Fixed Income Portfolio of The BFM Institutional Trust
Inc. at June 30, 1995 and the results of their operations, their cash flows, the
changes in their net assets and their financial highlights for the periods
stated, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
New York, New York
August 7, 1995
27
<PAGE> 530
- --------------------------------------------------------------------------------
THE BFM INSTITUTIONAL TRUST INC.
TAX INFORMATION
- --------------------------------------------------------------------------------
As of The Core Fixed Income Porfolio's fiscal year end (June 30, 1995) total
dividends to shareholders exceeded taxable income by $9,414, or $0.003 per
share, and was paid from current realized capital gains income. This designation
does not impact the net asset value of the Portfolio or the number or shares
owned.
In January 1996, after definitive information has been provided to the
Portfolio, shareholders will receive a Form 1099-DIV which will reflect the
amount of the dividends declared and the actual amount which is taxable in
calendar 1995 and reportable on their 1995 federal tax return.
If you have any questions regarding your investment, please do not hesitate to
contact BlackRock Financial Management, Inc., the Investment Adviser, at (800)
227-7BFM.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
There have been no material changes in the Trust's investment objectives or
policies that have not been approved by the shareholders, or to its charter or
by-laws, or in the principal risk factors associated with investment in the
Trust. There have been no changes in the persons who are primarily responsible
for the day-to-day management of the Trust's portfolio.
At a Special Meeting of Trust Shareholders on February 15, 1995, the
Shareholders approved the investment advisory agreement for the Portfolio with
BlackRock Financial Management, Inc. The results of the voting is as follows:
<TABLE>
<CAPTION>
VOTES VOTES VOTES
FOR AGAINST WITHHELD
----- ------- --------
<S> <C> <C> <C>
The Short Duration Portfolio 930,411 -- --
The Core Fixed Income Portfolio 1,098,752 -- --
</TABLE>
28
<PAGE> 531
- --------------------------------------------------------------------------------
THE BFM INSTITUTIONAL TRUST INC.
GLOSSARY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
ADJUSTABLE RATE MORTGAGE-BACKED Mortgage instruments with interest rates
SECURITIES (ARMS): that adjust at periodic intervals at a
fixed amount relative to the market levels
of interest rates as reflected in specified
indexes. ARMS are backed by mortgage loans
secured by real property.
ASSET-BACKED SECURITIES: Securities backed by various types of
receivables such as automobile and credit
card receivables.
COLLATERALIZED MORTGAGE Mortgage-backed securities which separate
OBLIGATIONS (CMOS): mortgage pools into short-, medium-, and
long-term securities with different
priorities for receipt of principal and
interest. Each class is paid a fixed or
floating rate of interest at regular
intervals. Also known as multiple-class
mortgage pass-throughs.
DIVIDEND: This is income generated by securities in a
portfolio and distributed to shareholders
after the deduction of expenses. This Trust
declares dividends daily and pays dividends
on a monthly basis.
DIVIDEND REINVESTMENT: Shareholders may elect to have all
distributions of dividends and capital gains
automatically reinvested into additional
shares of the Trust.
FHA: Federal Housing Administration, a government
agency that facilitates a secondary mortgage
market by providing an agency that
guarantees timely payment of interest and
principal on mortgages.
FHLMC: Federal Home Loan Mortgage Corporation, a
publicly owned, federally chartered
corporation that facilitates a secondary
mortgage market by purchasing mortgages from
lenders such as savings institutions and
reselling them to investors by means of
mortgage-backed securities. Obligations of
FHLMC are not guaranteed by the U.S.
government, however; they are backed by
FHLMC's authority to borrow from the U.S.
government. Also known as Freddie Mac.
FNMA: Federal National Mortgage Association, a
publicly owned, federally chartered
corporation that facilitates a secondary
mortgage market by purchasing mortgages from
lenders such as savings institutions and
reselling them to investors by means of
mortgage-backed securities. Obligations of
FNMA are not guaranteed by the U.S.
government, however; they are backed by
FNMA's authority to borrow from the U.S.
government. Also known as Fannie Mae.
</TABLE>
29
<PAGE> 532
- -------------------------------------------------------------------------------
THE BFM INSTITUTIONAL TRUST INC.
GLOSSARY
- -------------------------------------------------------------------------------
GNMA: Government National Mortgage Association, a
government agency that facilitates a
secondary mortgage market by providing an
agency that guarantees timely payment of
interest and principal on mortgages. GNMA's
obligations are supported by the full faith
and credit of the U.S. Treasury. Also known
as Ginnie Mae.
GOVERNMENT SECURITIES: Securities issued or guaranteed by the U.S.
government, or one of its agencies or
instrumentalities, such as GNMA (Government
National Mortgage Association), FNMA
(Federal National Mortgage Association) and
FHLMC (Federal Home Loan Mortgage
Corporation).
INTEREST-ONLY SECURITIES: Mortgage securities that receive only the
(I/O) interest cash flows from an underlying pool
of mortgage loans or underlying pass-through
securities. Also known as a Strip.
MORTGAGE DOLLAR ROLLS: A mortgage dollar roll is a transaction in
which the Trust sells mortgage-backed
securities for delivery in the current month
and simultaneously contracts to repurchase
substantially similar (although not the
same) securities on a specified future date.
During the "roll" period, the Trust does not
receive principal and interest payments on
the securities, but is compensated for
giving up these payments by the difference
in the current sales price (for which the
security is sold) and lower price that the
Trust pays for the similar security at the
end date as well as the interest earned on
the cash proceeds of the initial sale.
MORTGAGE PASS- Mortgage-backed securities issued by
THROUGHS: Fannie Mae, Freddie Mac or Ginnie Mae.
MULTIPLE-CLASS PASS- See Collateralized Mortgage Obligations.
THROUGHS:
NET ASSET VALUE (NAV): Net asset value is the total market value of
all securities and other assets held by the
Trust, plus income accrued on its
investments, minus any liabilities including
accrued expenses, divided by the total
number of outstanding shares. It is the
underlying value of a single share on a
given day. Net asset value for the Trust is
calculated daily and published in The New
York Times and The Wall Street Journal.
OPEN-END FUND: Investment vehicle which continually offers
its shares to the public at net asset value
and redeems its shares anytime at the
prevailing net asset value. The fund invests
in a portfolio of securities in accordance
with its stated investment objectives and
policies.
30
<PAGE> 533
- --------------------------------------------------------------------------------
THE BFM INSTITUTIONAL TRUST INC.
GLOSSARY
- --------------------------------------------------------------------------------
PRINCIPAL-ONLY SECURITIES Mortgage securities that receive only the
(P/O): principal cash flows from an underlying pool
of mortgage loans of underlying pass-through
securities, also known as a strip.
PROJECT LOANS: Mortgages for multi-family, low- to
middle-income housing.
REMIC: Real Estate Mortgage Investment Conduit, a
multiple-class security backed by
mortgage-backed securities or whole mortgage
loans and formed as a trust, corporation,
partnership, or segregated pool of assets
that elects to be treated as a REMIC for
federal tax purposes. Generally, Fannie Mae
REMICs are formed as trusts and are backed
by mortgage-backed securities.
RESIDUALS: Securities issued in connection with
collateralized mortgage obligations that
generally represent the excess cash flow
from the mortgage assets underlying the CMO
after payment of principal and interest on
the other CMO securities and related
administrative expenses.
REVERSE REPURCHASE AGREEMENTS: In a reverse repurchase agreement, the Trust
sells securities and agrees to repurchase
them at a mutually agreed date and price.
During this time, the Trust continues to
receive the principal and interest payments
from that security. At the end of the term,
the Trust receives the same securities that
were sold for the same initial dollar amount
plus interest on the cash proceeds of the
initial sale.
STRIPS: Arrangements in which a pool of assets is
separated into two classes that receive
different proportions of the interest and
principal distribution from underlying
mortgage-backed securities. IO's and PO's
are examples of strips.
32
<PAGE> 534
- --------------------------------------------------------------------------------
BLACKROCK FINANCIAL MANAGEMENT, INC.
SUMMARY OF CLOSED-END FUNDS
- --------------------------------------------------------------------------------
<TABLE>
TAXABLE TRUSTS
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
MATURITY
STOCK SYMBOL DATE
------------ --------
<S> <C> <C>
PERPETUAL TRUSTS
The BlackRock Income Trust Inc. ......................................... BKT N/A
The BlackRock North American Government Income Trust Inc, ............... BNA N/A
TERM TRUSTS
The BlackRock 1998 Term Trust Inc. ...................................... BBT 12/98
The BlackRock 1999 Term Trust Inc. ...................................... BNN 12/99
The BlackRock Target Term Trust Inc. .................................... BTT 12/00
The BlackRock 2001 Term Trust Inc. ...................................... BLK 06/01
The BlackRock Strategic Term Trust Inc. ................................. BGT 12/02
The BlackRock Investment Quality Term Trust Inc. ........................ BQT 12/04
The BlackRock Advantage Term Trust Inc. ................................. BAT 12/05
The BlackRock Broad Investment Grade 2009 Term Trust Inc. ............... BCT 12/09
</TABLE>
<TABLE>
TAX-EXEMPT TRUSTS
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
MATURITY
STOCK SYMBOL DATE
<S> <C> <C>
PERPETUAL TRUSTS
The BlackRock Investment Quality Municipal Trust Inc. ................... BKN N/A
The BlackRock California Investment Quality Municipal Trust Inc. ........ RAA N/A
The BlackRock Florida Investment Quality Municipal Trust................. RFA N/A
The BlackRock New Jersey Investment Quality Municipal
Trust Inc............................................................ RNJ N/A
The BlackRock New York Investment Quality Municipal
Trust Inc............................................................ RNY N/A
TERM TRUSTS
The BlackRock Municipal Target Term Trust Inc. .......................... BMN 12/06
The BlackRock Insured Municipal 2008 Term Trust Inc. .................... BRM 12/08
The BlackRock California Insured Municipal 2008 Term
Trust Inc. ......................................................... BFC 12/08
The BlackRock Florida Insured Municipal 2008 Term Trust.................. BRF 12/08
The BlackRock New York Insured Municipal 2008 Term
Trust Inc. ........................................................ BLN 12/08
The BlackRock Insured Municipal Term Trust Inc. ......................... BMT 12/10
</TABLE>
If would like further information
please call BlackRock
33
<PAGE> 535
at (800) 227-7BFM (7236) or
consult with your financial advisor.
34
<PAGE> 536
- --------------------------------------------------------------------------------
BLACKROCK FINANCIAL MANAGEMENT, INC.
AN OVERVIEW
- --------------------------------------------------------------------------------
BlackRock Financial Management, Inc. (BlackRock), is a registered
investment adviser which specializes in managing high quality fixed income
securities, both taxable and tax-exempt. BlackRock currently manages over $32
billion of assets in 80 portfolios of government, mortgage, corporate and
municipal securities. These assets are managed on behalf of many individual
investors in twenty-one closed-end funds and four open-end funds and on behalf
of more than 80 institutional clients in the United States and overseas.
BlackRock's institutional investor base includes Chrysler Corporation Master
Retirement Trust, General Retirement System of the City of Detroit, State
Treasurer of Florida, Ford Motor Company Pension Plan, General Electric Pension
Trust and Unisys Corporation Master Trust.
BlackRock was formed in April 1988 by fixed income professionals who sought
to create an asset management firm specializing in managing fixed income
securities for individual and institutional investors. The professionals at
BlackRock have extensive experience creating, analyzing and trading a variety of
fixed income instruments, including the most complex structured securities. In
fact, individuals at BlackRock are responsible for many of the major innovations
in the mortgage-backed and asset-backed securities markets, including the
creation of the CMO, the floating rate CMO, the senior/subordinated pass-through
and the multi-class asset-backed security.
BlackRock is unique among asset management and advisory firms in the
significant emphasis it places on the development of proprietary analytical
capabilities. A quarter of the professionals at BlackRock work full-time in the
design, maintenance and use of such systems which are otherwise not generally
available to investors. BlackRock's proprietary analytical tools are used for
evaluating, investing in and designing investment strategies and portfolios of
fixed income securities, including mortgage securities, corporate debt
securities or tax-exempt securities and a variety of hedging instruments.
BlackRock has developed investment products which respond to investors'
needs and has been responsible for several major innovations in closed-end
funds. BlackRock introduced the first closed-end mortgage fund, the first
taxable and tax-exempt closed-end funds to offer a finite term, the first
closed-end fund to achieve a AAAf rating by Standard & Poor's, and the first
closed-end fund to invest primarily in North American Government securities.
BlackRock's closed-end funds currently have dividend reinvestment plans which
are designed to provide an ongoing source of demand for the stock in the
secondary market. BlackRock manages a ladder of alternative investment vehicles,
with each fund having specific investment objectives and policies.
In view of our continued desire to provide a high level of service to all
our shareholders, BlackRock maintains a toll-free number for your questions. The
number is (800) 227-7BFM (7236). We encourage you to call us with any questions
you may have about your BlackRock funds and thank you for the continued trust
you place in our abilities.
35
<PAGE> 537
[To be inserted after Portfolio of Investments]
KEY TO ABBREVIATIONS
ABS: Asset-Backed Security
ARM: Adjustable Rate Mortgage
CMO: Collateralized Mortgage Obligation
GNMA: Government National Mortgage Association
FHA: Federal Housing Authority
FHLMC: Federal Home Loan Mortgage Corporation
FNMA: Federal National Mortgage Association
I/O: Interest-Only
MBS: Mortgage-Backed Security
NAV: Net Asset Value
PAC: Planned Amortization Class
P/O: Principal-Only
REMIC: Real Estate Mortgage Conduit
36
<PAGE> 538
DIRECTORS
Kent Dixon
Frank J. Fabozzi
James Grosfeld
OFFICERS
James Grosfeld, President
Frank J. Fabozzi, Vice President
Kent Dixon, Treasurer and Secretary
INVESTMENT ADVISER
BlackRock Financial Management, Inc.
345 Park Avenue
New York, NY 10154
(800) 227-7BFM
ADMINISTRATOR, CUSTODIAN AND TRANSFER AGENT
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281-1434
LEGAL COUNSEL
Skadden, Arps, Slate, Meagher & Flom
919 Third Avenue
New York, NY 10022
This report is for shareholder information. This is not a prospectus intended
for use in the purchase or sale of Trust shares.
THE BFM INSTITUTIONAL TRUST INC.
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
(800) 227-7BFM
<PAGE> 539
THE PNC(R) FUND
(INSTITUTIONAL SHARES OF THE OF THE
MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III)
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A ITEM LOCATION
- -------------- --------
PART A PROSPECTUS
<S> <C> <C>
1. Cover page . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expense Table
3. Condensed Financial Information . . . . . . . . . . . . . . . . . Financial Highlights
4. General Description of Registrant . . . . . . . . . . . . . . . . Cover Page; Investment
Policies;
Description of
Shares
5. Management of the Fund . . . . . . . . . . . . . . . . . . . . . . Management
5A. Management's Discussion of Fund Performance . . . . . . . . . . . Inapplicable
6. Capital Stock and Other Securities . . . . . . . . . . . . . . . . Cover Page; Dividends
and Distributions;
Description of
Shares
7. Purchase of Securities Being Offered . . . . . . . . . . . . . . . Purchase and Redemption
of Shares;
Dividends and Distributions
Net Asset Value
8. Redemption or Repurchase . . . . . . . . . . . . . . . . . . . . . Purchase and Redemption
of Shares -
Redemption of
Shares
9. Pending Legal Proceedings . . . . . . . . . . . . . . . . . . . . Inapplicable
</TABLE>
<PAGE> 540
THE MULTI-SECTOR MORTGAGE
SECURITIES PORTFOLIO III
The PNC(R) Fund (the "Fund") consists of 30 investment portfolios. This
Prospectus relates to shares ("Institutional Shares" or "Shares") representing
interests in the Multi-Sector Mortgage Securities Portfolio III (the
"Portfolio"). The Portfolio seeks to provide a total rate of return before
fees and expenses over a rolling twelve-month period that exceeds the total
rate of return of the Salomon Broad Investment Grade Index over the same period
by at least 1.60% on an annualized basis. The securities in which the
Portfolio may invest include, but are not limited to, Commercial and
Residential Mortgage-Backed Securities, collateralized mortgage obligations,
real estate mortgage investment conduits, adjustable rate mortgages and U.S.
Treasury and agency securities. The Portfolio will maintain a dollar-weighted
average credit quality of at least A-/A3, with U.S. Government securities being
assigned a AAA rating.
INVESTMENTS IN THE PORTFOLIO MAY INCLUDE SECURITIES HAVING A CREDIT
QUALITY BELOW INVESTMENT GRADE. SUCH SECURITIES, ALSO CALLED "JUNK BONDS," ARE
CONSIDERED TO BE SPECULATIVE AND MAY BE SUBJECT TO SPECIAL RISKS, INCLUDING A
GREATER RISK OF LOSS OF PRINCIPAL AND NON-PAYMENT OF INTEREST. SEE
"DESCRIPTION OF SECURITIES -- LOWER RATED SECURITIES" AND "RISK FACTORS".
Institutional Shares of the Portfolio ("Shares") are sold at net asset
value to institutional investors ("Institutions").
This Prospectus contains information that a prospective investor needs to
know before investing. Please keep it for future reference. A Statement of
Additional Information currently dated ____________, 1995 has been filed with
the Securities and Exchange Commission (the "SEC"). The current Statement of
Additional Information may be obtained free of charge from the Fund by calling
(800) 422-6538. The Statement of Additional Information, as it may be
supplemented from time to time, is incorporated by reference in this
Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 541
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION OR ANY OTHER BANK AND SHARES ARE
NOT INSURED BY, GUARANTEED BY, OBLIGATIONS OF OR OTHERWISE SUPPORTED BY THE
U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD, OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENTS IN SHARES OF THE FUND
INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL AMOUNT
INVESTED.
PROSPECTUS , 1995
---------
-2-
<PAGE> 542
INTRODUCTION
- --------------------------------------------------------------------------------
The Fund is an open-end management investment company which has registered
shares in 30 investment portfolios, of which only the Portfolio is described in
this Prospectus.
PORTFOLIO MANAGEMENT
BlackRock Financial Management Inc. ("BlackRock" or the "Adviser") serves
as investment adviser to the Portfolio. The investment adviser is an indirect
wholly-owned subsidiary of PNC Bank Corp.
THE ADMINISTRATORS
PNC Mutual Fund Company ("PMFCO"), PFPC Inc. ("PFPC") and Provident
Distributors, Inc. ("PDI") serve as the Fund's administrators (collectively,
the "Administrators").
THE DISTRIBUTOR
Provident Distributors, Inc. (the "Distributor") serves as the Fund's
distributor.
-3-
<PAGE> 543
EXPENSE TABLE
ANNUAL OPERATING EXPENSES FOR INSTITUTIONAL SHARES AFTER FEE WAIVERS AND
EXPENSE
REIMBURSEMENTS AS A PERCENTAGE OF DAILY NET ASSETS
<TABLE>
<S> <C>
Advisory fees . . . . . . . . . . . . . . 0.25%(a)
Other expenses . . . . . . . . . . . . . 0.12%(b)
-----
Total operating expenses . . . . . . . . 0.37%
=====
- ---------------
</TABLE>
(a) BlackRock reserves the right in its sole discretion to reduce the
advisory fee charged to the Portfolio.
(b) BlackRock has agreed to cap the "Other expenses" for the Portfolio at
this level.
EXAMPLE
An investor in Institutional Shares would pay the following expenses on a
$1,000 investment in Shares of the Portfolio, assuming (1) 5% annual return,
and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
FIVE TEN
ONE YEAR THREE YEARS YEARS YEARS
-------- ----------- ----- -----
<S> <C> <C> <C> <C>
Multi-Sector Mortgage Securities
Portfolio III . . . . . . . . . . $4 $12 $21 $48
</TABLE>
The foregoing Expense Table and Example are intended to assist investors
in understanding the Portfolio's estimated annual operating expenses with
respect to Institutional Shares based on the level of such expenses during its
most recent fiscal period, adjusted to reflect current fees and expenses.
Investors bear these expenses either directly or indirectly. See "Financial
Highlights--Background," "Management," "Purchase and Redemption of Shares" and
"Description of Shares" for a more complete description of shareholder
transaction expenses and operating expenses.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
INVESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND
OPERATING EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
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CERTAIN RISK FACTORS TO CONSIDER
An investment in the Portfolio is subject to certain investment
considerations, as set forth in detail under "Investment Policies." As with
other mutual funds, there can be no assurance that the Portfolio will achieve
its investment objective. The following are some of these considerations. The
Portfolio may invest in both Commercial Mortgage-Backed Securities and
Residential Mortgage-Backed Securities. The Portfolio may invest in lower
credit quality securities, which are commonly referred to as "junk bonds." The
Portfolio is classified as non-diversified under the Investment Company Act of
1940 (the "1940 Act"). The Portfolio (subject to limitations described herein)
may use various other investment management techniques that also involve
special considerations including purchasing illiquid securities, engaging in
hedging transactions, selling listed and over-the-counter covered call options,
making forward commitments, entering into repurchase agreements, purchasing
securities on a when-issued basis, entering into interest rate swaps and
purchasing or selling interest rate caps and floors. For further discussion of
these practices and the associated risks and special considerations, see
"Description of Securities", "Other Investment Practices" and "Risk Factors."
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<PAGE> 545
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
BACKGROUND
The Portfolio commenced investment operations on October 6, 1994 as a
separate investment portfolio (the "Predecessor Portfolio") of The BFM
Institutional Trust Inc., which was organized as a Maryland corporation. On
__________, 1995, the assets and liabilities of the Predecessor Portfolio
transferred to the Portfolio, which had no prior operating history. The
Predecessor Portfolio also received investment advisory services from
BlackRock.
The financial highlights set forth certain information concerning the
investment results of the Predecessor Portfolio for the fiscal period ended
June 30, 1995. The financial statements and notes thereto for the Predecessor
Portfolio were audited by the Predecessor Portfolio's former independent
accountants, whose report thereon is incorporated by reference into the
Statement of Additional Information. Additional information about the
performance of the Predecessor Portfolio is contained in the Predecessor
Portfolio's annual report. Both the Statement of Additional Information and
the Predecessor Portfolio's annual report may be obtained from the Portfolio
free of charge by calling the number on the front cover of this Prospectus.
During the period shown, the Predecessor Portfolio offered one class of shares
to institutional investors.
<TABLE>
<CAPTION>
THE MULTI-SECTOR
MORTGAGE SECURITIES
PORTFOLIO III
-------------------
OCTOBER 6, 1994*
THROUGH
JUNE 30, 1995
---------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period . . . . . $1,000.00
Net investment income (a) . . . . . . . . . . 55.81
Net realized and unrealized gain
on investments . . . . . . . . . . . . . . 68.11
---------
Net increase
from investment operations . . . . . . . . 123.92
---------
Dividends from net investment income . . . . . (55.81)
---------
Net asset value, end of period . . . . . . . . $1,068.11
=========
TOTAL INVESTMENT RETURN (b) . . . . . . . . . . 12.78%
RATIOS TO AVERAGE NET ASSETS:
Expenses (a) . . . . . . . . . . . . . . . . . 0.37%(c)
Net investment income (a) . . . . . . . . . . . 7.54%(c)
SUPPLEMENTAL DATA:
Average net assets (in thousands) . . . . . . . $103,332
Portfolio turnover . . . . . . . . . . . . . . 215%
Net assets, end of period (in thousands) . . . $112,810
</TABLE>
- -------------------------------------------------------------------------------
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<PAGE> 546
* Commencement of investment operations.
(a) For the period ended June 30, 1995, the Adviser waived expenses amounting
to $56,269. Net investment income before waiver of fees would have been
$55.28 on a per share basis and the ratio of net operating expenses to
average net assets and the ratio of net investment income to average net
asset would have been 0.45% and 7.46%, respectively.
(b) Total investment return is calculated assuming a purchase of common stock
at net asset value per share on the first day and a sale at net asset
value per share on the last day of the period reported. Dividends are
assumed, for purposes of this calculation, to be reinvested at the net
asset value per share on the payment date.
(c) Annualized.
Contained above is audited operating performance based on an average share
of common stock outstanding, total investment return, ratios to average
net assets and other supplemental data, for each of the periods indicated.
This information has been determined based upon financial information
provided in the financial statements.
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<PAGE> 547
INVESTMENT POLICIES
- -------------------------------------------------------------------------------
The following describes briefly the investment objective and policies of
the Portfolio. Certain instruments and techniques discussed in this section
are described in greater detail later in this Prospectus and in the Statement
of Additional Information ("SAI").
THE ADVISER'S ANALYSIS OF OPPORTUNITIES IN THE COMMERCIAL AND RESIDENTIAL
MORTGAGE-BACKED SECURITIES MARKETS
Commercial and non-agency Residential Mortgage-Backed Securities are among
the highest yielding, call protected, domestic, fixed-income securities across
all rating categories. Under current market conditions, the Adviser believes
that investments in non-agency mortgage securities (which include Commercial
and non-agency Residential Mortgage-Backed Securities) provide attractive
investment opportunities. This is due to several factors, including the
developing nature of the Commercial and non-agency Residential Mortgage-Backed
Securities markets, the restructuring of the real estate loans underlying
non-agency mortgage securities, the infusion of capital to the real estate
market and the Adviser's expectation of no further significant deterioration of
real estate property values.
The construction boom of the early 1980's resulted in the oversupply of
developed commercial and residential real estate. This oversupply led to high
vacancy rates and, coupled with declining rental rates, led to a decline in
real estate values in the late 1980's and early 1990's. Real estate loans
originated in the early and mid-1980's were issued during a period of higher
real estate values. The subsequent rise in delinquencies and losses for
lenders has led to new mortgage origination standards which incorporate less
optimistic assumptions concerning rent growth and occupancy. Mortgages
originated during this period of higher values may be restructured or
renegotiated to reflect current market conditions. The resulting non-agency
mortgage securities have underlying loans with LTV ratios that the Adviser
believes more accurately reflect current market values and allow the Adviser to
better assess credit exposure.
Many sophisticated investors have recently become active participants in
the commercial real estate market, which has brought new equity into these
types of investments. The increased issuance of real estate investment trusts
("REITs") has been another source of new equity. The Adviser believes that
this infusion of equity, combined with more conservative real estate
valuations, as well as the dislocation of traditional
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<PAGE> 548
lenders provides a strong foundation for the continued issuance of Commercial
and non-agency Residential Mortgage-Backed Securities.
The Adviser expects that a recovery of the real estate market in general
would have a positive effect on investments in non-agency Mortgage-Backed
Securities. Market indicators are beginning to show positive trends, with
declines in commercial mortgage delinquencies and defaults. Additionally, the
second quarter of 1993 brought the first positive quarterly total return on
real estate investments in two years, as measured by the Russel-NCREIF Index,
which tracks the performance of U.S. commercial real estate.
The Resolution Trust Corporation (the "RTC") entered the non-agency
Mortgage-Backed Securities market as a significant participant by securitizing
non-agency mortgage loans in June of 1991, packaging certain mortgages it
acquired as receiver of failed savings and loans. The RTC, in addition to
other entities, has securitized commercial and non-agency residential
mortgages, aggregating in excess of $22 billion of Commercial Mortgage-Backed
Securities and $200 billion of Residential Mortgage-Backed Securities created
from January, 1987 to December, 1992. As a result of the significant decline
in real estate values in the U.S. in the late 1980's and early 1990's and in
conjunction with their efforts to improve the creditworthiness of financial
institutions, regulators such as the National Association of Insurance
Commissioners (the "NAIC") and the Bank for International Settlements (the
"BIS") set more stringent capital requirements for assets including real estate
holdings. These requirements have led traditional real estate leaders largely
to withdraw from lending to real estate borrowers and to seek a secondary
market outlet for these mortgage loans and for real estate borrowers to seek
financing from non-traditional lenders. The Adviser believes that, as a
result, banks and insurance companies will increasingly take advantage of the
secondary market to dispose of real estate holdings and borrowers will utilize
the capital markets as a major source of financing.
The Adviser believes that the establishment by rating agencies of
standardized rating criteria has helped further the development of the
secondary market for commercial and non-agency residential Mortgage-Backed
Securities. Unlike the securitization of traditional residential mortgages,
which are eligible for principal and interest guarantees from government
agencies such as the Government National Mortgage Association ("GNMA"), the
Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"), the securitization of commercial and non-agency
residential mortgages may require other forms of credit enhancement, including
the senior/subordinated security structure, reserve funds and third-party
letters of credit. The senior/subordinated structure was
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<PAGE> 549
developed in the 1980's to create a senior security which would be highly rated
and attractive to a wide range of investors. The subordinated security, which
was designed to absorb credit losses on the underlying mortgages and therefore
reduce the exposure of senior securities from such losses, was generally either
retained by the issuer or sold to a sophisticated investor in a negotiated
transaction. In the current environment, the subordinated securities are
further segmented into a hierarchy of loss positions. This allows many
different classes of securities to be created, with varying degrees of credit
exposure, prepayment exposure and potential total return.
Based on investor demand for certain securities (which depends in part on
a combination of rating, yield spread and maturity) the issuer of a
senior/subordinated structure typically works closely with the rating agencies
to determine the credit support levels required to achieve the desired rating
for each security class. The specific structure created dictates the priority
for the allocation of available cash flows on the underlying mortgages. The
senior classes generally receive the first available cash flows of both
interest and principal, while the subordinated classes typically receive only
interest until the senior and higher ranked subordinated classes are paid down.
Any principal losses experienced on the underlying properties are generally
absorbed first by the equity holder and then by the cash reserve fund and
letters of credit, if any are present in the structure, and then by the "first
loss" subordinated security holder to the extent of its principal balance and
then by the next subordinated classes, in order of their respective position in
the structure.
The Adviser believes that the development of the secondary market for
Commercial and non-agency Residential Mortgage-Backed Securities has created
significant opportunities for investing in the lower-rated and non-rated
classes of these securities. Furthermore, the Adviser believes that there is
sufficient liquidity in this secondary market for the Portfolio to accomplish
its investment objectives. The Adviser believes that many of the lower-rated
and non-rated Commercial Mortgage-Backed Securities are subject to less
prepayment risk than is the case with Residential Mortgage-Backed Securities
because of structural features of the underlying mortgage loans and the fact
that they are entitled to repayment only after more senior classes are paid.
Such securities therefore offer an opportunity for attractive yields, which the
Adviser believes more than compensates investors for assuming the credit risk
associated with such securities. In addition, the Adviser believes that the
Commercial and non-agency Residential Mortgage-Backed Securities market will
expand and yield spreads to Treasuries will decline, leading to an opportunity
for price appreciation. The Adviser believes this sector of the
Mortgage-Backed Securities market is likely to realize expansion similar to
that which the agency
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<PAGE> 550
residential Mortgage-Backed Securities market experienced in the late 1980's,
where the earlier investors benefitted greatly as the market improved and
expanded.
INVESTMENT OBJECTIVE
The Portfolio (i) will seek to provide a total rate of return before fees
and expenses over rolling twelve-month periods that exceeds the total return of
the Salomon Broad Investment Grade Index over the same period by at least 1.60%
on an annualized basis, (ii) will not invest in Asset-Backed Securities, bank
or corporate debt securities other than money market instruments, or non-rated
securities (other than for U.S Government securities) and (iii) will maintain a
dollar-weighted average credit quality of at least A- by Standard & Poor's
Ratings Group, Division of McGraw Hill ("S&P"), Duff & Phelps Inc. ("D&P") or
Fitch Investors Service ("Fitch") or A3 by Moody's Investors Service, Inc.
("Moody's"), with U.S. Government securities being assigned a AAA rating. The
Portfolio will maintain a targeted duration within 20% shorter or longer than
the then current duration of the Salomon Broad Investment Grade Index.
Duration is a measure of the expected life of a fixed income security on a
present value basis and is indicative of a security's price "volatility" or
"risk" associated with changes in interest rates. The Portfolio seeks to meet
its objective by investing in a range of agency and non-agency Mortgage-Backed
Securities, including primarily senior and subordinated tranches of
residential, commercial, multi-family and agricultural mortgage securities.
The securities in which the Portfolio may invest include, but are not limited
to, collateralized mortgage obligations, real estate mortgage investment
conduits, adjustable rate mortgages and U.S. Treasury and agency securities.
The Portfolio will limit to 20% of net assets its investments in U.S.
Government securities that are not also Mortgage-Backed Securities. The
Portfolio may invest in lower rated securities. Such securities are commonly
referred to as "junk bonds" and have a higher risk of default of principal and
interest. During temporary defensive periods and in order to keep cash on hand
fully invested, the Portfolio may invest in money market instruments.
In determining which Mortgage-Backed Securities the Portfolio will
purchase, the Adviser will consider, among other factors, the following:
characteristics of the underlying mortgage loan, including LTV and debt service
coverage ratio, loan seasoning, and refinancing risk; characteristics of the
underlying property, including diversity of the loan pool, occupancy and
leasing, and competitiveness in the pertinent market; economic, environmental
and local considerations; deal structure, including historical performance of
the originator, subordination percentages and reserve fund balances; and
structural participants such as administrators and servicers.
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<PAGE> 551
In addition to examining the relative value of the investments, the
Adviser's disciplined approach to investments for the Portfolio will include
considerable interaction with rating agencies, extensive review of due
diligence by underwriters and rating agencies, confirmation of debt service
coverage ratios and stress testing of security cash flows. The Adviser also
will select investments which will vary the Portfolio by underlying property
types, geographic regions and industry exposure. In this regard, the Portfolio
will not purchase any commercial Mortgage-Backed Security ("CMBS") if, giving
effect thereto, (i) the net assets of the Portfolio constituting CMBS that are
directly or indirectly secured by or payable out of cash flow from the same
pool of collateral would increase and would account for more than 10% of the
Portfolio's net assets, or (ii) the net assets of the Portfolio attributable to
CMBS backed by the same pool of collateral would increase and the Portfolio
would own more than 25% of the currently outstanding principal amount of CMBS
that are directly or indirectly secured by or payable out of cash flow from the
same pool of collateral. In addition, the Portfolio will not, except during
any three-month period after any month in which its net assets have increased
by more than 30%, purchase any CMBS if, giving effect thereto, (i) the net
assets of the Portfolio constituting CMBS that are directly or indirectly
secured by or payable out of cash flow from properties located within a single
state of the U.S. would increase and would account for more than 25% of the
Portfolio's net assets or (ii) the net assets of the Portfolio constituting
CMBS that are directly or indirectly secured by or payable out of cash flow
from office properties would increase and would account for more than 33%, or
from hotel and motel properties would increase and would account for more than
20%, or from any one of multi-family, cooperative, industrial and warehouse,
retail and shopping mall, mobile home park, nursing home and senior living
center or hospital properties would increase and would account for more than
75% of the Portfolio's net assets, or (iii) the net assets of the Portfolio
constituting particular issuances of CMBS that are directly or indirectly
secured by or payable out of cash flow from single properties would increase
and would account for more than 50% of the Portfolio's net assets. For the
foregoing purpose, a CMBS will be considered to be secured by or payable out of
the cash flow from a property only in the proportion that the outstanding
principal amount of the mortgage loan relating to such property and backing
such security bears to the sum of the outstanding principal amount of all
mortgage loans backing such security. If the Portfolio's asset composition in
any of the foregoing categories subsequently exceeds 110% of the related
percentage limitation for any reason, the Portfolio will take such action as
may be necessary so that within 60 days after the occurrence of such excess the
relevant percentage limitation is again satisfied. The Portfolio will not
invest in any issuance of Mortgage-Backed Securities more than 5% of the
principal
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<PAGE> 552
amount of the collateral of which at the time of issuance is single-family
residential and agricultural properties in the aggregate.
INVESTMENT RESTRICTIONS
The Portfolio has also adopted a number of fundamental investment
restrictions which may not be changed without the approval of the Portfolio's
outstanding voting securities. The SAI sets forth these restrictions in full.
In addition, the Portfolio's investment objective is fundamental and may not be
changed without such shareholder approval.
The Portfolio has also adopted several non-fundamental portfolio
investment limitations. The Portfolio will not modify any of its
non-fundamental portfolio investment limitations without providing at least 60
days prior written notice of such modification to its shareholders.
DESCRIPTION OF SECURITIES
The following describes certain types of securities in which the Portfolio
may invest:
COMMERCIAL MORTGAGE-BACKED SECURITIES
Commercial Mortgage-Backed Securities are generally multi-class debt or
pass-through securities backed by a mortgage loan or pool of mortgage loans
secured by commercial property, such as industrial and warehouse properties,
office buildings, retail space and shopping malls, multi-family properties and
cooperative apartments, hotels and motels, nursing homes, hospitals, senior
living centers and agricultural property. The commercial mortgage loans that
underlie Commercial Mortgage-Backed Securities have certain distinct
characteristics. Commercial mortgage loans are generally not amortizing or not
fully amortizing. At their maturity date, repayment of the remaining principal
balance or "balloon" is due and is repaid through the attainment of an
additional loan or sale of the property. Unlike most single family residential
mortgages, commercial real property loans often contain provisions which
substantially reduce the likelihood that such securities will be prepaid. The
provisions generally impose significant prepayment penalties on loans and, in
some cases there may be prohibitions on principal prepayments for several years
following origination. This difference in prepayment exposure is significant
due to extraordinarily high levels of refinancing of traditional residential
mortgages experienced over the past year as mortgage rates have reached a 25
year low. Assets underlying Commercial Mortgage-Backed Securities may relate
to only a few properties or to a single property. See "Risk Factors."
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<PAGE> 553
Commercial Mortgage-Backed Securities have been issued in public and
private transactions by a variety of public and private issuers.
Non-governmental entities that have issued or sponsored Commercial
Mortgage-Backed Securities offerings include owners of commercial properties,
originators of and investors in mortgage loans, savings and loan associations,
mortgage banks, commercial banks, insurance companies, investment banks and
special purpose subsidiaries of the foregoing. The Portfolio may from time to
time purchase Commercial Mortgage-Backed Securities directly from issuers in
negotiated transactions or from a holder of such Commercial Mortgage-Backed
Securities in the secondary market .
Commercial Mortgage-Backed Securities generally are structured to protect
the senior class investors against potential losses on the underlying mortgage
loans. This is generally provided by the subordinated class investors, which
may be included in the Portfolio, by taking the first loss if there are
defaults on the underlying commercial mortgage loans. Other protection, which
may benefit all of the classes, including the subordinated classes in which the
Portfolio intends to invest, may include issuer guarantees, reserve funds,
additional subordinated securities, cross-collateralization,
over-collateralization and the equity investors in the underlying properties.
By adjusting the priority of interest and principal payments on each class
of a given Commercial Mortgage-Backed Security, issuers are able to issue
senior investment grade securities and lower rated or non-rated subordinated
securities tailored to meet the needs of sophisticated institutional investors.
In general, subordinated classes of Commercial Mortgage-Backed Securities are
entitled to receive repayment of principal only after all required principal
payments have been made to more senior classes and have subordinate rights as
to receipt of interest distributions. Such subordinated classes are subject to
a substantially greater risk of nonpayment than are senior classes of
Commercial Mortgage-Backed Securities. Even within a class of subordinate
securities, most Commercial Mortgage-Backed Securities are structured with a
hierarchy of levels (or "loss positions"). Loss positions are the order in
which non-recoverable losses of principal are applied to the securities within
a given structure. For instance, a first loss subordinate security will absorb
any principal losses before any higher loss position subordinate security.
This type of structure allows a number of classes of securities to be created
with varying degrees of credit exposure, prepayment exposure and potential
total return.
Subordinated classes of Commercial Mortgage-Backed Securities have more
recently been structured to meet specific investor preferences and issuer
constraints and have different
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<PAGE> 554
priorities for cash flow and loss absorption. As previously discussed, from a
credit perspective, they are structured to absorb any credit-related losses
prior to the senior class. The principal cash flow characteristics of
subordinated classes are designed to be among the most stable in the
Mortgage-Backed Securities market, the probability of prepayment being much
lower than with traditional Residential Mortgage-Backed Securities. This
characteristic is primarily due to the structural feature that directs the
application of principal payments first to the senior classes until they are
retired before the subordinated classes receive any prepayments. While this
serves to enhance the credit protection of the senior classes, it produces
subordinated classes with more stable average lives. Subject to the applicable
provisions of the 1940 Act, there are no limitations on the classes of
Commercial Mortgage-Backed Securities in which the Portfolio may invest.
Accordingly, in certain circumstances, the Portfolio may recover proportionally
less of its investment in a Commercial Mortgage-Backed Security than the
holders of more senior classes of the same Commercial Mortgage-Backed Security.
The rating assigned to a given issue and class of Commercial
Mortgage-Backed Securities is a product of many factors, including, the
structure of the security, the level of subordination, the quality and adequacy
of the collateral, and the past performance of the originators and servicing
companies. The rating of any Commercial Mortgage-Backed Security is determined
to a substantial degree by the debt service coverage ratio (i.e., the ratio of
current net operating income from the commercial properties, in the aggregate,
to the current debt service obligations on the properties) and the LTV ratio of
the pooled properties. The amount of the securities issued in any one rating
category is determined by the rating agencies after a rigorous credit rating
process which includes analysis of the issuer, servicer and property manager,
as well as verification of the LTV and debt service coverage ratios. LTV
ratios may be particularly important in the case of commercial mortgages
because most commercial mortgage loans provide that the lender's sole remedy in
the event of a default is against the mortgaged property, and the lender is not
permitted to pursue remedies with respect to other assets of the borrower.
Accordingly, loan-to-value ratios may, in certain circumstances, determine the
amount realized by the holder of the Commercial Mortgaged-Backed Security.
RESIDENTIAL MORTGAGE-BACKED SECURITIES
The Portfolio also expects to invest in Residential Mortgage-Backed
Securities that are Mortgage-Backed Securities representing participation
interests in pools of single-family residential mortgage loans originated by
private mortgage originators. Traditionally, Residential Mortgage-Backed
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<PAGE> 555
Securities were issued by governmental agencies such as Fannie Mae, Freddie Mac
and Ginnie Mae. The Portfolio intends to invest in those securities issued by
nongovernmental agencies as well as governmental agencies. Nongovernmental
entities that have issued or sponsored Residential Mortgage-Backed Securities
offerings include savings and loan associations, mortgage banks, insurance
companies, investment banks and special purpose subsidiaries of the foregoing.
Residential Mortgage-Backed Securities, similar to Commercial Mortgage-Backed
Securities, have been issued using a variety of structures, including
multi-class structures featuring senior and subordinated classes.
While single-family residential loans do not typically have prepayment
penalties or restrictions, as commercial mortgage loans often do, Residential
Mortgage-Backed Securities are often structured so that subordinated classes
may be locked out of prepayments for a period of time. However, in a period of
extremely rapid prepayments, during which senior classes may be retired faster
than expected, the subordinated classes may receive unscheduled payments of
principal and would have average lives that, while longer than the average
lives of the senior classes, would be shorter than originally expected.
The types of agency and non-agency Commercial and Residential
Mortgage-Backed Securities which the Portfolio may invest shall include, but
not be limited to, the following securities:
MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The Portfolio may invest in Mortgage-Backed Securities
issued by agencies or instrumentalities of the U.S. Government including GNMA,
FNMA and FHLMC. The U.S. Government or the issuing agency guarantees the
payment of interest and principal on these securities. However, the guarantees
do not extend to the securities' yield or value, nor do the guarantees extend
to the yield or value of a Portfolio's shares. These securities are in most
cases "pass-through" instruments, through which the holder receives a share of
all interest and principal payments from the mortgages underlying the security,
net of certain fees. See "Mortgage-Backed Securities" in the SAI.
PRIVATE MORTGAGE PASS-THROUGH SECURITIES. Private mortgage pass-through
securities are structured similarly to GNMA, FNMA and FHLMC mortgage
pass-through securities and are issued by originators of and investors in
mortgage loans, including depository institutions, mortgage banks, investment
banks and special purpose subsidiaries of the foregoing. These securities
usually are backed either by GNMA, FNMA or FHLMC certificates or by a pool of
fixed rate or adjustable rate mortgage loans. Securities which are backed by a
pool of fixed rate or adjustable rate mortgage loans generally are structured
with one or more
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<PAGE> 556
types of credit enhancement. See "Types of Credit Enhancement" in the SAI.
ADJUSTABLE RATE MORTGAGE SECURITIES. Adjustable rate mortgage securities
are pass-through mortgage securities collateralized by mortgages with
adjustable rather than fixed rates ("ARMs"). ARMs eligible for inclusion in a
mortgage pool generally provide for a fixed initial mortgage interest rate for
either the first three, six, twelve, thirteen, thirty-six or sixty scheduled
monthly payments. Thereafter, the interest rates are subject to periodic
adjustment based on changes to a designated benchmark index. See "Adjustable
Rate Mortgage Securities" in the SAI.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS PASS-THROUGH
SECURITIES. Collateralized mortgage obligations or "CMOs" are debt obligations
collateralized by mortgage loans or mortgage pass-through securities.
Typically, CMOs are collateralized by GNMA, FNMA or FHLMC certificates, but
also may be collateralized by whole loans or private mortgage pass-through
securities (collectively, "Mortgage Assets"). Multi-class pass-through
securities are equity interests in a trust composed of Mortgage Assets. Unless
the context indicates otherwise, all references herein to CMOs include
multi-class pass-through certificates. Payments of principal of and interest
on the Mortgage Assets, and any reinvestment income thereon, provide the funds
to pay debt service on the CMOs or make scheduled distributions on the
multi-class pass-through securities. CMOs may be issued by agencies or
instrumentalities of the U.S. Government, or by private originators of, or
investors in, mortgage loans, including depository institutions, mortgage
banks, investment banks and special purpose subsidiaries of the foregoing. The
issuer of CMOs or multi-class pass-through securities may elect to be treated
as a Real Estate Mortgage Investment Conduit ("REMIC"). See "Collateralized
Mortgage Obligations and Multi-Class Pass-Through Securities" in the SAI.
LOWER RATED SECURITIES. The Mortgage-Backed Securities in which the
Portfolio may invest may be lower rated (i.e., have a credit quality below
investment grade). Investments in such lower rated securities are subject to
special risks, including a greater risk of loss of principal and non-payment of
interest. An investor should carefully consider the following factors before
purchasing shares of the Portfolio. The Portfolio (i) will not invest in
securities (other than U.S. Government securities) that are not rated at least
B by S&P, D&P or Fitch or B2 by Moody's at the time of investment; (ii) will
not invest in securities (other than U.S. Government securities) not rated by
at least one of the foregoing organizations at the time of investment; (iii)
will not invest more than 12.5% of its assets in securities that are rated
below BB-/Ba3 by any of the foregoing organizations; and (iv) will not invest
more than 25%
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<PAGE> 557
of its assets in securities that are rated below BBB-/Baa3 by any of the
foregoing organizations. In the case of short-term money market instruments
and short-term commingled funds the applicable rating requirement will be
A2/P2. Split rated securities will be accounted for at the lower rating. If
any security held in its portfolio is downgraded such that the Portfolio would
not be able at that time to make an investment in such security, the Portfolio
will sell such security within 30 days after such downgrade. The Portfolio
will maintain a dollar-weighted average credit quality of at least A-/A3, with
U.S. Government securities assigned a AAA rating. In order to calculate the
average credit quality of the Portfolio, the Portfolio will assign sequential
numbers to each of the 20 rating categories from AAA to D, multiply the value
of each instrument by the rating equivalent number assigned to its lowest
rating, sum all of such products, divide the aggregate by the net asset value
of the Portfolio and convert the number back to its equivalent rating symbol.
Generally, lower rated securities offer a higher return potential than
higher rated securities but involve greater volatility of price and greater
risk of loss of income and principal, including the possibility of default or
bankruptcy of the issuers of such securities. Lower rated securities will
likely have large uncertainties or major risk exposure to adverse conditions
and are predominately speculative. The occurrence of adverse conditions and
uncertainties would likely reduce the value of securities held by the
Portfolio, with a commensurate effect on the value of a given portfolio's
shares. While the market values of lower rated securities tend to react less
to fluctuations in interest rate levels than do those of higher rated
securities, the market values of certain of these securities also tend to be
more sensitive to changes in economic conditions than higher rated securities.
In addition, lower rated securities generally present a higher degree of credit
risk. The Portfolio may incur additional expenses to the extent that it is
required to seek recovery upon a default in the payment of principal or
interest on its portfolio holdings.
Securities which are rated BB by S&P, D&P and Fitch and Ba by Moody's have
speculative characteristics with respect to capacity to pay interest and repay
principal. Securities which are rated B generally lack characteristics of a
desirable investment and assurance of interest and principal payments over any
long period of time may be small. A general description of the bond ratings of
Moody's, S&P, D&P and Fitch is set forth in Appendix A to the Prospectus.
In general, the ratings of nationally recognized statistical rating
organizations represent the opinions of these agencies as to the quality of
securities that they rate. Such ratings, however, are relative and subjective,
and are not absolute standards of quality and do not evaluate the market value
risk of
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the securities. It is possible that an agency might not change its rating of a
particular issue to reflect subsequent events. These ratings will be used by
the Portfolio as initial criteria for the selection of portfolio securities,
but the Portfolio also will rely upon the independent advice of the Adviser to
evaluate potential investments.
U.S. GOVERNMENT SECURITIES
U.S. TREASURY SECURITIES. The Portfolio will invest in U.S. Treasury
securities, including bills, notes, bonds and other debt securities issued by
the U.S. Treasury. These instruments are direct obligations of the U.S.
Government and, as such, are backed by the "full faith and credit" of the
United States. They differ primarily in their interest rates, the lengths of
their maturities and the dates of their issuances.
SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The Portfolio may invest in securities issued by agencies
of the U.S. Government or instrumentalities of the U.S. Government, including,
but not limited to, GNMA, FNMA and FHLMC securities. Obligations of GNMA, the
Farmers Home Administration and the Export-Import Bank are backed by the "full
faith and credit" of the United States. In the case of securities not backed
by the "full faith and credit" of the United States, the Portfolio must look
principally to the agency issuing or guaranteeing the obligation for ultimate
repayment. Such securities include obligations issued by FNMA and FHLMC, each
of which may borrow from the U.S. Treasury to meet its obligations, although
the U.S. Treasury is under no obligation to lend to FNMA or FHLMC. GNMA, FNMA
and FHLMC investments by the Portfolio may also include pass-through
securities, CMOs and certain other Mortgage-Backed Securities.
BANK AND CORPORATE DEBT SECURITIES
The Portfolio may not invest in bank or corporate debt securities except
that it may invest in money market instruments for temporary defensive purposes
and in order to keep cash on hand fully invested. Such instruments include but
are not limited to notes, certificates of deposit, bankers' acceptances and
commercial paper.
FLOATING RATE AND INDEX OBLIGATIONS
The Portfolio may invest in debt securities with interest payments or
maturity values that are not fixed, but float in conjunction with an underlying
index or price. These securities may be backed by U.S. Government or corporate
issuers, or by collateral such as mortgages. In certain cases, a change in the
underlying index or price may have a leveraging effect on the periodic coupon
payments, creating larger possible swings in the
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prices of such securities than would be expected when taking into account their
maturities alone. The indices and prices upon which such securities can be
based include interest rates, currency rates and commodities prices. However,
the Portfolio will not invest in any instrument whose value is computed based
on a multiple of the change in price or value of an asset or an index of or
relating to assets in which the Portfolio could not invest.
Floating rate securities pay interest according to a coupon which is reset
periodically. This reset mechanism may be formula based, or reflect the
passing through of floating interest payments on an underlying collateral pool.
The coupon is usually reset daily, weekly, monthly, quarterly or semi-annually,
but other schedules are possible. Floating rate obligations generally exhibit
a low price volatility for a given stated maturity or average life because
their coupons adjust with changes in interest rates. If their underlying index
is not an interest rate, or the reset mechanism lags the movement of rates in
the current market, greater price volatility may be experienced.
Index securities pay a fixed rate of interest, but have a maturity value
that varies by formula, so that when the obligation matures a gain or loss is
realized. The risk of index obligations depends on the volatility of the
underlying index, the coupon payment and the maturity of the obligation.
ILLIQUID SECURITIES
Illiquid securities are subject to legal or contractual restrictions on
disposition or lack an established secondary trading market. The sale of
restricted and illiquid securities often requires more time and results in
higher brokerage charges or dealer discounts and other selling expenses than
does the sale of securities eligible for trading on national securities
exchanges or in the over-the-counter markets. Restricted securities may sell
at a price lower than similar securities that are not subject to restrictions
on resale. The Portfolio may purchase certain restricted securities up to 15%
of its net assets eligible for sale to qualified institutional buyers as
contemplated by Rule 144A under the Securities Act of 1933 and may treat such
securities as being liquid if the Adviser determines, pursuant to procedures
adopted by the Trust's Board of Trustees, that a sufficient secondary market
does exist for such securities. See the SAI for a further discussion of
illiquid securities.
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OTHER INVESTMENT PRACTICES.
DURATION MANAGEMENT AND OTHER MANAGEMENT TECHNIQUES
As a basic element of its overall investment strategy the Portfolio
intends to use a variety of other investment management techniques and
instruments. A more complete description of such techniques is contained in
the SAI. The Portfolio may purchase and sell futures contracts, enter into
various interest rate transactions such as swaps, caps and floors and may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, financial indices and futures contracts (collectively, "Additional
Investment Management Techniques"). These Additional Investment Management
Techniques may be used for duration management and other risk management to
attempt to protect against possible changes in the market value of the
Portfolio resulting from trends in the debt securities markets and changes in
interest rates, to protect the Portfolio's unrealized gains in the value of its
securities holdings, to facilitate the sale of such securities for investment
purposes, to establish a position in the securities markets as a temporary
substitute for purchasing particular securities. There is no particular
strategy that requires use of one technique rather than another as the decision
to use any particular strategy or instrument is a function of market conditions
and the composition of the portfolio. See Appendix B "General Characteristics
and Risks of Additional Investment Management Techniques."
Additional Investment Management Techniques present certain risks. With
respect to hedging and risk management, the variable degree of correlation
between price movements of hedging instruments and price movements in the
position being hedged creates the possibility that losses on the hedge may be
greater than gains in the value of the Portfolio's position. In addition,
certain instruments and markets may not be liquid in all circumstances. As a
result, in volatile markets, the Portfolio may not be able to close out a
transaction without incurring losses substantially greater than the initial
deposit. Although the contemplated use of these instruments predominantly for
hedging should tend to minimize the risk of loss due to a decline in the value
of the position, at the same time they tend to limit any potential gain which
might result from an increase in the value of such position. The ability of
the Portfolio to successfully utilize Additional Investment Management
Techniques will depend on the Adviser's ability to predict pertinent market
movements and sufficient correlations, which cannot be assured. Finally, the
daily deposit requirements in futures contracts that the Portfolio has sold
create an ongoing greater potential financial risk than do options
transactions, where the exposure is limited to the cost of the initial premium.
Losses due to the use of Additional Investment Management Techniques will
reduce net asset value.
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In selecting counterparties for OTC hedging and risk management
transactions, the Portfolio will adhere to the following minimum ratings: (i)
with respect to an OTC derivative instrument with a remaining nominal maturity
of six months or less, a Moody's Derivative Counterparty Rating of A3; (ii)
with respect to an OTC derivative instrument with a remaining maturity of more
than six months, a Moody's Derivative Counterparty Rating of AA3. If the
counterparty does not have a Moody's counterparty rating, then either the
Moody's or S&P long-term securities rating of A3/A- (with respect to category
(i) above) or Aa3/AA- (with respect to category (ii) above) may be used as a
substitute. In addition, all such counterparties must have a minimum
short-term rating of A-1 by Moody's and P-1 by S&P. If a counterparty drops
below the minimum ratings, then the Portfolio will seek to unwind existing
agreements with such counterparty in a cost effective manner and will be
prohibited from entering into new agreements with the counterparty so long as
the counterparty's rating is below the relevant minimum.
The principal risks relating to the use of futures contracts and other
Additional Investment Management Techniques are: (a) less than perfect
correlation between the prices of the instrument and the market value of the
securities in the Portfolio's holdings; (b) possible lack of a liquid secondary
market for closing out a position in such instruments; (c) losses resulting
from interest rate or other market movements not anticipated by the Adviser;
and (d) the obligation to meet additional variation margin or other payment
requirements, all of which could result in the Portfolio being in a worse
positionthan if such techniques had not been used. See Appendix B "General
Characteristics and Risks of Additional Investment Management Techniques" and
the Statement of Additional Information for further information.
The Portfolio may also purchase securities on a "when-issued" basis and
may purchase or sell securities on a "forward commitment" basis. When such
transactions are negotiated, the price, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but delivery and payment
for the securities take place at a later date outside the normal course of
settlement for securities of that type. When-issued securities and forward
commitments may be sold prior to the settlement date, but the Portfolio will
enter into when-issued and forward commitments only with the intention of
actually receiving or delivering the securities, as the case may be. If the
Portfolio disposes of the right to acquire a when-issued security prior to its
acquisition or disposes of its right to deliver or receive against a forward
commitment, it can incur a gain or loss. At the time the Portfolio enters into
a transaction on a when-issued or forward commitment basis, it will segregate
with its custodian cash or other liquid high grade debt securities with a value
not less than the value of the when-
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issued or forward commitment securities. The value of these assets will be
monitored daily to ensure that their marked to market value will at all times
equal or exceed the corresponding obligations of the Portfolio. There is
always a risk that the securities may not be delivered and that the Portfolio
may incur a loss. Settlements in the ordinary course, which typically occur
monthly for mortgage-related securities, are not treated by the Portfolio as
when-issued or forward commitment transactions and accordingly are not subject
to the foregoing restrictions.
REPURCHASE AGREEMENTS
The Portfolio may invest temporarily, without limitation, in repurchase
agreements, which are agreements pursuant to which securities are acquired by
the Portfolio from a third party with the understanding that they will be
repurchased by the seller at a fixed price on an agreed upon date. These
agreements may be made with respect to anyof the securities in which the
Portfolio is authorized to invest. Repurchase agreements may be characterized
as loans secured by the underlying securities and will be entered into in
accordance with the requirements of the SEC. The Portfolio will not enter into
any repurchase agreement with respect to securities other than U.S. Government
securities and mortgage-backed securities. The value of the collateral for
such repurchase agreement marked-to-market at the end of each business day will
be at least 102% of the amount of the repurchase agreement. The Portfolio will
not enter into any repurchase agreement the term of which exceeds 90 days.
RISK FACTORS
COMMERCIAL MORTGAGE-BACKED SECURITIES AND RESIDENTIAL MORTGAGE-BACKED
SECURITIES. Investments in Commercial Mortgage-Backed Securities involve the
credit risks of delinquency and default. Delinquency refers to interruptions
in the payment of interest and principal. Default refers to the potential for
unrecoverable principal loss from the sale of foreclosed property. These risks
include the risks inherent in the commercial mortgage loans which support such
Commercial Mortgage-Backed Securities and the risks associated with direct
ownership of real estate. This may be especially true in the case of
Commercial Mortgage-Backed Securities secured by, or evidencing an interest in,
a relatively small or less diverse pool of commercial mortgage loans. The
factors contributing to these risks include the effects of general and local
economic conditions on real estate values, the conditions of specific industry
segments, the ability of tenants to make lease payments and the ability of a
property to attract and retain tenants, which in turn may be affected by local
conditions such as oversupply of space or a reduction of available space, the
ability of the owner to provide adequate maintenance and insurance, energy
costs, government regulations with respect to
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environmental, zoning, rent control and other matters, and real estate and
other
taxes.
While the credit quality of the Commercial Mortgage-Backed Securities in
which the Portfolio may invest will reflect the perceived likelihood of future
cash flows to meet operating expenses and cash flow requirements, the
underlying commercial properties may not be able to continue to generate income
to meet their operating expenses and cash flow requirements (mainly debt
service, lease payments, capital expenditures, taxes, maintenance, insurance
and tenant improvements) as a result of any of the factors mentioned above.
Consequently, the obligors under commercial mortgages may be unable to make
payments of interest in a timely fashion, increasing the risk of default on a
related Commercial Mortgage-Backed Security. In addition, the repayment of the
commercial mortgage loans underlying Commercial Mortgage-Backed Securities will
typically depend upon the future availability of financing and the stability of
real estate property values.
The commercial mortgage loans that underlie Commercial Mortgage-Backed
Securities have certain distinct characteristics. Commercial mortgage loans
are generally not amortizing or not fully amortizing. At their maturity date,
repayment of the remaining principal balance or "balloon" is due and is repaid
through the attainment of an additional loan or sale of the property. Most
commercial mortgage loans are nonrecourse obligations of the borrower, meaning
that the sole remedy of the lender in the event of a default is to foreclose
upon the collateral. As a result, in the event of default by a borrower,
recourse may be had only against the specified property pledged to secure the
loan and not against the borrower's other assets. If borrowers are not able or
willing to refinance or dispose of the property to pay the principal balance
due at maturity, payments on the subordinated classes of the related Commercial
Mortgage-Backed Security are likely to be adversely affected. The ultimate
extent of the loss, if any, to the subordinated classes may only be determined
after the foreclosure of the mortgage encumbering the property and, if the
mortgagee takes title to the property, upon liquidation of the property.
Factors such as the title of the property, its physical condition and financial
performance, as well as governmental disclosure requirements with respect to
the condition of the property, may make a third party unwilling to purchase the
property at a foreclosure sale or for a price sufficient to satisfy the
obligations with respect to the related Commercial Mortgage-Backed Securities.
The condition of a property may deteriorate during foreclosure proceedings.
Certain obligors on underlying mortgages may become subject to bankruptcy
proceedings, in which case the amount and timing of amounts due under the
related Commercial Mortgage-Backed Securities may be materially adversely
affected.
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In general, any losses on a given Commercial Mortgage-Backed Security will
be absorbed first by the equity holder, then by a cash reserve fund or letter
of credit, if any, and then by the "first loss" subordinated security to the
extent of its principal balance. Because the Portfolio intends to invest in
subordinated classes of Commercial Mortgage-Backed Securities, there can be no
assurances that in the event of default and the exhaustion of equity support,
the reserve fund and any debt classes junior to those in which the Portfolio
invests, the Portfolio will be able to recover all of its investment in the
securities it purchases. In addition, if the underlying mortgage portfolio has
been overvalued by the originator, or if mortgage values subsequently decline,
the Portfolio may hold the "first loss" position in certain Commercial
Mortgage-Backed Securities ahead of the more senior debt holders, which may
result in significant losses. Many of the lower-rated Commercial
Mortgage-Backed Securities are subject to less prepayment risk than in the case
with Residential Mortgage-Backed Securities because of structural features of
the underlying mortgage loans and the fact that they are entitled to repayment
only after more senior classes are paid.
Investments in Residential Mortgage-Backed Securities involve the credit
risks that affect interest and principal cash flows similar to the credit risks
of Commercial Mortgage-Backed Securities discussed above, as well as the
prepayment risks associated with the possibility that prepayments of principal
generally may be made at any time without penalty. Prepayment rates are
influenced by changes in current interest rates and a variety of economic,
geographic, social and other factors. Changes in the rate of prepayments on a
Residential Mortgage-Backed Security may change the yield to maturity of the
security and amounts available for reinvestment from such securities by the
Portfolio are likely to be greater during periods of relatively low or
declining interest rates and therefore are likely to be reinvested at lower
interest rates than during a period of relatively high interest rates. This
prepayment effect has been particularly pronounced during the past three years
as borrowers have refinanced higher interest rate mortgages into lower interest
rate mortgages available in the marketplace. Because the Portfolio expects to
invest in subordinated Residential Mortgage-Backed Securities, the
prioritization of cash flows from mortgages under the Residential
Mortgage-Backed Securities in favor of the senior classes generally reduces
this prepayment risk.
INVESTING IN LOWER CREDIT QUALITY SECURITIES. An investor should
recognize that the lower-rated Commercial and Residential Mortgage-Backed
Securities in which the Portfolio may invest have speculative characteristics.
The prices of lower credit quality securities, which are commonly referred to
as "junk bonds," have been found to be less sensitive to interest rate changes
than more highly rated investments, but more sensitive to adverse
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economic downturns or individual issuer developments. Securities rated lower
than B by S&P and Moody's, including bonds rated as low as D by S&P or C by
Moody's, can be regarded as having extremely poor prospects of ever attaining
any real investment standing and may be in default with payment of interest
and/or repayment of principal in arrears. A projection of an economic downturn
or the advent of a recession, for example, could cause a decline in the price
of lower credit quality securities because the advent of a recession could
lessen the ability of obligors of mortgages underlying Commercial
Mortgage-Backed Securities and Residential Mortgage-Backed Securities to make
principal and interest payments. In such event, existing credit supports and
any first loss positions may be insufficient to protect against loss of
principal.
NON-DIVERSIFIED STATUS. The Portfolio has registered as a
"non-diversified" investment company which enables it to invest more than 5% of
its assets in the obligations of any single issuer, subject only to the
diversification requirements of Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). As a result of its ability to concentrate its
investments in the obligations of a smaller number of issuers, the Portfolio
may be more susceptible than a more widely diversified fund to any single
economic, political or regulatory occurrence.
ILLIQUID SECURITIES. Liquidity of a security relates to the ability to
easily dispose of securities and the price to be obtained, and does not
necessarily relate to the credit risk or likelihood of receipt of cash at
maturity. Illiquid securities may trade at a discount from comparable, more
liquid investments. The Commercial Mortgage-Backed Securities which the
Portfolio intends to acquire may be less marketable and in some instances will
be considered illiquid by the Portfolio under applicable standards because of
the absence of registration under the federal securities laws, contractual
restrictions on transfer or the small size of the issue (relative to the issues
of comparable interests).
PORTFOLIO TURNOVER
The Portfolio has no fixed policy with respect to portfolio turnover. The
Portfolio does not expect to trade in securities for short-term gain. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the
Portfolio's securities, excluding securities having a maturity at the date of
purchase of one year or less. While the Portfolio will pay commissions in
connection with its options and futures transactions, the other securities in
which the Portfolio invests are generally traded on a "net" basis with dealers
acting as
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principals for their own account without a stated commission. Nevertheless,
high portfolio turnover may involve correspondingly greater brokerage
commissions and other transaction costs which will be borne directly by the
Portfolio. It is expected that the annual portfolio turnover rate for the
Portfolio will not exceed 400%, excluding securities having a maturity of one
year or less. Higher portfolio turnover results in increased Portfolio
expenses, including brokerage commissions, dealer mark-ups and other
transaction commissions, costs on the sale of securities and on reinvestment in
other securities. BlackRock will monitor the tax status of the Portfolio under
the Internal Revenue Code during any period in which the annual turnover rate
of the Portfolio exceeds 100%. To the extent that increased portfolio turnover
results in sales at a profit of securities held less than three months, the
Portfolio's ability to qualify as a "regulated investment company" under the
Internal Revenue Code may be affected. See "Portfolio Transactions" in the
Statement of Additional Information.
MANAGEMENT
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BOARD OF TRUSTEES
The business and affairs of the Fund are managed under the direction of
the Fund's Board of Trustees. The Statement of Additional Information contains
the name of each trustee and certain background information.
ADVISER
BlackRock (formerly BlackRock Financial Management L.P.) was organized in
1988. On February 28, 1995, BlackRock Financial Management L.P. sold its
business to PNC Bank, National Association ("PNC Bank"). The principal
business address of BlackRock is 345 Park Avenue, New York, NY 10154.
As adviser, BlackRock, is responsible for the day-to-day management of the
Portfolio, and generally makes all purchase and sale decisions regarding the
investments made by the Portfolio. BlackRock also provides research and credit
analysis as well as certain other services.
Keith Anderson and Robert S. Kapito are the persons primarily responsible
for the day-to-day management of the Portfolio's investments.
Keith Anderson is a Managing Director at BlackRock Financial Management,
and co-head of the Portfolio Management Group. In addition, Mr. Anderson
co-chairs the Investment Strategy Committee and he is a member of the firm's
Management Committee.
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Mr. Anderson has primary responsibility for managing client portfolios and for
acting as a specialist in the government and mortgage sectors. His areas of
expertise include Treasuries, agencies, futures, options, swaps and a wide
range of traditional and non-traditional mortgage securities. Mr. Anderson
also serves as Vice President for BlackRock's family of mutual funds and for
the Shearson Lehman Brothers Adjustable Rate Government Income Fund.
Prior to founding BlackRock in 1988, Mr. Anderson was a Vice President in
Fixed Income Research at The First Boston Corporation. Mr. Anderson joined
First Boston in 1987 as a mortgage securities and derivative products
strategist working with institutional money managers. From 1983 to 1987, Mr.
Anderson was a Vice President and Portfolio Manager at Criterion Investment
Management Company where he had primary responsibility for a $2.8 billion fixed
income portfolio and was an integral part of the firm's portfolio management
team.
Mr. Anderson has published numerous articles on fixed income strategies,
including two articles in The Handbook of Fixed Income Options: "Scenario
Analysis and the Use of Options in Total Return Portfolio Management" and
"Measuring, Interpreting, and Applying Volatility within the Fixed Income
Market." Mr. Anderson received a Bachelor of Science in Economics and Finance
from Nichols College in 1981 and an M.B.A. from Rice University in 1983.
Rob Kapito is Vice Chairman of BlackRock Financial Management, and co-head
of its Portfolio Management Group. Mr. Kapito is a member of both the firm's
Management Committee and its Investment Strategy Committee. Mr. Kapito has
primary responsibility for managing client portfolios and for acting as a
specialist in the mortgage and municipal sectors. In addition, Mr. Kapito has
been instrumental in marketing BlackRock's mutual funds and in coordinating the
analytics and administrative functions necessary for managing these funds. Mr.
Kapito also serves as Vice President for BlackRock's family of mutual funds and
for the Shearson Lehman Brothers Adjustable Rate Government Income Fund.
Prior to founding BlackRock in 1988, Mr. Kapito was a Vice President in
the Mortgage Products Group at The First Boston Corporation. Mr. Kapito
initially joined First Boston in 1979 in the Public Finance Department and
returned to the firm in 1983 in the Mortgage Products Group after completing
business school. In the Mortgage Products Group, he initially traded mortgage
securities and then became the head trader of collateralized mortgage
obligations. Ultimately, Mr. Kapito became head of Mortgage Capital Markets
with responsibility for marketing and pricing all of the mortgage-backed and
asset-backed securities underwritten by First Boston. In 1982, Mr. Kapito
worked as a
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strategic consultant with Bain & Co. and with two other private companies in
Europe.
Mr. Kapito received a Bachelor of Science in Economics from the Wharton
School of the University of Pennsylvania in 1979, and an M.B.A. from Harvard
Business School in 1983.
For the services provided and expenses assumed by it, BlackRock is
entitled to receive from the Portfolio a fee paid at the end of each calendar
quarter at an annualized rate of .25% of the Portfolio's average month-end net
assets. From time to time BlackRock may waive all or any portion of its
advisory fee for and may reimburse expenses of the Portfolio. The Adviser has
agreed to cap the Portfolio's expenses (other than advisory fees) at no more
than .12% of average net assets per year. See "Introduction--Expense Table."
ADMINISTRATORS
PMFCO, whose principal business address is 345 Park Avenue, New York, New
York 10154, PFPC, whose principal business address is 400 Bellevue Parkway,
Wilmington, Delaware 19809 and PDI, whose principal business address is 259
Radnor-Chester Road, Suite 120, Radnor, Pennsylvania 19087, serve as the Fund's
co-administrators. PMFCO and PFPC are indirect wholly-owned subsidiaries of
PNC Bank Corp. A majority of the outstanding stock of PDI is owned by its
officers and the remaining outstanding stock is owned by Pennsylvania Merchant
Group Ltd.
The Administrators generally assist the Fund in all aspects of its
administration and operation, including matters relating to the maintenance of
financial records and fund accounting. As compensation for their services,
PMFCO is entitled to receive a fee, computed daily and payable monthly, at an
annual rate of .03% of the Portfolio's average daily net assets, and PFPC and
PDI are entitled to receive a combined fee, computed daily and payable monthly,
at an annual rate of .20% of the first $500 million of the Portfolio's average
daily net assets, .18% of the next $500 million of the Portfolio's average
daily net assets, .16% of the next $1 billion of the Portfolio's average daily
net assets and .15% of the Portfolio's average daily net assets in excess of $2
billion. From time to time the Administrators may waive all or any portion of
the administration fees for the Portfolio.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND CUSTODIAN
PNC Bank serves as the Fund's custodian and PFPC serves as the Fund's
transfer agent and dividend disbursing agent.
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EXPENSES
Expenses are deducted from the total income of the Portfolio before
dividends and distributions are paid. These expenses include, but are not
limited to, fees paid to BlackRock and the Administrators, transfer agency
fees, fees and expenses of officers and trustees who are not affiliated with
BlackRock or the Distributor or any of their affiliates, taxes, interest, legal
fees, custodian fees, auditing fees, certain fees and expenses in registering
and qualifying the Portfolio and its Shares for distribution under Federal and
state securities laws, expenses of preparing prospectuses and statements of
additional information and of printing and distributing prospectuses and
statements of additional information to existing shareholders, the expense of
reports to shareholders, shareholders' meetings and proxy solicitations,
fidelity bond and trustees and officers liability insurance premiums, the
expense of using independent pricing services and other expenses which are not
expressly assumed by BlackRock or the Administrators under their respective
agreements with the Fund. Any general expenses of the Fund that are not
readily identifiable as belonging to a particular investment portfolio will be
allocated among all investment portfolios by or under the direction of the
Board of Trustees in a manner the Board determines to be fair and equitable.
If the total expenses borne by the Portfolio in any fiscal year exceed the
expense limitations imposed by applicable state securities regulations,
BlackRock and the Administrators will bear the amount of such excess to the
extent required by such regulations in proportion to the fees otherwise payable
to them for such year. Such amount, if any, will be estimated and accrued
daily and paid on a monthly basis. See "Introduction--Example,"
"Management--Adviser" and "Management--Administrators" for discussions of
expense reimbursements and fee waivers.
PORTFOLIO TRANSACTIONS
The Portfolio's adviser may consider a number of factors in determining
which brokers to use in purchasing or selling portfolio securities. These
factors, which are more fully discussed in the Statement of Additional
Information, include, but are not limited to, research services, sales of
shares of the Fund, the reasonableness of commissions and quality of services
and execution. Brokerage transactions for the Portfolio may be directed
through registered broker/dealers ("Authorized Dealers") who have entered into
dealer agreements with the Distributor, subject to the requirements of best
execution.
BANKING LAWS
Banking laws and regulations currently prohibit a bank holding company
registered under the Federal Bank Holding Company
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Act of 1956 or any bank or non-bank affiliate thereof from sponsoring,
organizing, controlling or distributing the shares of a registered open-end
investment company continuously engaged in the issuance of its shares, and
prohibit banks generally from underwriting securities, but such banking laws
and regulations do not prohibit such a holding company or affiliate or banks
generally from acting as investment adviser, administrator, transfer agent or
custodian to such an investment company, or from purchasing shares of such
company as agent for and upon the order of customers. PNC Bank, BlackRock,
PMFCO, PFPC and Institutions that are banks or bank affiliates, are subject to
such banking laws and regulations. In addition, state securities laws on this
issue may differ from the interpretations of Federal law expressed herein and
banks and financial institutions may be required to register as dealers
pursuant to state law.
Should future legislative, judicial or administrative action prohibit or
restrict the activities of such companies in connection with the provision of
services on behalf of the Fund and the holders of Institutional Shares, the
Fund might be required to alter materially or discontinue its arrangements with
such companies and change its method of operations with respect to the
Institutional Shares. It is not anticipated, however, that any change in the
Fund's method of operations would affect its net asset value per share or
result in a financial loss to any investor.
PURCHASE AND REDEMPTION OF SHARES
- --------------------------------------------------------------------------------
DISTRIBUTOR
Shares of the Portfolio are offered on a continuous basis for the Fund by
the distributor, Provident Distributors, Inc. (the "Distributor"). The
Distributor is a registered broker/dealer with principal offices at 259
Radnor-Chester Road, Suite 120, Radnor, Pennsylvania 19087.
The Fund has adopted an Amended and Restated Distribution and Service Plan
(the "Plan") pursuant to Rule 12b-1 under the 1940 Act. The Plan permits the
Adviser to pay a fee to the Distributor, which in turn is authorized to make
payments to securities dealers with which the Distributor may enter into
solicitation fee agreements. The Distributor may also use a portion of the fee
it receives under the Plan to compensate institutions who perform support
services that would otherwise be performed by an Administrator or its agents.
The purpose of the Plan is to promote distribution of the Fund's shares and to
enhance the provision of shareholder services. The Fund is not required or
permitted under the Plan to make payments over and above its investment
advisory fee; the Plan merely permits the
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<PAGE> 571
reallocation of a portion of the advisory fee the Adviser receives to pay for
distribution related and shareholder servicing activities. See "Distributor
and Distribution Plan" in the SAI.
PURCHASE OF SHARES
Institutional Shares are offered without a sales load on a continuous
basis to Institutions at the net asset value per share of the Portfolio next
computed after an order is received in proper form by PFPC. Dividends will
commence accruing on that day. Shares may be purchased on any Business Day. A
"Business Day" is any weekday that the New York Stock Exchange (the "NYSE") and
the Federal Reserve Bank of Philadelphia (the "FRB") are open for business.
Purchase orders may be transmitted by telephoning PFPC at (800) 441-7379.
Orders received by PFPC after 12:00 Noon (Eastern Time) are priced at the net
asset value per share on the following Business Day. The Fund may in its
discretion reject any order for Shares.
Payment for Shares may be made only in Federal funds or other funds
immediately available to the Fund's custodian. The minimum initial investment
by an Institution is $50 million. There is no minimum subsequent investment.
REDEMPTION OF SHARES
Redemption orders may be transmitted to PFPC by telephone at (800)
441-7379. Shares are redeemed at the net asset value per share of the
Portfolio next determined after PFPC's receipt of the redemption request in
proper order, and dividends will not accrue after the day on which the
redemption is effectuated. THE FUND, THE ADMINISTRATORS AND THE DISTRIBUTOR
WILL NOT BE LIABLE FOR ANY LOSS, LIABILITY, COST OR EXPENSE FOR ACTING UPON
TELEPHONE INSTRUCTIONS THAT ARE REASONABLY BELIEVED TO BE GENUINE. IN
ATTEMPTING TO CONFIRM THAT TELEPHONE INSTRUCTIONS ARE GENUINE, THE FUND WILL
USE SUCH PROCEDURES AS ARE CONSIDERED REASONABLE, INCLUDING RECORDING THOSE
INSTRUCTIONS AND REQUESTING INFORMATION AS TO ACCOUNT REGISTRATION (SUCH AS THE
NAME IN WHICH AN ACCOUNT IS REGISTERED, THE ACCOUNT NUMBER, RECENT TRANSACTIONS
IN THE ACCOUNT, AND THE ACCOUNT HOLDER'S SOCIAL SECURITY NUMBER, ADDRESS AND/OR
BANK).
The date on which a redemption request is received will be the date
specified if the redemption request specifies a particular date in the future
for its effectiveness. The Fund expects to pay all redemption requests made
with at least thirty (30) days' advance notice in cash. Redemption requests in
excess of $250,000 by any single shareholder from the Portfolio within any
three-month period may be paid in kind unless the Fund has received at least
thirty (30) days' advance notice and will be paid in kind if the redeeming
shareholder so requests and such
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<PAGE> 572
payment will not adversely affect other shareholders. Shareholders who receive
redemptions in kind will incur additional expense and delay in disposing of
such securities and the value of such securities may decline during the
disposition period.
If a proper redemption request is received prior to 12:00 noon (Eastern
time) on any Business Day payment of the redemption price will ordinarily be
wired to the Shareholder's bank on the first business day subsequent to the
30-day advance notice redemption request in the case of the Portfolio. If the
request is received after 12:00 noon (Eastern time) payment will ordinarily be
wired to the shareholder's bank within two business days subsequent to the
30-day advance notice redemption request. Redemption proceeds will be sent by
wire only to the bank named on the shareholder's application form. A
shareholder may change the wire instructions on the application form by writing
to PFPC with an appropriate signature guarantee.
During periods of substantial economic or market change, telephone
redemptions may be difficult to complete. If an Institution is unable to
contact PFPC by telephone, the Institution may also deliver the redemption
request to PFPC by mail at 400 Bellevue Parkway, Wilmington, DE 19809.
The Fund may suspend the right of redemption or postpone the date of
payment upon redemption (as well as suspend the recordation of the transfer of
Shares) for such periods as are permitted under the 1940 Act. The Fund may
also redeem Shares involuntarily or make payment for redemption in securities
or other property if it appears appropriate to do so in light of the Fund's
responsibilities under the 1940 Act. See "Purchase and Redemption Information"
in the Statement of Additional Information for examples of when such redemption
might be appropriate.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The net asset value for the Portfolio is calculated as of the close of
trading on the NYSE (currently 4:00 p.m. Eastern Time) on each Business Day by
adding the value of all its securities, cash and other assets subtracting the
liabilities and dividing by the total number of Shares outstanding. The net
asset value per Share of the Portfolio is determined independently of the
Fund's other portfolios.
The value of securities held by the Portfolio are based upon market
quotations or, if market quotations are not readily
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available are valued at fair value as determined in good faith by or under the
direction of the Fund's Board of Trustees.
The Portfolio may use a pricing service, bank or broker/dealer experienced
in such matters to value the Portfolio's securities. A more detailed
discussion of net asset value and security valuation is contained in the
Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
- --------------------------------------------------------------------------------
The Portfolio will distribute substantially all of its net investment
income and net realized capital gains, if any, to shareholders. For dividend
purposes, the Portfolio's investment income available for distribution to
holders of Institutional Shares is reduced by accrued expenses directly
attributable to the Portfolio and the general expenses of the Fund prorated to
the Portfolio on the basis of its relative net assets. All distributions are
reinvested at net asset value in the form of additional full and fractional
Shares of the Portfolio unless an Institution elects otherwise. Such election,
or any revocation thereof, must be made in writing to PFPC, and will become
effective with respect to dividends paid after its receipt by PFPC. The net
investment income of the Portfolio is declared daily. All such dividends are
paid within ten days after the end of each month and within seven days after
redemption of all of a shareholder's Shares in the Portfolio. Net realized
capital gains (including net short-term capital gains), if any, will be
distributed by the Portfolio at least annually.
TAXES
- -------------------------------------------------------------------------------
The following discussion is only a brief summary of some of the important
tax considerations generally affecting the Portfolio and its shareholders and
is not intended as a substitute for careful tax planning. Accordingly,
investors in the Portfolio should consult their tax advisers with specific
reference to their own tax situation.
The Portfolio will elect to be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. So long
as the Portfolio qualifies for this tax treatment, it generally will be
relieved of Federal income tax on amounts distributed to shareholders, but
shareholders, unless otherwise exempt, will pay income or capital gains taxes
on amounts so distributed (except distributions that are treated as a return of
capital), regardless of whether such
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<PAGE> 574
distributions are paid in cash or reinvested in additional Shares.
Distributions paid out of the "net capital gain" (the excess of net
long-term capital gain over net short-term capital loss), if any, of the
Portfolio will be taxed to shareholders as long-term capital gain, regardless
of the length of time a shareholder has held his Shares and whether such gain
was reflected in the price paid for the Shares. All other distributions, to
the extent they are taxable, are taxed to shareholders as ordinary income.
The Fund will send written notices to shareholders annually regarding the
tax status of distributions made by the Portfolio. Dividends declared in
October, November or December of any year payable to shareholders of record on
a specified date in those months will be deemed to have been received by the
shareholders on December 31 of such year, if the dividends are paid during
January of the following year.
A taxable gain or loss may be realized by a shareholder upon his
redemption, transfer or exchange of Portfolio Shares depending upon the tax
basis of such Shares and their price at the time of redemption, transfer or
exchange.
Future legislative or administrative changes or court decisions may
materially affect the tax consequences of investing in the Portfolio.
Shareholders are also urged to consult their tax advisers concerning the
application of state and local income taxes to investments in the Fund which
may differ from the Federal income tax consequences described above.
Shareholders who are nonresident alien individuals, foreign trusts or estates,
foreign corporations or foreign partnerships may be subject to different U.S.
Federal income tax treatment and should consult their tax advisers.
DESCRIPTION OF SHARES
- --------------------------------------------------------------------------------
The Fund was organized as a Massachusetts business trust on December 22,
1988 and is registered under the 1940 Act as an open-end management investment
company. The Declaration of Trust authorizes the Board of Trustees to classify
and reclassify any unissued shares into one or more classes of shares.
Pursuant to such authority, the Board of Trustees has authorized the issuance
of an unlimited number of shares in each of 109 classes (22 classes of "Series
B Investor Shares" and 29 classes each of "Institutional Shares," "Service
Shares" and "Series A Investor Shares") representing interests in the Fund's
investment portfolios. This Prospectus describes the Multi-Sector Mortgage
Securities Portfolio III, which is classified as a non-
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<PAGE> 575
diversified company under the 1940 Act. For information regarding other
portfolios of the Fund, contact the Distributor by phone at (800) 998-7633 or
at the address listed in "Purchase and Redemption of Shares--Distributor."
Each share of an investment portfolio has a par value of $.001, represents
an equal proportionate interest in the portfolio and is entitled to such
dividends and distributions earned on the portfolio's assets as are declared in
the discretion of the Board of Trustees. The Fund's shareholders are entitled
to one vote for each full share held and proportionate fractional votes for
fractional shares held, and will vote in the aggregate and not by class, except
where otherwise required by law or when the Board of Trustees determines that
the matter to be voted upon affects only the interests of the shareholders ofa
particular class or investment portfolio. Under Massachusetts law, the Fund's
state of organization, and the Fund's Declaration of Trust and Code of
Regulations, the Fund is not required and does not currently intend to hold
annual meetings of shareholders for the election of trustees (except as
required under the 1940 Act). For a further discussion of the voting rights of
shareholders, see "Additional Information Concerning Shares" in the Statement
of Additional Information.
On September 29, 1995, PNC Bank held of record approximately 79% of the
Fund's outstanding shares, and may be deemed a controlling person of the Fund
under the 1940 Act. PNC Bank is a subsidiary of PNC Bank Corp., a multi-bank
holding company.
OTHER INFORMATION
- ------------------------------------------------------------------------------
REPORTS AND INQUIRIES
Shareholders will receive unaudited semi-annual financial statements and
annual financial statements audited by independent accountants. Shareholder
inquiries should be addressed to the Fund c/o PFPC, P.O. Box 8950, Wilmington,
Delaware 19885-9628, toll-free (800) 441-7764 (in Delaware call collect (302)
791-1104).
PERFORMANCE INFORMATION
From time to time, total return and yield data for Shares of the Portfolio
may be quoted in advertisements or in communications to Institutions. Total
return will be calculated on an average annual total return basis for various
periods. Average annual total return reflects the average annual percentage
change in value of an investment in Shares of the Portfolio over the measuring
period. This method of calculating
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<PAGE> 576
total return assumes that dividends and capital gain distributions made by the
Portfolio during the period relating to Shares are reinvested in Shares.
The yield of Shares of the Portfolio are computed based on the net income
of the Portfolio allocated to such Shares during a 30-day (or one month)
period, which period will be identified in connection with the particular yield
quotation. More specifically, the yield of Shares of the Portfolio is computed
by dividing the Portfolio's net income per share allocated to such Shares
during a 30-day (or one month) period by the net asset value per share on the
last day of the period and annualizing the result on a semi-annual basis.
Performance data of Shares of the Portfolio may be compared to those of
other mutual funds with similar investment objectives and to other relevant
indexes or to ratings or rankings prepared by independent services or other
financial or industry publications that monitor the performance of mutual
funds. In addition, certain indexes may be used to illustrate historic
performance of select asset classes. For example, the total return and/or
yield of Shares of the Portfolio may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Weisenberger
Investment Company Service, and with the performance of the Salomon Broad
Investment Grade Index, the T-Bill Index and the "stocks, bonds and inflation
Index" published annually by Ibbotson Associates. Performance information may
also include evaluations of the Portfolio and their Shares published by
nationally recognized ranking services and information as reported by financial
publications such as Business Week, Fortune, Institutional Investor, Money
Magazine, Forbes, Barron's, The Wall Street Journal and The New York Times, or
in publications of a local or regional nature.
In addition to providing performance information that demonstrates the
actual yield or returns of Shares of the Portfolio over a particular period of
time, the Portfolio may provide certain other information demonstrating
hypothetical investment returns. Such information may include, but is not
limited to, illustrating the compounding effects of a dividend in a dividend
reinvestment plan.
Performance quotations of Shares of the Portfolio represent past
performance and should not be considered as representative of future results.
The investment return and principal value of an investment in Shares of the
Portfolio will fluctuate so that a shareholder's Shares, when redeemed, may be
worth more or less than their original cost. Since performance will fluctuate,
performance data for Shares of the Portfolio cannot necessarily be used to
compare an investment in such Shares with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a
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<PAGE> 577
stated period of time. Shareholders should remember that performance is
generally a function of the kind and quality of the instruments held in the
portfolio, portfolio maturity, operating expenses and market conditions. Any
fees charged by Service Organizations directly to their customer accounts in
connection with investments in Shares will not be included in the Portfolio's
calculations of yield and total return.
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<PAGE> 578
APPENDIX A
The following summarizes the ratings used for debt securities:
DESCRIPTION OF MOODY'S BOND RATINGS:
"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 risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be
in default.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally.
These are bonds secured by (a) earnings of projects under construction, (b)
earnings of projects unseasoned in operation experience, (c) rentals which
begin when facilities are completed, or (d) payments to which some other
limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
A-1
<PAGE> 579
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" to "B" in its bond rating system. The modifier 1
indicates that the company ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks at the lower end of its generic rating category.
DESCRIPTION OF S&P BOND RATINGS:
"AAA" - This designation represents the highest rating assigned by
Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay interest
and repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt
in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
B -- Debt rated "B" has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
CCC -- Debt rated "CCC" has a currently identifiable
vulnerability to default, and is dependent upon
A-2
<PAGE> 580
favorable business, financial, and economic conditions to meet timely payment
of interest and repayment of principal. In the event of adverse business,
financial, or economic conditions, it is not likely to have the capacity to pay
interest and repay principal. The "CCC" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "B" or "B-"
rating.
CC -- The rating "CC" typically is applied to debt subordinated
to senior debt that is assigned an actual or implied "CCC" rating.
C -- The rating "C" typically is applied to debt subordinated to
senior debt that is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
CI - The rating "CI" is reserved for income bonds on which no
interest is being paid.
D -- Debt rated "D" is in payment default. The "D" rating
category is used when interest payments or principal payments are not made on
the date due even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period. The "D"
rating also will be used upon the filing of a bankruptcy petition if debt
service payments are jeopardized.
Standard & Poor's letter ratings may be modified by the addition
of a plus or minus sign, which is used to show relative standing within the
major rating categories, except in the AAA, CC, C, CI and D categories.
DESCRIPTION OF DUFF & PHELPS' BOND RATINGS:
AAA - Bonds rated AAA are of the highest credit quality. The risk
factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
AA -- Bonds rated AA have high credit quality with strong protection
factors. Risk is modest.
A -- Bonds rated A have average but adequate protection factors.
Risk factors are greater and more variable in times of economic stress than AAA
or AA.
BBB -- Bonds rated BBB exhibit below average protection factors, but
still considered for prudent investment. Considerable variability in risk
during economic cycles.
BB -- Bonds rated BB are below investment grade, but deemed likely to
meet obligations when due.
B -- Bonds rated B are below investment grade and possessing risk
that obligations will not be met when due.
A-3
<PAGE> 581
CCC -- Bonds rated CCC are well below investment grade. They may be
in default or have considerable uncertainty as to timely payment of interest
and/or principal.
DD -- Bonds rated DD are defaulted debt obligations. Payments of
principal and/or interest have not been made.
Duff & Phelps' letter ratings may be modified by the addition of a
plus or minus sign, which is used to show relative standing within the major
rating categories, except in the AAA, CCC and DD categories.
DESCRIPTION OF FITCH BOND RATINGS:
AAA -- Bonds rated AAA are considered investment grade and of the
highest quality. The ability to pay interest and principal is exceptionally
strong and unlikely to be affected by reasonably foreseeable events.
AA -- Bonds rated AA are considered investment grade and very high
credit quality.
A -- Bonds rated A are considered investment grade and of high credit
quality. The ability to pay interest and principal is strong, but may be
vulnerable to adverse changes in economic conditions and circumstances than
bonds with higher ratings.
BBB -- Bonds rated BBB are considered investment grade and
satisfactory credit quality. The likelihood that these bonds will fall below
investment grade, however, is higher than for bonds with higher ratings.
BB -- Bonds rated BB are considered speculative. The ability to pay
interest and principal may be affected over time by adverse economic changes.
B -- Bonds rated B are considered highly speculative. While bonds in
this class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the issuer's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC -- Bonds rated CCC have certain identifiable characteristics
which, if not remedied, may lead to default.
CC -- Bonds rated CC are minimally protected. Default seems probable
over time.
C -- Bonds rated C are in imminent default in payments of interest or
principal.
DDD, DD and D -- Bonds rated in any of these categories are in
default on interest and/or principal payments.
A-4
<PAGE> 582
Fitch's letter ratings may be modified by the addition of a plus or
minus sign, which is used to show relative standing within the major rating
categories, except in the AAA category.
A-5
<PAGE> 583
APPENDIX B
GENERAL CHARACTERISTICS AND RISKS OF
ADDITIONAL INVESTMENT MANAGEMENT TECHNIQUES
In order to manage the risk of its securities portfolio, including
duration management, or to enhance income or gain as described above, the
Portfolio will engage in Additional Investment Management Techniques. The
Portfolio will engage in such activities in the Adviser's discretion, and may
not necessarily be engaging in such activities when movements in interest rates
that could affect the value of the assets of the Portfolio occur. The
Portfolio's ability to pursue certain of these strategies may be limited by
applicable regulations of the CFTC and the federal income tax requirements
applicable to regulated investment companies.
PUT AND CALL OPTIONS ON SECURITIES AND INDICES
The Portfolio may purchase and sell put and call options on
securities and indices. A put option gives the purchaser of the option the
right to sell and the writer the obligation to buy the underlying security at
the exercise price during the option period. The Portfolio may also purchase
and sell options on stock indices ("index options"). Index options are similar
to options on securities except that, rather than taking or making delivery of
securities underlying the option at a specified price upon exercise, an index
option gives the holder the right to receive cash upon exercise of the option
if the level of the stock index upon which the option is based is greater, in
the case of a call, or less, in the case of a put, than the exercise price of
the option. The purchase of a put option on a debt security could protect the
Portfolio's holdings in a security or a number of securities against a
substantial decline in the market value. A call option gives the purchaser of
the option the right to buy and the seller the obligation to sell the
underlying security or index at the exercise price during the option period or
for a specified period prior to a fixed date. The purchase of a call option on
a security could protect the Portfolio against an increase in the price of a
security that it intended to purchase in the future. In the case of either put
or call options that it has purchased, if the option expires without being sold
or exercised, the Portfolio will experience a loss in the amount of the option
premium plus any related commissions. When the Portfolio sells put and call
options, it receives a premium as the seller of the option. The premium that
the Portfolio receives for selling the option will serve as a partial hedge, in
the amount of the option premium, against changes in the value of the
securities in its portfolio. During the term of the option, however, a covered
call seller has, in return for the premium on the option, given up the
opportunity for capital appreciation above the exercise price of the option if
the value of the underlying security increases, but has retained the risk of
loss should the price of the underlying security decline. Conversely, a
secured put seller retains the risk of loss should the market value of the
underlying security decline below the exercise price of the option, less the
premium received on the sale of the option. The Portfolio is authorized
<PAGE> 584
to purchase and sell exchange listed options and over-the-counter options ("OTC
Options") which are privately negotiated with the counterparty. Listed options
are issued by the Options Clearing Corporation ("OCC") which guarantees the
performance of the obligations of the parties to such options.
The Portfolio's ability to close out its position as a purchaser or
seller of an exchange-listed put or call option is dependent upon the existence
of a liquid secondary market on option exchanges. Among the possible reasons
for the absence of a liquid secondary market on an exchange are: (i)
insufficient trading interest in certain options; (ii) restrictions on
transactions imposed by an exchange; (iii) trading halts, suspensions or other
restrictions imposed with respect to particular classes or series of options or
underlying securities; (iv) interruption of the normal operations on an
exchange; (v) inadequacy of the facilities of an exchange or OCC to handle
current trading volume; or (vi) a decision by one or more exchanges 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
on that exchange that had been listed by the OCC as a result of trades on that
exchange would generally continue to be exercisable in accordance with their
terms. OTC options are purchased from or sold to dealers, financial
institutions or other counterparties which have entered into direct agreements
with the Portfolio. With OTC options, such variables as expiration date,
exercise price and premium will be agreed upon between the Portfolio and the
counterparty, without the intermediation of a third party such as the OCC. If
the counterparty fails to make or take delivery of the securities underlying an
option it has written, or otherwise settle the transaction in accordance with
the terms of that option as written, the Portfolio would lose the premium paid
for the option as well as any anticipated benefit of the transaction. As the
Portfolio must rely on the credit quality of the counterparty rather than the
guarantee of the OCC, it will only enter into OTC options with counterparties
with the highest long-term credit ratings, and with primary United States
government securities dealers recognized by the Federal Reserve Bank of New
York.
The hours of trading for options on debt securities may not conform
to the hours during which the underlying securities are traded. To the extent
that the option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying markets
that cannot be reflected in the option markets.
FUTURES CONTRACTS AND RELATED OPTIONS
CHARACTERISTICS. The Portfolio may sell financial futures contracts
or purchase put and call options on such futures as a hedge against anticipated
interest rate changes or other market movements. The sale of a futures
contract creates an obligation by the Portfolio, as seller, to deliver the
specific type of financial instrument called for in the contract at a specified
future time for a specified price. Options on
<PAGE> 585
futures contracts are similar to options on securities except that 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 (a long position if the option is a
call and a short position if the option is a put).
MARGIN REQUIREMENTS. At the time a futures contract is purchased or
sold, the Portfolio must allocate cash or securities as a deposit payment
("initial margin"). It is expected that the initial margin that the Portfolio
will pay may range from approximately 1% to approximately 5% of the value of
the securities or commodities underlying the contract. In certain
circumstances, however, such as periods of high volatility, the Portfolio may
be required by an exchange to increase the level of its initial margin payment.
Additionally, initial margin requirements may be increased generally in the
future by regulatory action. An outstanding futures contract is valued daily
and the payment in cash of "variation margin" may be required, a process known
as "marking to the market." Transactions in listed options and futures are
usually settled by entering into an offsetting transaction, and are subject to
the risk that the position may not be able to be closed if no offsetting
transaction can be arranged.
LIMITATIONS ON USE OF FUTURES AND OPTIONS ON FUTURES. The
Portfolio's use of futures and options on futures will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the CFTC. Under such regulations the Portfolio currently
may enter into such transactions without limit for bona fide hedging purposes,
including risk management and duration management and other portfolio
strategies.
The Portfolio will not enter into a futures contract or related
option if, immediately thereafter, the sum of the amount of its initial
deposits and premiums on open contracts and options would exceed 5% of the
Portfolio's liquidation value, i.e. net assets (taken at current value);
provided, however, that in the case of an option that is in-the-money at the
time of the purchase, the in-the-money amount may be excluded in calculating
the 5% limitation. Also, when required, a segregated account of cash or cash
equivalents will be maintained and marked to market in an amount equal to the
market value of the contract. The Portfolio reserves the right to comply with
such different standard as may be established from time to time by CFTC rules
and regulations with respect to the purchase or sale of futures contracts or
options thereon.
SEGREGATION AND COVER REQUIREMENTS. Futures contracts, interest rate
swaps, caps, floors and collars and listed options on securities, indices and
futures contracts sold by the Portfolio are subject to segregation and coverage
requirements of either the CFTC or the SEC, with the result that, if the
Portfolio does not hold the security or futures contract underlying the
instrument, the Portfolio will be required to segregate on an ongoing basis
with its custodian, cash, U.S. government securities, or other liquid high
grade debt obligations in an amount at least equal to the Portfolio's
<PAGE> 586
obligations with respect to such instruments. Such amounts fluctuate as the
obligations increase or decrease. The segregation requirement can result in
the Portfolio maintaining securities positions it would otherwise liquidate,
segregating assets at a time when it might be disadvantageous to do so or
otherwise restrict portfolio management.
<PAGE> 587
<TABLE>
<S> <C>
The Multi-Sector
NO PERSON HAS BEEN AUTHORIZED TO Mortgage
GIVE ANY INFORMATION OR MAKE ANY Securities
REPRESENTATIONS NOT CONTAINED IN THIS Portfolio III
PROSPECTUS, OR IN THE STATEMENT OF
ADDITIONAL INFORMATION INCORPORATED
HEREIN BY REFERENCE, IN CONNECTION WITH
THE OFFERING MADE BY THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH Institutional
REPRESENTATIONS MUST NOT BE RELIED UPON Class
AS HAVING BEEN AUTHORIZED BY THE FUND OR
ITS DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFERING BY THE FUND
OR BY THE DISTRIBUTOR IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY
NOT LAWFULLY BE MADE.
</TABLE>
------------------- Prospectus
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Page
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Introduction . . . . . . . . . . . . . ______________, 1995
Financial Highlights . . . . . . . . .
Investment Policies . . . . . . . . . .
Management . . . . . . . . . . . . . .
Purchase and Redemption of Shares . . .
Net Asset Value . . . . . . . . . . . .
Dividends and Distributions . . . . . .
Taxes . . . . . . . . . . . . . . . . .
Description of Shares . . . . . . . . .
Other Information . . . . . . . . . . .
INVESTMENT ADVISER
BlackRock Financial Management Inc.
New York, New York
CO-ADMINISTRATOR
PNC Mutual Fund Company
New York, New York
CO-ADMINISTRATOR AND TRANSFER AGENT
PFPC Inc.
Wilmington, Delaware
CO-ADMINISTRATOR AND DISTRIBUTOR
Provident Distributors, Inc.
Radnor, Pennsylvania
COUNSEL
Drinker Biddle & Reath
Philadelphia, Pennsylvania
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand, L.L.P.
Philadelphia, Pennsylvania
</TABLE>
<PAGE> 588
THE PNC(R) FUND
STATEMENT OF ADDITIONAL INFORMATION
MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III
This Statement of Additional Information provides supplementary
information pertaining to Institutional shares ("Shares") representing
interests in the Multi-Sector Mortgage Securities Portfolio III (the
"Portfolio") of The PNC Fund (the "Fund"). This Statement of Additional
Information is not a prospectus, and should be read only in conjunction with
the Prospectus of the Fund relating to the Portfolio dated ____________, as
amended from time to time (the "Prospectus"). The Prospectus may be obtained
from the Fund's distributor by calling toll-free (800) 441-7379. This
Statement of Additional Information is dated ____________. Capitalized terms
used herein and not otherwise defined have the same meanings as are given to
them in the Prospectus.
CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
THE FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INVESTMENT OBJECTIVE AND POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . .
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TRUSTEES AND OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INVESTMENT ADVISORY, ADMINISTRATION,
DISTRIBUTION AND SERVICING ARRANGEMENTS . . . . . . . . . . . . . . . . . . . . . .
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PURCHASE AND REDEMPTION INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . .
VALUATION OF PORTFOLIO SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . .
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ADDITIONAL INFORMATION CONCERNING SHARES . . . . . . . . . . . . . . . . . . . . . .
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS STATEMENT OF ADDITIONAL INFORMATION OR
THE PROSPECTUS IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE FUND OR ITS DISTRIBUTOR. THE PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY THE FUND OR BY THE FUND'S DISTRIBUTOR IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
<PAGE> 589
THE FUND
The Fund was organized on December 22, 1988 as a Massachusetts
business trust. The Portfolio originally commenced operations on October 6,
1994 as a separate investment portfolio (the "Predecessor Portfolio") of The
BFM Institutional Trust Inc., which was organized as a Maryland corporation.
On ______________, 1995 the assets and liabilities of the Predecessor Portfolio
were transferred to the Portfolio, which had no prior operating history.
The Fund also offers other investment portfolios which are described
in separate Prospectuses and Statements of Additional Information. For
information concerning these other portfolios contact the distributor at the
telephone number stated on the cover page of this Statement of Additional
Information.
INVESTMENT OBJECTIVE AND POLICIES
For a description of the objective and policies of the Portfolio, see
"Investment Policies" in the Prospectus. In accordance with the applicable
provisions of the Investment Company Act of 1940 (the "1940 Act"), the
Portfolio will maintain with its custodian a segregated account of cash, cash
equivalents, U.S. Government securities or other high grade liquid debt to the
extent the Portfolio's obligations require segregation from the use of
investment practices listed below. The following information is provided for
those investors desiring information in addition to that contained in the
Prospectus.
OTHER INVESTMENT PRACTICES
INTEREST RATE TRANSACTIONS. The Portfolio may enter into interest
rate swaps and the purchase or sale of interest rate caps and floors. The
Portfolio expects to enter into these transactions primarily to preserve a
return or spread on a particular investment or portion of its portfolio as a
duration management technique or to protect against any increase in the price
of securities that the Portfolio anticipates purchasing at a later date. The
Portfolio will use these transactions as a hedge or for duration or risk
management. The Portfolio will not sell interest rate caps or floors that it
does not own. Interest rate swaps involve the exchange by the Portfolio with
another party of their respective commitments to pay or receive interest e.g.,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal. The purchase of an interest rate cap entitles
the purchaser, to the extent that a specified index exceeds a predetermined
interest
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<PAGE> 590
rate, to receive payments of interest on a notional principal amount from the
party selling such interest rate cap. The purchase of an interest rate floor
entitles the purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate floor.
The Portfolio may enter into interest rate swaps, caps and floors on
either an asset-based or liability-based basis, and will usually enter into
interest rate swaps on a net basis, i.e., the two payment streams are netted
out, with the Portfolio receiving or paying, as the case may be, only the net
amount of the two payments on the payment dates. The Portfolio will accrue the
net amount of the excess, if any, of the Portfolio's obligations over its
entitlements with respect to each interest rate swap on a daily basis and will
segregate with a custodian an amount of cash or liquid high grade securities
having an aggregate net asset value at all times at least equal to the accrued
excess. If there is a default by the other party to such a transaction, the
Portfolio will have contractual remedies pursuant to the agreements related to
the transaction.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Portfolio may
also enter into contracts for the purchase or sale for future delivery
("futures contracts") of debt securities, aggregates of debt securities or
indices or prices thereof, other financial indices and U.S. government debt
securities or options on the above. The Portfolio will ordinarily engage in
such transactions only for bona fide hedging, risk management (including
duration management) and other portfolio management purposes.
CALLS ON SECURITIES, INDICES AND FUTURES CONTRACTS. The Portfolio may
sell or purchase call options ("calls") on U.S. Treasury securities,
mortgage-backed securities, other debt securities, indices, and Eurodollar
instruments that are traded on U.S. and foreign securities exchanges and in the
over-the-counter markets, and future contracts. A call gives the purchaser of
the option the right to buy, and obligates the seller to sell, the underlying
security, futures contract or index at the exercise price at any time or at a
specified time during the option period. All such calls sold by the Portfolio
must be "covered" as long as the call is outstanding (i.e., the Portfolio must
own the securities or futures contract subject to the call or other securities
acceptable for applicable segregation requirements). A call sold by the
Portfolio exposes the Portfolio during the term of the option to possible loss
of opportunity to realize appreciation in the market price of the underlying
security, index or futures contract and may require the Portfolio to hold a
security or futures contract which it might otherwise have sold. The purchase
of a call gives the
-3-
<PAGE> 591
Portfolio the right to buy a security, futures contract or index at a fixed
price. Calls on futures on U.S. Treasury securities, Mortgage-Backed
Securities, other debt securities and Eurodollar instruments must also be
covered by deliverable securities or the futures contract or by liquid high
grade debt securities segregated to satisfy the Portfolio's obligations
pursuant to such instruments.
PUTS ON SECURITIES, INDICES AND FUTURES CONTRACTS. The Portfolio may
purchase put options ("puts") that relate to U.S. Treasury securities,
Mortgage-Backed Securities, other debt securities and Eurodollar instruments
(whether or not it holds such securities in its portfolio), indices or futures
contracts. The Portfolio may also sell puts on U.S. Treasury securities,
Mortgage-Backed Securities, other debt securities, Eurodollar instruments,
indices or futures contracts on such securities if the Portfolio's contingent
obligations on such puts are secured by segregated assets consisting of cash or
liquid high grade debt securities having a value not less than the exercise
price. The Portfolio will not sell puts if, as a result, more than 50% of the
Portfolio's assets would be required to cover its potential obligations under
its hedging and other investment transactions. In selling puts, there is a
risk that the Portfolio may be required to buy the underlying instrument at a
price higher than the current market price.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES. The Portfolio may also
purchase securities on a "when-issued" basis and may purchase or sell
securities on a "forward commitment" basis. When such transactions are
negotiated, the price, which is generally expressed in yield terms, is fixed at
the time the commitment is made, but delivery and payment for the securities
take place at a later date. When-issued securities and forward commitments may
be sold prior to the settlement date, but the Portfolio will enter into
when-issued and forward commitments only with the intention of actually
receiving or delivering the securities, as the case may be. If the Portfolio
disposes of the right to acquire a when-issued security prior to its
acquisition or disposes of its right to deliver or receive against a forward
commitment, it can incur a gain or loss. At the time the Portfolio enters into
a transaction on a when-issued or forward commitment basis, it will segregate
with its custodian cash or other liquid high grade debt securities with a value
not less than the value of the when-issued or forward commitment securities.
The value of these assets will be monitored daily to ensure that their marked
to market value will at all times equal or exceed the corresponding obligations
of the Portfolio. There is always a risk that the securities may not be
delivered and that the Portfolio may incur a loss. Settlements in the ordinary
course, which typically occur monthly for mortgage-related securities, are not
treated by the Portfolio as when-issued or
-4-
<PAGE> 592
forward commitment transactions and accordingly are not subject to the
foregoing restrictions.
REPURCHASE AGREEMENTS. The Portfolio may invest temporarily, without
limitation, in repurchase agreements, which are agreements pursuant to which
securities are acquired by the Portfolio from a third party with the
understanding that they will be repurchased by the seller at a fixed price on
an agreed date. These agreements may be made with respect to any of the
portfolio securities in which the Portfolio is authorized to invest.
Repurchase agreements may be characterized as loans secured by the underlying
securities and will be entered into in accordance with the requirements of the
SEC. The Portfolio may enter into repurchase agreements with (i) member banks
of the Federal Reserve System having total assets in excess of $500 million and
(ii) securities dealers, provided that such banks or dealers meet the
creditworthiness standards established by the Fund's Board of Trustees
("Qualified Institutions"). The Adviser will monitor the continued
creditworthiness of Qualified Institutions, subject to the supervision of the
Fund's Board of Trustees. The resale price reflects the purchase price plus an
agreed upon market rate of interest which is unrelated to the coupon rate or
date of maturity of the purchased security. The collateral is marked to market
daily. Such agreements permit the Portfolio to keep all its assets earning
interest while retaining "overnight" flexibility in pursuit of investments of a
longer-term nature.
The use of repurchase agreements involves certain risks. For example,
if the seller of securities under a repurchase agreement defaults on its
obligation to repurchase the underlying securities, as a result of its
bankruptcy or otherwise, the Portfolio will seek to dispose of such securities,
which action could involve costs or delays. If the seller becomes insolvent
and subject to liquidation or reorganization under applicable bankruptcy or
other laws, the Portfolio's ability to dispose of the underlying securities may
be restricted. Finally, it is possible that the Portfolio may not be able to
substantiate its interest in the underlying securities. To minimize this risk,
the securities underlying the repurchase agreement will be held by the
custodian at all times in an amount at least equal to the repurchase price,
including accrued interest. If the seller fails to repurchase the securities,
the Portfolio may suffer a loss to the extent proceeds from the sale of the
underlying securities are less than the repurchase price.
RESTRICTED AND ILLIQUID SECURITIES. The Portfolio may purchase
certain restricted securities ("Rule 144A securities") eligible for sale to
qualified institutional buyers as contemplated by Rule 144A under the
Securities Act of 1933. Rule 144A provides an exemption from the registration
requirements of
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<PAGE> 593
the Securities Act of 1933 for the resale of certain restricted securities to
qualified institutional buyers. One effect of Rule 144A is that certain
restricted securities may now be liquid, though no assurance can be given that
a liquid market for Rule 144A securities will develop or be maintained. The
Portfolio's holdings of Rule 144A securities which are liquid securities will
not be subject to its limitation on investment in illiquid securities. The
Fund's Board of Trustees has adopted policies and procedures for the purpose of
determining whether securities that are eligible for resale under Rule 144A are
liquid or illiquid. The Board of Trustees will periodically review the
Portfolio's purchases and sales of Rule 144A securities.
OTHER INVESTMENTS
U.S. GOVERNMENT SECURITIES
U.S. Government securities include:
1. U.S. Treasury bills (maturities of one year
or less), U.S. Treasury notes (maturities of one to ten years)
and U.S. Treasury bonds (generally maturities of greater than
ten years), all of which are direct obligations of the U.S.
Government and, as such, are backed by the "full faith and
credit" of the United States.
2. Securities issued by agencies and
instrumentalities of the U.S. Government which are backed by
the full faith and credit of the United States. Among the
agencies and instrumentalities issuing such obligations are
the Federal Housing Administration, the Government National
Mortgage Association ("GNMA"), the Department of Housing and
Urban Development, the Export-Import Bank, the Farmers Home
Administration ("FHA"), the General Services Administration,
the Maritime Administration and the Small Business
Administration. The maturities of such obligations range from
three months to 30 years.
3. Securities issued by agencies and
instrumentalities which are not backed by the full faith and
credit of the United States, but whose issuing agency or
instrumentalities may borrow, to meet its obligations, from
the U.S. Treasury. Among the agencies and instrumentalities
issuing such obligations are the Tennessee Valley Authority,
the Federal National Mortgage Association ("FNMA"), the
Federal Home Loan Mortgage Corporation ("FHLMC") and the U.S.
Postal Service.
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<PAGE> 594
4. Securities issued by agencies and
instrumentalities which are not backed by the full faith and
credit of the United States, but which are backed by the
credit of the issuing agency or instrumentality. Among the
agencies and instrumentalities issuing such obligations are
the Federal Farm Credit System and the Federal Home Loan Bank.
Neither the value nor the yield of the Portfolio's shares or of the
U.S. Government securities which may be invested in by the Portfolio are
guaranteed by the U.S. Government. Such values and yield will fluctuate with
changes in prevailing interest rates and other factors. Generally, as
prevailing interest rates rise, the value of any U.S. Government securities
held by the Portfolio will fall. Such securities with longer maturities
generally tend to produce higher yields and are subject to greater market
fluctuation, as a result of changes in interest rates, than debt securities
with shorter maturities.
MORTGAGE-BACKED SECURITIES
As discussed in the Prospectus, the Mortgage-Backed securities
purchased by the Portfolio evidence an interest in a specific pool of
mortgages. Such securities are issued by GNMA, FNMA and FHLMC and by private
issuers, such as depository institutions, mortgage banks, investment banks and
special purpose subsidiaries of the foregoing.
GNMA CERTIFICATES. GNMA is a wholly-owned corporate instrumentality
of the United States within the Department of Housing and Urban Development.
The National Housing Act of 1934, as amended (the "Housing Act"), authorized
GNMA to guarantee the timely payment of the principal of and interest on
certificates that are based on and backed by a pool of mortgage loans insured
by the Federal Housing Administration under the Housing Act, or Title V of the
Housing Act of 1949 ("FHA Loans"), or guaranteed by the Veterans'
Administration under the Servicemen's Readjustment Act of 1944, as amended ("VA
Loans"), or by pools of other eligible mortgage loans. The Housing Act
provides that the full faith and credit of the U.S. Government is pledged to
the payment of all amounts that may be required to be paid under the guarantee.
In order to meet its obligations under such guarantee, GNMA is authorized to
borrow from the U.S. Treasury with no limitations as to amount.
The GNMA certificates will represent a pro-rata interest in one or
more pools of the following types of mortgage loans: (i) fixed rate level
payment mortgage loans; (ii) fixed rate graduated payment mortgage loans; (iii)
fixed rate growing equity mortgage loans; (iv) fixed rate mortgage loans
secured by
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<PAGE> 595
manufactured (mobile) homes; (v) mortgage loans on multi-family residential
properties under construction; (vi) mortgage loans on completed multi-family
projects; (vii) fixed rate mortgage loans as to which escrowed funds are used
to reduce the borrower's monthly payments during the early years of the
mortgage loans ("buydown" mortgage loans); (viii) mortgage loans that provide
for adjustments in payments based on periodic changes in interest rates or in
other payment terms of the mortgage loans; and (ix) mortgage-backed serial
notes. All of these mortgage loans will be FHA Loans or VA Loans and, except
as otherwise specified above, will be fully-amortizing loans secured by first
liens on one-to four-family housing units.
FNMA CERTIFICATES. FNMA is a federally chartered and privately owned
corporation organized and existing under the Federal National Mortgage
Association Charter Act. FNMA was originally established in 1938 as a U.S.
Government agency to provide supplemental liquidity to the mortgage market and
was transformed into a stockholder owned and privately managed corporation by
legislation enacted in 1968. FNMA provides funds to the mortgage market
primarily by purchasing home mortgage loans from local lenders, thereby
replenishing their funds for additional lending. FNMA acquires funds to
purchase home mortgage loans from many capital market investors that may not
ordinarily invest in mortgage loans directly, thereby expanding the total
amount of funds available for housing.
Each FNMA certificate will entitle the registered holder thereof to
receive amounts representing such holder's pro-rata interest in scheduled
principal payments and interest payments (at such FNMA certificate's
pass-through rate, which is net of any servicing and guarantee fees on the
underlying mortgage loans), and any principal prepayments on the mortgage loans
in the pool represented by such FNMA certificate and such holder's
proportionate interest in the full principal amount of any foreclosed or
otherwise finally liquidated mortgage loan. The full and timely payment of
principal of and interest on each FNMA certificate will be guaranteed by FNMA,
which guarantee is not backed by the full faith and credit of the U.S.
Government.
Each FNMA certificate will represent a pro rata interest in one or
more pools of FHA Loans, VA Loans or conventional mortgage loans (i.e.,
mortgage loans that are not insured or guaranteed by any governmental agency)
of the following types: (i) fixed rate level payment mortgage loans; (ii) fixed
rate graduated payment mortgage loans; and (iii) adjustable rate mortgage
loans.
FHLMC CERTIFICATES. FHLMC is a corporate instrumentality of the
United States created pursuant to the Emergency Home Finance Act of 1970, as
amended (the "FHLMC Act"). FHLMC was established primarily for the purpose of
increasing the availability of
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<PAGE> 596
mortgage credit for the financing of needed housing. The principal activity of
FHLMC currently consists of the purchase of first lien, conventional,
residential mortgage loans and participation interests in such mortgage loans
and the resale of the mortgage loans so purchased in the form of mortgage
securities, primarily FHLMC certificates.
FHLMC guarantees to each registered holder of a FHLMC certificate the
timely payment of interest at the rate provided for by such FHLMC certificate,
whether or not received. FHLMC also guarantees to each registered holder of a
FHLMC certificate ultimate collection of all principal of the related mortgage
loans, without any offset or deduction, but does not, generally, guarantee the
timely payment of scheduled principal. FHLMC may remit the amount due on
account of its guarantee of collection of principal at any time after default
on an underlying mortgage loan, but not later than 30 days following (i)
foreclosure sale, (ii) payment of a claim by any mortgage insurer or (iii) the
expiration of any right of redemption, whichever occurs later, but in any event
no later than one year after demand has been made upon the mortgagor for
accelerated payment of principal. The obligations of FHLMC under its guarantee
are obligations solely of FHLMC and are not backed by the full faith and credit
of the U.S. Government.
FHLMC certificates represent a pro rata interest in a group of
mortgage loans (a "FHLMC certificate group") purchased by FHLMC. The mortgage
loans underlying the FHLMC certificates will consist of fixed rate or
adjustable rate mortgage loans with original terms to maturity of between ten
and thirty years, substantially all of which are secured by first liens on one-
to four-family residential properties or multifamily projects. Each mortgage
loan must meet the applicable standards set forth in the FHLMC Act. A FHLMC
certificate group may include whole loans, participation interests in whole
loans and undivided interests in whole loans and participations comprising
another FHLMC certificate group.
ADJUSTABLE RATE MORTGAGE SECURITIES. Adjustable rate mortgage
securities are pass-through mortgage securities collateralized by mortgages
with adjustable rather than fixed rates ("ARMs"). ARMs eligible for inclusion
in a mortgage pool generally provide for a fixed initial mortgage interest rate
for either the first three, six, twelve, thirteen, thirty-six or sixty
scheduled monthly payments. Thereafter, the interest rates are subject to
periodic adjustment based on changes to a designated benchmark index.
ARMs contain maximum and minimum rates beyond which the mortgage
interest rate may not vary over the lifetime of the mortgage. In addition,
certain ARMs provide for additional
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<PAGE> 597
limitations on the maximum amount by which the mortgage interest rate may
adjust for any single adjustment period. Alternatively, certain ARMs contain
limitations on changes in the required monthly payment. In the event that a
monthly payment is not sufficient to pay the interest accruing on an ARM, any
such excess interest is added to the principal balance of the mortgage loan,
which is repaid through future monthly payments. If the monthly payment for
such an instrument exceeds the sum of the interest accrued at the applicable
mortgage interest rate and the principal payment required at such point to
amortize the outstanding principal balance over the remaining term of the loan,
the excess is utilized to reduce the then outstanding principal balance of the
ARM.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS PASS-THROUGH
SECURITIES. Collateralized mortgage obligations or "CMOs" are debt obligations
collateralized by mortgage loans or mortgage pass-through securities.
Typically, CMOs are collateralized by GNMA, FNMA or FHLMC certificates, but
also may be collateralized by whole loans or private mortgage pass-through
securities (collectively, "Mortgage Assets"). Multi-class pass-through
securities are equity interests in a trust composed of Mortgage Assets. Unless
the context indicates otherwise, all references herein to CMOs include
multi-class pass-through certificates. Payments of principal of and interest
on the Mortgage Assets, and any reinvestment income thereon, provide the funds
to pay debt service on the CMOs or make scheduled distributions on the
multi-class pass-through securities. CMOs may be issued by agencies or
instrumentalities of the U.S. Government, or by private originators of, or
investors in, mortgage loans, including depository institutions, mortgage
banks, investment banks and special purpose subsidiaries of the foregoing. The
issuer of CMOs or multi-class pass-through securities may elect to be treated
as a Real Estate Mortgage Investment Conduit ("REMIC").
In a CMO, a series of bonds or certificates is issued in multiple
classes. Each class of CMOs, often referred to as a "tranche," is issued at a
specific fixed or floating coupon rate and has a stated maturity or final
distribution date. Principal prepayments on the Mortgage Assets may cause the
CMOs to be retired substantially earlier than their stated maturities or final
distribution dates. Interest is paid or accrues on all classes of the CMOs on
a monthly, quarterly or semi-annual basis. The principal of and interest on
the Mortgage Assets may be allocated among the several classes of a CMO series
in a number of different ways. Generally, the purpose of the allocation of the
cash flow of a CMO to the various classes is to obtain a more predictable cash
flow to the individual tranches than exists with the underlying collateral of
the CMO. As a general rule, the more predictable the cash flow is on a CMO
tranche, the lower the
-10-
<PAGE> 598
anticipated yield will be on that tranche at the time of issuance relative to
prevailing market yields on Mortgage-Backed securities.
The Portfolio also may invest in, among other things, parallel-pay
CMOs and Planned Amortization Class CMOs ("PAC Bonds"). Parallel-pay CMOs are
structured to provide payments of principal on each payment date to more than
one class. These simultaneous payments are taken into account in calculating
the stated maturity date or final distribution date of each class, which, as
with other CMO structures, must be retired by its stated maturity date or final
distribution date but may be retired earlier. PAC Bonds generally require
payments of a specified amount of principal on each payment date. PAC Bonds
are parallel-pay CMOs with the required principal payment on such securities
having the highest priority after interest has been paid to all classes.
The Portfolio may invest in CMO residuals. The residual in a CMO
structure generally represents the interest in any excess cash flow remaining
after making required payments of principal of and interest on the CMOs and
related administrative expenses of the issuer.
TYPES OF CREDIT ENHANCEMENT
Mortgage-Backed Securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, those
securities may contain elements of credit support, which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from default ensures ultimate payment of the obligations on at least
a portion of the assets in the pool. This protection may be provided through
guarantees, insurance policies or letters of credit obtained by the issuer or
sponsor from third parties, through various means of structuring the
transaction or through a combination of such approaches. The Portfolio will
not pay any additional fees for credit support, although the existence of
credit support may increase the price of a security.
Examples of credit support arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class securities
with one or more classes subordinate to other classes as to the payment of
principal thereof and interest thereon, with the result that defaults on the
underlying
-11-
<PAGE> 599
assets are borne first by the holders of the subordinated class), creation of
"reserve funds" (where cash or investments, sometimes funded from a portion of
the payments on the underlying assets, are held in reserve against future
losses) and "overcollateralization" (where the scheduled payments on, or the
principal amount of, the underlying assets exceeds that required to make
payment of the securities and pay any servicing or other fees). The degree of
credit support provided for each issue is generally based on historical
information respecting the level of credit risk associated with the underlying
assets. Delinquencies or losses in excess of those anticipated could adversely
affect the return on an investment in such issue.
RISK FACTORS RELATING TO MORTGAGE-BACKED SECURITIES
The yield characteristics of Mortgage-Backed Securities differ from
traditional debt securities. Among the major differences are that interest and
principal payments are made more frequently, usually monthly, and that
principal may be prepaid at any time because the underlying mortgage loans or
other assets generally may be prepaid at any time. As a result, if the
Portfolio purchases such a security at a premium, a prepayment rate that is
faster than expected will reduce yield to maturity, while a prepayment rate
that is slower than expected will have the opposite effect of increasing yield
to maturity. Alternatively, if the Portfolio purchases these securities at a
discount, faster than expected prepayments will increase, while slower than
expected prepayments will reduce, yield to maturity.
Although the extent of prepayments on a pool of mortgage loans depends
on various economic and other factors, as a general rule prepayments on fixed
rate mortgage loans will increase during a period of falling interest rates and
decrease during a period of rising interest rates. Accordingly, amounts
available for reinvestment by the Portfolio are likely to be greater during a
period of declining interest rates and, as a result, likely to be reinvested at
lower interest rates than during a period of rising interest rates.
Mortgage-Backed Securities may decrease in value as a result of increases in
interest rates and may benefit less than other fixed income securities from
declining interest rates because of the risk of prepayment.
INVESTMENT RESTRICTIONS
The Portfolio is subject to the investment limitations enumerated in
this subsection which may be changed only by a vote of the holders of a
majority of the Portfolio's outstanding shares (as defined below under
"Miscellaneous").
-12-
<PAGE> 600
The Portfolio may not:
(1) invest 25% or more of the value of its total assets
in any one industry (Mortgage-Backed Securities and
other securities issued or guaranteed by the U.S.
government or any agency or instrumentality thereof
are not treated as industries); provided, however,
that the Portfolio will, except for temporary
defensive purposes, invest at least 25 % of the value
of its total assets in securities which represent
interests in mortgages or liens on real property;
(2) issue senior securities (including borrowing money,
including on margin if margin securities are owned)
in excess of 33 1/3 % of its total assets (including
the amount of senior securities issued but excluding
any liabilities and indebtedness not constituting
senior securities) except that the Portfolio may
borrow up to an additional 5% of its total assets for
temporary purposes; or pledge its assets other than
to secure such issuances or in connection with
hedging transactions, short sales, when-issued and
forward commitment transactions and similar
investment strategies. The Portfolio's obligations
under interest rate swaps are not treated as senior
securities;
(3) make loans of money or property to any person, except
through loans of portfolio securities, the purchase
of fixed income securities consistent with the
Portfolio's investment objective and policies or the
acquisition of securities subject to repurchase
agreements;
(4) underwrite the securities of other issuers, except to
the extent that in connection with the disposition of
portfolio securities or the sale of its own shares
the Portfolio may be deemed to be an underwriter;
(5) invest for the purpose of exercising control over
management of any company other than issuers of
collateralized mortgage obligations;
(6) purchase real estate or interests therein other than
Commercial and Residential Mortgage-Backed Securities
and similar instruments;
-13-
<PAGE> 601
(7) purchase or sell commodities or commodity contracts
for any purposes except as, and to the extent,
permitted by applicable law without the Portfolio
becoming subject to registration with the Commodity
Futures Trading Commission as a commodity pool; or
(8) make any short sale of securities except in
conformity with applicable laws, rules and
regulations and unless, giving effect to such sale,
the market value of all securities sold short does
not exceed 25% of the value of the Portfolio's total
assets and the Portfolio's aggregate short sales of a
particular class of securities does not exceed 25% of
the then outstanding securities of that class.
TRUSTEES AND OFFICERS
The trustees and executive officers of the Fund, and their business
addresses and principal occupations during the past five years, are:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH FUND DURING PAST FIVE YEARS
- ---------------- ------------------ ----------------------
<S> <C> <C>
Philip E. Coldwell Trustee Economic Consultant;
Coldwell Financial Chairman, Coldwell
Consultants Financial Consultants;
3330 Southwestern Blvd. Director, Maxus Energy
Dallas, TX 75225 Corporation (energy
Age: 72 products) from 1989 to
1993; Director or Trustee
of Temporary Investment
Fund, Inc., Trust for
Federal Securities, and
Municipal Fund for
Temporary Investment.
Robert R. Fortune Trustee Financial consultant;
2920 Ritter Lane Chairman, President and
Allentown, PA 18104 Chief Executive Officer,
Age: 78 Associated Electric & Gas
Insurance Services Limited
from 1984 to 1993; Member
of the Financial Executives
Institute and American
Institute of Certified
Public Accountants;
</TABLE>
-14-
<PAGE> 602
<TABLE>
<S> <C> <C>
Director, Trustee or Managing
General Partner of a number
of investment companies
advised by PIMC; Director,
Prudential Utility Fund, Inc.,
Prudential Structured Maturity
Fund, Inc. and Prudential
IncomeVertible Fund, Inc.
Rodney D. Johnson Trustee President, Fairmount
Fairmont Capital Capital Advisors, Inc.
Advisers, Inc. (financial advisers)
1435 Walnut Street since 1987; Treasurer,
Philadelphia, PA 19102 North Philadelphia Health
Age: 53 System (formerly Girard Medical
Center) from 1988 to 1992;
Member, Board of Education,
School District of
Philadelphia, 1983 to 1988;
Treasurer, Cascade Aphasia
Center, 1984 to 1988;
Director or Trustee of
Temporary Investment Fund,
Inc., Trust for Federal
Securities, Municipal Fund
for Temporary Investment,
Municipal Fund for California
Investors, Inc. and
Municipal Fund for New
York Investors, Inc.
G. Willing Pepper1 Chairman of Retired; Chairman of the
128 Springton the Board Board, Specialty
Lake Road and President Composites Corporation
Media, PA 19063 until May 1984;
Age: 86 Chairman of the Board,
The Institute for Cancer
Research until 1979;
Director, Philadelphia
National Bank until
1978; President, Scott Paper
</TABLE>
- --------------------
1. This trustee may be deemed an "interested person" of the Fund
as defined in the 1940 Act.
-15-
<PAGE> 603
<TABLE>
<S> <C> <C>
Company from 1971 to 1973;
Director, Marmon Group, Inc. until
April 1986; Director, Trustee or
Managing General Partner of a
number of investment companies
advised by PIMC.
Anthony M. Santomero Trustee Deputy Dean from
310 Keithwood Road 1990 to 1994, Richard
Wynnewood, PA 19096 K. Mellon Professor
Age: 48 of Finance since April
1984, and Dean's Advisory
Council Member since July
1984, The Wharton School,
University of Pennsylvania;
Associate Editor, Journal of
Banking and Finance since
June 1978; Associate Editor,
Journal of Economics and
Business since October 1979;
Associate Editor, Journal of
Money, Credit and Banking
since January 1980; Research
Associate, New York University
Center for Japan-U.S. Business
and Economic Studies since
July 1989; Editorial Advisory
Board, Open Economics Review
since November 1990; Director,
The Zweig Fund and The Zweig
Total Return Fund; Director
or Trustee of Temporary
Investment Fund, Inc.,
Trust for Federal Securities,
Municipal Fund for Temporary
Investment, and Municipal
Fund for California Investors, Inc.
David R. Wilmerding, Jr. Vice-Chairman President, Gates,
One Aldwyn Center of the Board Wilmerding, Carper &
Villanova, PA 19085 Rawlings, Inc.
</TABLE>
-16-
<PAGE> 604
<TABLE>
<S> <C> <C>
Age: 60 (investment advisers)
since February 1989;
Director, Beaver Management
Corporation; Until September
1988, President, Treasurer
and Trustee, The Mutual
Assurance Company; Until
September 1988, Chairman,
President Treasurer and
Director, The Green Tree
Insurance Company (a
wholly-owned subsidiary
of The Mutual Assurance
Company); Until September
1988, Director, Keystone
State Life Insurance
Company; Director, Trustee
or Managing General
Partner of a number of
investment companies advised
by PIMC.
Edward J. Roach Treasurer Certified Public
400 Bellevue Parkway and Vice- Accountant; Partner of
Suite 100 President the accounting firm of
Wilmington, DE 19809 Main Hurdman until 1981;
Age: 71 Vice Chairman of the Board,
Fox Chase Cancer Center;
Trustee Emeritus, Pennsylvania
School for the Deaf; Trustee
Emeritus, Immaculata College;
President, Vice President
and/or Treasurer of a
number of investment
companies advised by PIMC.
Morgan R. Jones Secretary Partner in the law
Philadelphia National firm of Drinker Biddle &
Bank Building Reath, Philadelphia,
1345 Chestnut Street Pennsylvania.
Philadelphia, PA 19107-3496
Age: 55
</TABLE>
The Fund pays trustees who are not affiliated with PNC Asset
Management Group ("PAMG") or Provident Distributors, Inc. ("PDI" or the
"Distributor") $5,500 annually and $500 per meeting of the Board or any
committee thereof that is not held in conjunction
-17-
<PAGE> 605
with a Board meeting (subject to a cap of $6,000 per year for such meeting
fees), and pays the Chairman an additional $5,000 annually. Trustees who are
not affiliated with PAMG or the Distributor are reimbursed for any expenses
incurred in attending meetings of the Board of Trustees or any committee
thereof. No officer, director or employee of PAMG, Provident Capital
Management, Inc. ("PCM"), PNC Bank, National Association ("PNC Bank"),
BlackRock Financial Management Inc. ("BlackRock"), PNC Equity Advisors Company
("PEAC"), PNC Mutual Fund Group, Inc. ("PMFCO"), PFPC Inc. ("PFPC"), Provident
Distributors, Inc. (formerly, MFD Group, Inc.) ("PDI" and, collectively with
PFPC, the "Administrators") or the Distributor currently receives any
compensation from the Fund. Drinker Biddle & Reath, of which Mr. Jones is a
partner, receives legal fees as counsel to the Fund. As of the date of this
Statement of Additional Information, the trustees and officers of the Fund, as
a group, owned less than 1% of the outstanding shares of each Portfolio.
-18-
<PAGE> 606
The table below sets forth the compensation actually received from the
Fund Complex of which the Portfolio is a part by the trustees for the period
ended September 30, 1995:
<TABLE>
<CAPTION>
PENSION OR TOTAL COMPENSATION
AGGREGATE RETIREMENT BENEFITS ESTIMATED ANNUAL FROM REGISTRANT AND
NAME OF PERSON, COMPENSATION FROM ACCRUED AS PART OF BENEFITS UPON FUND COMPLEX(1) PAID
POSITION REGISTRANT FUND EXPENSES RETIREMENT TO TRUSTEES
--------------- ---------- ------------- ---------- -----------
<S> <C> <C> <C> <C>
Philip E. Coldwell, Trustee $ n/a n/a (3)(2) $
----- -----
Robert R. Fortune, Trustee $ n/a n/a (4)(2) $
----- -----
Rodney D. Johnson, Trustee $ n/a n/a (5)(2) $
----- -----
G. Willing Pepper, Chairman $ n/a n/a (6)(2) $
of the Board and President ----- -----
Anthony M. Santomero, $ n/a n/a (4)(2) $
Trustee ----- -----
David R. Wilmerding, Jr., $ n/a n/a (5)(2) $
Trustee ----- -----
</TABLE>
SHAREHOLDER AND TRUSTEE LIABILITY. Under Massachusetts law,
shareholders of a business trust may, under certain circumstances, be held
personally liable as partners for the obligations of the trust. However, the
Fund's Declaration of Trust provides that shareholders shall not be subject to
any personal liability in connection with the assets of the Fund for the acts
or obligations of the Fund, and that every note, bond, contract, order or other
undertaking made by the Fund shall contain a provision to the effect that the
shareholders are not personally liable thereunder. The Declaration of Trust
provides for indemnification out of the trust property of any shareholder held
personally liable solely by reason of his being or having
- --------------------
1. A Fund Complex means two or more investment companies that hold themselves
out to investors as related companies for purposes of investment and
investor services, or have a common investment adviser or have an
investment adviser that is an affiliated person of the investment adviser
of any of the other investment companies.
2. Total number of such other investment companies trustee serves on within
the Fund Complex.
-19-
<PAGE> 607
been a shareholder and not because of his acts or omissions or some other
reason. The Declaration of Trust also provides that the Fund shall, upon
request, assume the defense of any claim made against any shareholder for any
act or obligation of the Fund, and shall satisfy any judgment thereon.
The Declaration of Trust further provides that all persons having any
claim against the trustees or Fund shall look solely to the trust property for
payment; that no trustee of the Fund shall be personally liable for or on
account of any contract, debt, tort, claim, damage, judgment or decree arising
out of or connected with the administration or preservation of the trust
property or the conduct of any business of the Fund; and that no trustee shall
be personally liable to any person for any action or failure to act except by
reason of his own bad faith, willful misfeasance, gross negligence or reckless
disregard of his duties as a trustee. With the exception stated, the
Declaration of Trust provides that a trustee is entitled to be indemnified
against all liabilities and expenses reasonably incurred by him in connection
with the defense or disposition of any proceeding in which he may be involved
or with which he may be threatened by reason of his being or having been a
trustee, and that the Fund will indemnify officers, representatives and
employees of the Fund to the same extent that trustees are entitled to
indemnification.
INVESTMENT ADVISORY, ADMINISTRATION,
DISTRIBUTION AND SERVICING ARRANGEMENTS
ADVISORY AGREEMENT. The advisory services provided by BlackRock and
the fees received by it for such services are described in the Prospectus. As
stated in the Prospectus, BlackRock may from time to time voluntarily waive its
advisory fees with respect to the Portfolio and may voluntarily reimburse the
Portfolio for expenses. In addition, if the total expenses borne by the
Portfolio in any fiscal year exceed the expense limitations imposed by
applicable state securities regulations, BlackRock and the Administrators will
bear the amount of such excess to the extent required by such regulations in
proportion to the fees otherwise payable to them for such year. Such amount,
if any, will be estimated and accrued daily and paid on a monthly basis. As of
the date of this Statement of Additional Information, to the knowledge of the
Fund, there were no state expense limitations more restrictive than the
following: 2 1/2% of the first $30 million of average annual net assets, 2% of
the next $70 million of average annual net assets, and 1 1/2% of average annual
net assets in excess of $100 million.
BlackRock renders advisory services to the Portfolio pursuant to an
Investment Advisory Agreement (the "Advisory
-20-
<PAGE> 608
Contract"). Under the Advisory Contract, BlackRock is not liable for any error
of judgment or mistake of law or for any loss suffered by the Fund or the
Portfolio in connection with the performance of the Advisory Contract, except a
loss resulting from willful misfeasance, bad faith or gross negligence on the
part of BlackRock in the performance of its duties or from reckless disregard
of its duties and obligations thereunder. The Advisory Contract is terminable
as to the Portfolio by vote of the Board of Trustees or by the holders of a
majority of the outstanding voting securities of the Portfolio, at any time
without penalty, on 60 days' written notice to BlackRock. BlackRock may also
terminate its advisory relationship with respect to the Portfolio, on 60 days'
written notice to the Fund. The Advisory Contract terminates automatically in
the event of its assignment.
The Predecessor Portfolio was also advised by BlackRock. For the
fiscal period October 6, 1994 (commencement of investment operations) through
June 30, 1995, the Predecessor Portfolio paid $189,677, in investment advisory
fees to BlackRock pursuant to the prior advisory agreement. In addition,
during the period October 6, 1994 (commencement of investment operations)
through June 30, 1995, BlackRock waived $56,269, in expenses.
ADMINISTRATION AGREEMENTS. The Fund has entered into a
Co-Administration Agreement with PMFCO and a separate Administration Agreement
with PFPC and PDI (the "Administration Agreements"). The Administrators have
agreed to maintain office facilities for the Fund, furnish the Fund with
statistical and research data, clerical, accounting, and bookkeeping services,
and certain other services required by the Fund.
The Administration Agreements provide that the Administrators will not
be liable for any error of judgment or mistake of law or for any loss suffered
by the Fund or the Portfolio in connection with the performance of the
Administration Agreements, except a loss resulting from willful misfeasance,
bad faith or gross negligence in the performance of their respective duties or
from reckless disregard of their respective duties and obligations thereunder.
The Predecessor Portfolio received administrative services from State
Street Bank and Trust Company ("State Street"). During the period October 6,
1994 (commencement of investment operations) through June 30, 1995, the
Predecessor Portfolio paid $32,948, in administrative fees to State Street
pursuant to the prior administration agreement.
CUSTODIAN AND TRANSFER AGENCY AGREEMENTS. PNC Bank National
Association ("PNC Bank") is custodian of the Fund's assets pursuant to a
custodian agreement (the "Custodian Agreement").
-21-
<PAGE> 609
Under the Custodian Agreement, PNC Bank or a sub-custodian (i) maintains a
separate account or accounts in the name of the Portfolio, (ii) holds and
transfers portfolio securities on account of the Portfolio, (iii) accepts
receipts and makes disbursements of money on behalf of the Portfolio, (iv)
collects and receives all income and other payments and distributions on
account of the Portfolio's securities and (v) makes periodic reports to the
Board of Trustees concerning the Portfolio's operations. PNC Bank is
authorized to select one or more banks or trust companies to serve as
sub-custodian on behalf of the Fund, provided that, with respect to
sub-custodians other than sub-custodians for foreign securities, PNC Bank
remains responsible for the performance of all its duties under the Custodian
Agreement and holds the Fund harmless from the acts and omissions of any
sub-custodian. The Chase Manhattan Bank, N.A., State Street Bank and Trust
Company and Barclays Bank PLC serve as the Fund's sub-custodians.
For its services to the Fund under the Custodian Agreement, PNC Bank
receives a fee which is calculated based upon the Portfolio's average gross
assets, with a minimum monthly fee of $1,000 per investment portfolio. PNC
Bank is also entitled to out-of-pocket expenses and certain transaction
charges.
PFPC, an affiliate of PNC Bank, serves as the transfer and dividend
disbursing agent for the Fund pursuant to a Transfer Agency Agreement (the
"Transfer Agency Agreement"), under which PFPC (i) issues and redeems shares in
the Portfolio, (ii) addresses and mails all communications by the Portfolio to
record owners of its shares, including reports to shareholders, dividend and
distribution notices and proxy materials for its meetings of shareholders,
(iii) maintains shareholder accounts and, if requested, sub-accounts and (iv)
makes periodic reports to the Board of Trustees concerning the operations of
the Portfolio. PFPC may, on 30 days' notice to the Fund, assign its duties as
transfer and dividend disbursing agent to any other affiliate of PNC Bank Corp.
For its services with respect to the Fund's Institutional Shares under the
Transfer Agency Agreement, PFPC receives fees at the annual rate of .03% of the
average net asset value of outstanding Institutional Shares in the Portfolio,
plus per account fees and disbursements.
DISTRIBUTOR AND DISTRIBUTION PLAN. The Fund has entered into a
distribution agreement with the Distributor under which the Distributor, as
agent, offers shares of the Portfolio on a continuous basis. The Distributor
has agreed to use appropriate efforts to effect sales of the shares, but it is
not obligated to sell any particular amount of shares.
The Fund has adopted an Amended and Restated Distribution and Service
Plan (the "Plan") pursuant to Rule 12b-1 under the
-22-
<PAGE> 610
1940 Act on behalf of its Institutional Shares pursuant to which the Adviser is
permitted to use a portion of the advisory fee it receives from the Portfolio
to promote the distribution of the Fund Shares and to enhance the provision of
shareholder services. The Plan was approved by a majority of (i) the trustees
of the Fund and (ii) the trustees of the Fund who are not interested persons of
the Fund and who have no direct or indirect financial interest in the operation
of the Plan or in any agreement related to the Plan (the "Rule 12b-1
Trustees"). The Plan permits the Adviser to pay fees to the Distributor. The
Fund is not required or permitted under the Plan to make payments over and
above the amount of the advisory fee to promote the sale of its shares; the
Plan merely permits the reallocation of a portion of the advisory fee the
Adviser receives to pay for distribution-related activities.
From amounts received by it under the Plan, the Distributor is
authorized to make payments to securities dealers with which the Distributor
has entered into solicitation fee agreements. The Distributor may also use a
portion of the fee it receives under the Plan to cover the Distributor's cost
of marketing services and advertising on behalf of the Portfolio and to
compensate institutions who perform support services that would otherwise is
performed by the Fund or its agent. These support services may include
providing such office space, equipment, telephone facilities and various
personnel as may be necessary or beneficial to establish and maintain
shareholders' accounts and records, process purchase and redemption
transactions, answer routine client inquiries and provide such other services
to the Fund and the Portfolio as may reasonably be requested.
The Plan will continue from year to year, provided that each such
continuance is approved at least annually by a vote of the Board of Trustees,
including a majority vote of the Rule 12b-1 Trustees, cast in person at a
meeting called for the purpose of voting on such continuance. The Plan may be
terminated with respect to the Portfolio at any time, without penalty, by the
vote of a majority of the Rule 12b-1 Trustees or by a vote of the holders of a
majority of the outstanding shares of the Portfolio. The Plan may not be
amended materially without the approval of the Board of Trustees, including a
majority of the Rule 12b-1 Trustees, cast in person at a meeting called for
that purpose. Any modification to the Plan which would materially increase the
amount of money to be spent by a Portfolio must also be submitted to the
stockholders of the Portfolio for approval.
Service Organizations may charge their clients additional fees for
account services.
PORTFOLIO TRANSACTIONS
-23-
<PAGE> 611
The Adviser is responsible for decisions to buy and sell securities
for the Portfolio, the selection of brokers and dealers to effect the
transactions and the negotiation of prices and any brokerage commissions. The
securities in which the Portfolio invests are traded principally in the
over-the-counter market. In the over-the-counter market, securities are
generally traded on a "net" basis with dealers acting as principal for their
own accounts without a stated commission, although the price of the security
usually includes a mark-up to the dealer. Securities purchased in underwritten
offerings generally include, in the price, a fixed amount of compensation for
the manager(s), underwriter(s) and dealer(s). The Portfolio may also purchase
certain money market instruments directly from an issuer, in which case no
commissions or discounts are paid. Purchases and sales of debt securities on a
stock exchange are effected through brokers who charge a commission for their
services.
The Adviser's primary considerations in selecting the manner of
executing securities transactions for the Portfolio will be prompt execution of
orders, the size and breadth of the market for the security, the reliability,
integrity and financial condition and execution capability of the firm, the
size of and difficulty in executing the order, and the best net price. There
are many instances when, in the judgment of the Adviser, more than one firm can
offer comparable execution services. In selecting among such firms,
consideration is given to those firms which supply research and other services
in addition to execution services. However, it is not the policy of the
Adviser, absent special circumstances, to pay higher commissions to a firm
because it has supplied such services.
The Adviser is able to fulfill its obligations to furnish a continuous
investment program to the Portfolio without receiving such information from
brokers; however, it considers access to such information to be an important
element of financial management. Although such information is considered
useful, its value is not determinable, as it must be reviewed and assimilated
by the Adviser, and does not reduce the Adviser's normal research activities in
rendering investment advice under the Advisory Contract. It is possible that
the Adviser's expenses could be materially increased if it attempted to
purchase this type of information or generate it through its own staff.
One or more of the other accounts which the Adviser manages may own
from time to time the same investments as the Portfolio. Investment decisions
for the Portfolio are made independently from those of such other accounts;
however, from time to time, the same investment decision may be made for more
than one company or account. When two or more companies or accounts seek to
purchase or sell the same securities, the securities actually purchased or sold
will be allocated among the companies and
-24-
<PAGE> 612
accounts on a good faith equitable basis by the Adviser in its discretion in
accordance with the accounts' various investment objectives. In some cases,
this system may adversely affect the price or size of the position obtainable
for the Portfolio. In other cases, however, the ability of the Portfolio to
participate in volume transactions may produce better execution for the
Portfolio.
Although the Advisory Agreement contains no restrictions on portfolio
turnover it is not the policy of the Portfolio to engage in transactions with
the objective of seeking profits from short-term trading. It is expected that
the annual portfolio turnover rate of the Portfolio will not exceed 400%,
excluding securities having a maturity of one year or less. Because it is
difficult to predict accurately portfolio turnover rate, actual turnover may be
higher or lower. Higher portfolio turnover results in increased Portfolio
expenses, including brokerage commissions, dealer mark-ups and other
transaction costs on the sale of securities and on reinvestment in other
securities. The Adviser will monitor the tax status of the Portfolio under the
Internal Revenue Code during periods in which the annual turnover rate of the
Portfolio exceeds 100%. To the extent that increased portfolio turnover
results in sales at a profit of securities held less than three months, the
Portfolio's ability to qualify as a "regulated investment company" under the
Internal Revenue Code may be affected. See "Taxes" below.
For the period October 6, 1994 (commencement of operations) through
June 30, 1995, the Predecessor Portfolio paid no brokerage commissions. In
addition, for the period October 6, 1994 (commencement of operations) through
June 30, 1995, the portfolio turnover rate for the Predecessor Portfolio was
215%.
The Fund is required to identify any securities of its regular brokers
or dealers (as defined in Rule 10b-1 under the 1940 Act) or their parents held
by the Fund as of the end of its most recent fiscal year. As of September 30,
1994, the following Portfolios held the following securities: (a) Money Market
Portfolio: variable rate obligations of Goldman Sachs Group L.P., Lehman
Brothers Holdings, Inc. and Morgan Stanley Group in the principal amounts of
$47,000,000, $50,000,000 and $29,998,328, respectively; medium-term note of
Morgan Stanley Group in the principal amount of $15,000,000; and repurchase
agreements with Kidder, Peabody & Co., Morgan Stanley & Co. and PaineWebber
Group in the principal amounts of $100,000,000, $65,000,000 and $10,000,000,
respectively; (b) Government Money Market Portfolio: repurchase agreements with
Kidder, Peabody & Co. and Morgan Stanley & Co. in the principal amounts of
$9,058,000 and $70,000,000, respectively; (c) Managed Income Portfolio:
corporate bonds and variable rate obligations of Morgan Stanley Group in the
principal amounts of $4,925,000 and $10,000,000,
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respectively; medium-term note of Salomon Brothers, Inc. in the principal
amount of $3,730,680; (d) Short-Term Bond Portfolio: corporate bonds of Lehman
Brothers, Inc. and Merrill Lynch Co., Inc. in the principal amounts of $992,500
and $956,250, respectively; medium-term note of Salomon Brothers, Inc. in the
principal amount of $932,670; Intermediate-Term Bond Portfolio: corporate bonds
of Lehman Brothers Holdings, Inc. in the principal amount of $975,000; and
Index Equity Portfolio: common stock of Merrill Lynch & Co., Inc. and Salomon,
Inc. in the principal amounts of $380,875 and $280,450, respectively.
PURCHASE AND REDEMPTION INFORMATION
Institutional Shares of the Portfolio are sold at the net asset value
per share next determined after a purchase order is received.
EXCHANGE PRIVILEGE. By use of the exchange privilege, the investor
authorizes the Fund's transfer agent to act on telephonic or written exchange
instructions from any person representing himself to be the investor and
believed by the Fund's transfer agent to be genuine. The records of the Fund's
transfer agent pertaining to such instructions are binding. The exchange
privilege may be modified or terminated at any time upon 60 days' notice to
affected shareholders. The exchange privilege is only available in states
where the exchange may legally be made.
MISCELLANEOUS. The Fund reserves the right, if conditions exist which
make cash payments undesirable, to honor any request for redemption or
repurchase of the Portfolio's shares by making payment in whole or in part in
securities chosen by the Fund and valued in the same way as they would be
valued for purposes of computing the Portfolio's net asset value. If payment
is made in securities, a shareholder may incur transaction costs in converting
these securities into cash. The Fund has elected, however, to be governed by
Rule 18f-1 under the 1940 Act so that the Portfolio 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 Portfolio.
Under the 1940 Act, the Portfolio may suspend the right to redemption
or postpone the date of payment upon redemption for any period during which the
New York Stock Exchange (the "NYSE") is closed (other than customary weekend
and holiday closings), or during which trading on the NYSE is restricted, or
during which (as determined by the SEC by rule or regulation) an emergency
exists as a result of which disposal or valuation of portfolio securities is
not reasonably practicable, or for such other periods as the SEC may permit.
(The Portfolio may also suspend
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<PAGE> 614
or postpone the recordation of the transfer of its shares upon the occurrence
of any of the foregoing conditions.)
In addition to the situations described in the Prospectus, the Fund
may redeem shares involuntarily to reimburse the Portfolio 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.
VALUATION OF PORTFOLIO SECURITIES
In determining the approximate market value of portfolio investments,
the Fund may employ outside organizations, which may use, without limitation, a
matrix or formula method that takes into consideration market indexes,
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 the Fund's books at their face
value. Other assets, if any, are valued at fair value as determined in good
faith under the supervision of the Board of Trustees.
PERFORMANCE INFORMATION
TOTAL RETURN. For purposes of quoting and comparing the performance
of shares of the Portfolio to the performance of other mutual funds and to
stock or other relevant indexes in advertisements or in communications to
shareholders, performance may be stated in terms of total return. Under the
rules of the SEC, funds advertising performance must include total return
quotes calculated according to the following formula:
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<PAGE> 615
1/n
ERV
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value at the end of the
period covered by the computation of a
hypothetical $1,000 payment made at the
beginning of the period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed
in terms of years.
Total return, or "T" in the formula above, is computed by finding the
average annual compounded rates of return over the specified periods that would
equate the initial amount invested to the ending redeemable value.
Based on the foregoing calculation, the average annual total return
for the Predecessor Portfolio for period October 6, 1994 (commencement of
operations) through June 30, 1995 was as follows:
<TABLE>
<CAPTION>
Average Annual
Total Return
For the Period
ended
Portfolio 6/30/95(1)
--------- ----------
<S> <C>
PREDECESSOR PORTFOLIO 12.78%
</TABLE>
- -------------------------------
(1) Commenced investment operations on October 6, 1994.
The Portfolio may also from time to time include in advertisements and
communications to shareholders a total return figure that is not calculated
according to the formula set forth above in order to compare more accurately
the performance of each class of the Portfolio's shares with other performance
measures. For example, in comparing the total return of the Portfolio's shares
with data published by Lipper Analytical Services, Inc., CDA Investment
Technologies, Inc. or Weisenberger Investment Company Service, or with the
performance of the Standard & Poor's 500 Stock Index, EAFE, the Dow Jones
Industrial
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<PAGE> 616
Average or the Salomon Broad Investment Grade Index, as appropriate, the
Portfolio may calculate the aggregate total return for its shares for the
period of time specified in the advertisement or communication by assuming the
investment of $10,000 in the Portfolio's shares and assuming the reinvestment
of each dividend or other distribution at net asset value on the reinvestment
date. Percentage increases are determined by subtracting the initial value of
the investment from the ending value and by dividing the remainder by the
beginning value.
YIELD. The Portfolio may advertise its yield on its Institutional
Shares. Under the rules of the SEC, the Portfolio must calculate yield using
the following formula:
a-b 6
YIELD = 2[(----- +1) - 1]
cd
Where: a = dividends and interest earned during the
period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares
outstanding during the period that
were entitled to receive dividends.
d = the maximum offering price per share on the
last day of the period.
For the purpose of determining net investment income earned during the
period (variable "a" in the formula), dividend income on equity securities held
by the Portfolio is recognized by accruing 1/360th of the stated dividend rate
of the security each day that the security is in the Portfolio. Except as
noted below, interest earned on any debt obligations held by the Portfolio is
calculated by computing the yield to maturity of each obligation held by the
Portfolio based on the market value of the obligation (including actual accrued
interest) at the close of business on the last business day of each month, or,
with respect to obligations purchased during the month, the purchase price
(plus actual accrued interest) and dividing the result by 360 and multiplying
the quotient by the market value of the obligation (including actual accrued
interest) in order to determine the interest income on the obligation for each
day of the subsequent month that the obligation is held by the Portfolio. For
purposes of this calculation, it is assumed that each month contains 30 days.
The maturity of an obligation with
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<PAGE> 617
a call provision is the next call date on which the obligation reasonably may
be expected to be called or, if none, the maturity date.
With respect to debt obligations purchased at a discount or premium,
the formula generally calls for amortization of the discount or premium.
With respect to mortgage or other receivables-backed obligations which
are expected to be subject to monthly payments of principal and interest ("pay
downs"), (a) gain or loss attributable to actual monthly pay downs are
accounted for as an increase or decrease to interest income during the period;
and (b) the Portfolio may elect either (i) to amortize the discount and premium
on the remaining security, based on the cost of the security, to the
weighted-average maturity date, if such information is available, or to the
remaining term of the security, if any, if the weighted-average maturity date
is not available, or (ii) not to amortize discount or premium on the remaining
security. The amortization schedule will be adjusted monthly to reflect
changes in the market values of debt obligations.
Undeclared earned income will be subtracted from the maximum offering
price per share (variable "d" in the formula). Undeclared earned income is the
net investment income which, at the end of the base period, has not been
declared as a dividend, but is reasonably expected to be and is declared and
paid as a dividend shortly thereafter.
The annualized yield information for the 30-day period ended June 30,
1995 for the Predecessor Portfolio was as follows:
<TABLE>
<CAPTION>
PORTFOLIO YIELD
--------- -----
<S> <C>
Predecessor Portfolio 7.80%
</TABLE>
OTHER INFORMATION REGARDING INVESTMENT RETURNS. In addition to
providing performance information that demonstrates the total return or yield
of Institutional Shares of the Portfolio over a specified period of time, the
Fund may provide certain other information demonstrating hypothetical
investment returns. Such information may include, but is not limited to,
illustrating the compounding effects of a dividend in a dividend reinvestment
plan. As illustrated below, the Fund may demonstrate, using certain specified
hypothetical data, the compounding effect of dividend reinvestment on
investments in the Portfolio.
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<PAGE> 618
[CHART TO BE TAPED HERE]
MISCELLANEOUS. Yield on shares of the Portfolio may fluctuate daily
and does not provide a basis for determining future yield. Because such yield
will fluctuate, it cannot be compared with yields on savings account or other
investment alternatives that provide an agreed to or guaranteed fixed yield for
a stated period of time. In comparing the yield of one fund to another,
consideration should be given to each fund's investment policies, including the
types of investments made, lengths of maturities of the portfolio securities,
and whether there are any special account charges which may reduce the
effective yield. The fees which may be imposed by Authorized Dealers, Service
Organizations and other institutions on their customers are not reflected in
the calculations of total returns or yields for the Portfolio.
The Fund may also from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on an investment
in the Portfolio are reinvested by being paid in additional Portfolio shares,
any future income or capital appreciation of the Portfolio would increase the
value, not only of the original investment in the Portfolio, but also of the
additional Portfolio shares received through reinvestment. The Fund may also
include discussions or illustrations of the potential investment goals of a
prospective investor, investment management techniques, policies or investment
suitability of the Portfolio, economic conditions, the effects of inflation
and
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<PAGE> 619
historical performance of various asset classes, including but not limited to,
stocks, bonds and Treasury bills. From time to time advertisements or
communications to shareholders may summarize the substance of information
contained in shareholder reports (including the investment composition of the
Portfolio), as well as the views of the Portfolio's Adviser as to current
market, economy, trade and interest rate trends, legislative, regulatory and
monetary developments, investment strategies and related matters believed to be
of relevance to the Portfolio. The Fund may also include in advertisements
charts, graphs or drawings which illustrate the potential risks and rewards of
investment in various investment vehicles, including but not limited to,
stocks, bonds, treasury bills and shares of the Portfolio. In addition,
advertisement or shareholder communications may include a discussion of certain
attributes or benefits to be derived by an investment in the Portfolio. Such
advertisements or communicators may include symbols, headlines or other
material which highlight or summarize the information discussed in more detail
therein.
TAXES
The following is only a summary of certain additional tax
considerations generally affecting the Portfolio and its shareholders that are
not described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Portfolio or its shareholders, and the
discussion here and in the Prospectuses is not intended as a substitute for
careful tax planning. Investors are urged to consult their tax advisers with
specific reference to their own tax situation.
The Portfolio will elect to be taxed as a regulated investment company
under Part I of Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"). As a regulated investment company, the Portfolio generally is
exempt from Federal income tax on its net investment income and realized
capital gains that it distributes to shareholders, provided that it distributes
an amount equal to at least the sum of (a) 90% of its investment company
taxable income (net investment income and the excess of net short-term capital
gain over net long-term capital loss, if any, for the year) and (b) 90% of its
net tax-exempt interest income, if any, for the year (the "Distribution
Requirement") and satisfies certain other requirements of the Code that are
described below. Distributions of investment company taxable income and net
tax-exempt interest income made during the taxable year or, under specified
circumstances, within twelve months after the close of the taxable year will
satisfy the Distribution Requirement.
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<PAGE> 620
In addition to satisfaction of the Distribution Requirement, the
Portfolio must derive at least 90% of its gross income from dividends,
interest, certain payments with respect to securities loans and gains from the
sale or other disposition of stock or securities or foreign currencies
(including, but not limited to, gains from forward foreign currency exchange
contacts), or from other income derived with respect to its business of
investment in such stock, securities, or currencies (the "Income Requirement")
and derive less than 30% of its gross income from the sale or other disposition
of stock, securities and certain other investments (including securities and
forward foreign currency exchange contracts, but only to the extent that such
contracts are not directly related to the Portfolio's principal business of
investing in stock or securities) held for less than three months (the
"Short-Short Gain Test"). Future Treasury regulations may provide that foreign
currency gains that are not "directly related" to the Portfolio's principal
business of investing in stock or securities will not satisfy the Income
Requirement. Interest (including original issue discount and "accrued market
discount") received by the Portfolio at maturity or upon disposition of a
security held for less than three months will not be treated as gross income
derived from the sale or other disposition of such security held for less than
three months for purposes of the Short-Short Gain Test. However, any other
income that is attributable to realized market appreciation will be treated as
gross income from the sale or other disposition of securities for this purpose.
In addition to the foregoing requirements, at the close of each
quarter of its taxable year, at least 50% of the value of the Portfolio's
assets must consist of cash and cash items, U.S. government securities,
securities of other regulated investment companies, and securities of other
issuers (as to which the Portfolio has not invested more than 5% of the value
of its total assets in securities of such issuer and as to which the Portfolio
does not hold more than 10% of the outstanding voting securities of such
issuer), and no more than 25% of the value of the Portfolio's total assets may
be invested in the securities of any one issuer (other than U.S. Government
securities and securities of other regulated investment companies), or in two
or more issuers which such Portfolio controls and which are engaged in the same
or similar trades or businesses.
Distributions of investment company taxable income will be taxable
(other than the possible allowance of the dividends received deduction
described below) to shareholders as ordinary income, regardless of whether such
distributions are paid in cash or are reinvested in shares. Shareholders
receiving any taxable distribution from the Portfolio in the form of additional
shares will be treated as receiving a taxable distribution in an amount equal
to the fair market value of the shares received, determined as of the
reinvestment date.
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<PAGE> 621
The Portfolio intends to distribute to shareholders any of its excess
of net long-term capital gain over net short-term capital loss ("net capital
gain") for each taxable year. Such gain is distributed as a capital gain
dividend and is taxable to shareholders as long-term capital gain, regardless
of the length of time the shareholder has held his shares, whether such gain
was recognized by the Portfolio prior to the date on which a shareholder
acquired shares of the Portfolio and whether the distribution was paid in cash
or reinvested in shares.
In the case of corporate shareholders, distributions (other than
capital gain dividends) from the Portfolio for any taxable year generally
qualify for the dividends received deduction to the extent of the gross amount
of "qualifying dividends" received by the Portfolio for the year. Generally, a
dividend will be treated as a "qualifying dividend" if it has been received
from a domestic corporation. Distributions of net investment income from debt
securities and of net realized short-term capital gains will be taxable to
shareholders as ordinary income and will not be treated as "qualifying
dividends" for purposes of the dividends received deduction.
Ordinary income of individuals will be taxable at a maximum nominal
rate of 39.6%, but because of limitations on itemized deductions otherwise
allowable and the phase-out of personal exemptions, the maximum effective
marginal rate of tax for some taxpayers may be higher. An individual's
long-term capital gains will be taxable at a maximum rate of 28%. Capital
gains and ordinary income of corporate taxpayers are both taxed at a maximum
nominal rate of 35%, but at marginal rates of 39% for taxable income between
$100,000 and $335,000. Investors should be aware that any loss realized upon
the sale, exchange or redemption of shares held for six months or less will be
treated as a long-term capital loss to the extent any capital gain dividends
have been paid with respect to such shares.
Generally, futures contracts held by the Portfolio at the close of the
Portfolio's taxable year will be treated for Federal income tax purposes as
sold for their fair market value on the last business day of such year, a
process known as "mark-to-market." Forty percent of any gain or loss resulting
from such constructive sale will be treated as short-term capital gain or loss
and 60% of such gain or loss will be treated as long-term capital gain or loss
without regard to the length of time the Portfolio holds the futures contract
("the 40-60 rule"). The amount of any capital gain or loss actually realized
by the Portfolio in a subsequent sale or other disposition of those futures
contracts will be adjusted to reflect any capital gain or loss taken into
account by the Portfolio in a prior year as a result of the constructive sale
of the contracts. With respect to futures contracts to sell, which will be
regarded as parts of a "mixed straddle" because their values fluctuate
inversely to
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<PAGE> 622
the values of specific securities held by the Portfolio, losses as to such
contracts to sell will be subject to certain loss deferral rules which limit
the amount of loss currently deductible on either part of the straddle to the
amount thereof which exceeds the unrecognized gain (if any) with respect to the
other part of the straddle, and to certain wash sales regulations. Under short
sales rules, which also will be applicable, the holding period of the
securities forming part of the straddle will (if they have not been held for
the long-term holding period) be deemed not to begin prior to termination of
the straddle. With respect to certain futures contracts, deductions for
interest and carrying charges will not be allowed. Notwithstanding the rules
described above, with respect to futures contracts to sell which are properly
identified as such, the Portfolio may make an election which will exempt (in
whole or in part) those identified futures contracts from being treated for
Federal income tax purposes as sold on the last business day of the Fund's
taxable year, but gains and losses will be subject to such short sales, wash
sales, loss deferral rules and the requirement to capitalize interest and
carrying charges. Under temporary regulations, the Portfolio would be allowed
(in lieu of the foregoing) to elect either (1) to offset gains or losses from
portions which are part of a mixed straddle by separately identifying each
mixed straddle to which such treatment applies, or (2) to establish a mixed
straddle account for which gains and losses would be recognized and offset on a
periodic basis during the taxable year. Under either election, the 40-60 rule
will apply to the net gain or loss attributable to the futures contracts, but
in the case of a mixed straddle account election, not more than 50% of any net
gain may be treated as long-term and no more than 40% of any net loss may be
treated as short-term. Options on futures contracts generally receive Federal
tax treatment similar to that described above.
Under the Federal income tax provisions applicable to regulated
investment companies, less than 30% of a company's gross income for a taxable
year must be derived from gains realized on the sale or other disposition of
securities held for less than three months. The Internal Revenue Service has
issued a private letter ruling with respect to certain other investment
companies to the following effect: gains realized from a futures contract to
purchase or to sell will be treated as being derived from a security held for
three months or more regardless of the actual period for which the contract is
held if the gain arises as a result of a constructive sale of the contract at
the end of the taxable year as described above, and will be treated as being
derived from a security held for less than three months only if the contract is
terminated (or transferred) during the taxable year (other than by reason of
mark-to-market) and less than three months elapses between the date the
contract is acquired and the termination date. Although private letter rulings
are not binding on the Internal Revenue Service with respect to the
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<PAGE> 623
Portfolio, the Fund believes that the Internal Revenue Service would take a
comparable position with respect to the Portfolio. In determining whether the
30% test is met for a taxable year, increases and decreases in the value of the
Portfolio's futures contracts and securities that qualify as part of a
"designated hedge," as defined in the Code, may be netted.
If for any taxable year the Portfolio does not qualify as a regulated
investment company, all of its taxable income will be subject to tax at regular
corporate rates without any deduction for distributions to shareholders, and
all distributions will be taxable as ordinary dividends to the extent of the
Portfolio's current and accumulated earnings and profits. Such distributions
will be eligible for the dividends received deduction in the case of corporate
shareholders.
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute specified percentages of their
ordinary taxable income and capital gain net income (excess of capital gains
over capital losses). The Portfolio intends to make sufficient distributions
or deemed distributions of its ordinary taxable income and any capital gain net
income prior to the end of the each calendar year to avoid liability for this
excise tax.
The Fund will be required in certain cases to withhold and remit to
the United States Treasury 31% of dividends and gross sale proceeds paid to any
shareholder (i) who has provided either an incorrect tax identification number
or no number at all, (ii) who is subject to backup withholding by the Internal
Revenue Service for failure to report the receipt of interest or dividend
income properly, or (iii) who has failed to certify to the Fund that he is not
subject to backup withholding or that he is an "exempt recipient."
Shareholders will be advised annually as to the Federal income tax
consequences of distributions made by the Portfolio each year.
The foregoing general discussion of Federal income tax consequences is
based on the Code and the regulations issued thereunder as in effect on the
date of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.
Although the Portfolio expects to qualify as a "regulated investment
company" and to be relieved of all or substantially all Federal income taxes,
depending upon the extent of its activities in states and localities in which
its offices are
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<PAGE> 624
maintained, in which its agents or independent contractors are located or in
which it is otherwise deemed to be conducting business, the Portfolio may be
subject to the tax laws of such states or localities. Shareholders should
consult their tax advisors about state and local tax consequences, which may
differ from the Federal income tax consequences described above.
ADDITIONAL INFORMATION CONCERNING SHARES
Shares of the Fund have noncumulative voting rights and, accordingly,
the holders of more than 50% of the Fund's outstanding shares (irrespective of
class) may elect all of the trustees. Shares have no preemptive rights and
only such conversion and exchange rights as the Board may grant in its
discretion. When issued for payment as described in the Prospectus, shares
will be fully paid and non-assessable by the Fund.
There will normally be no meetings of shareholders for the purpose of
electing trustees unless and until such time as required by law. At that time,
the trustees then in office will call a shareholders' meeting to elect
trustees. Except as set forth above, the trustees shall continue to hold
office and may appoint successor trustees. The Fund's Declaration of Trust
provides that meetings of the shareholders of the Fund shall be called by the
trustees upon the written request of shareholders owning at least 10% of the
outstanding shares entitled to vote.
The Funds' Declaration of Trust authorizes the Board of Trustees,
without shareholder approval (unless otherwise required by applicable law), to:
(i) sell and convey the assets belonging to a class of shares to another
management investment company for consideration which may include securities
issued by the purchaser and, in connection therewith, to cause all outstanding
shares of such class to be redeemed at a price which is equal to their net
asset value and which may be paid in cash or by distribution of the securities
or other consideration received from the sale and conveyance; (ii) sell and
convert the assets belonging to one or more classes of shares into money and,
in connection therewith, to cause all outstanding shares of such class to be
redeemed at their net asset value; or (iii) combine the assets belonging to a
class of shares with the assets belonging to one or more other classes of
shares if the Board of Trustees reasonably determines that such combination
will not have a material adverse effect on the shareholders of any class
participating in such combination and, in connection therewith, to cause all
outstanding shares of any such class to be redeemed or converted into shares of
another class of shares at their net asset value. However, the exercise of
such authority may be subject to certain restrictions under the 1940 Act. The
Board of Trustees may authorize the termination of any class of shares
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<PAGE> 625
after the assets belonging to such class have been distributed to its
shareholders.
MISCELLANEOUS
COUNSEL. The law firm of Drinker Biddle & Reath, 1345 Chestnut
Street, Philadelphia, Pennsylvania 19107-3496, serves as the Fund's counsel.
INDEPENDENT ACCOUNTANTS. Coopers & Lybrand, L.L.P., 2400 Eleven Penn
Center, Philadelphia, Pennsylvania 19103, serves as the Fund's independent
accountants.
FIVE PERCENT OWNERS. The name, address and percentage ownership of
each person that on September 29, 1995 owned of record or beneficially 5% or
more of the outstanding shares of the Portfolio was as follows:
Money Market Portfolio: BHC Securities, 2005 Market St., Phila., PA 19103,
6.0%; PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113, 85.1%; Government
Money Market Portfolio: PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113,
76.5%; PNC Bank Pittsburgh, 960 Ft. Duquesne Blvd., Pittsburgh, PA 15222, 5.0%;
Municipal Money Market Portfolio: PNC Bank Pittsburgh, 960 Ft. Duquesne Blvd.,
Pittsburgh, PA 15222, 12.1%; PNC Bank Ohio, 201 E. Fifth St., Cincinnati, OH
45202, 8.1%; PNC Bank, Saxon and Co., 200 Stevens Dr., Suite 260, Lester, PA
19113, 73.1%; Ohio Municipal Money Market Portfolio: BHC Securities, 2005
Market St., Phila., PA 19103, 26.4%; PNC Bank, 200 Stevens Dr., Suite 260,
Lester, PA 19113, 58.9%; North Carolina Municipal Money Market Portfolio:
Branch Banking & Trust Company, P.O. Box 1847, Wilson, N.C. 27893, 5.6%;
Centura Bank, P.O. Box 1220, Rocky Mount, NC 27802, 13.1%; United Carolina Bank
Whiteville, P.O. Drawer 632, Whiteville, NC 28472, 22.3%; First Charter
National Bank, P.O. Box 228, Concord, NC 28926, 13.1%; McWood & Co., First
Citizens Bank, P.O. Box 29522, Raleigh, NC 27626, 13.0%; North Carolina Trust
Co., 301 North Elm St., Greensboro, NC 27402, 17.0%; Pennsylvania Municipal
Money Market Portfolio: BHC Securities, 2005 Market St., Phila., PA 19103,
5.6%; PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113, 85.3%; Virginia
Municipal Money Market Portfolio: Oldom & Co., First Virginia Bank Inc., 6400
Arlington Blvd., Falls Church, VA 22042, 77.4%; Warritrust & Company, F&M Bank,
P.O. Box 93, Warrenton, VA 22186, 5.8%; Piedmont Company, Piedmont Trust Bank,
P.O. Box 4751, Martinsville, VA 24115, 9.9%; Managed Income Portfolio: PNC
Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113, 92.3; Tax-Free Income
Portfolio: BHC Securities, 2005 Market St., Phila., PA 19103, 15.5%; PNC Bank,
200 Stevens Dr., Suite 260, Lester, PA 19113, 41.5%; Ohio Tax-Free Income
Portfolio: BHC Securities, 2005 Market St., Phila., PA 19103, 32.3%; PNC Bank,
200 Stevens Dr., Suite 260, Lester, PA 19113, 60.6%; Pennsylvania Tax-Free
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<PAGE> 626
Income: BHC Securities, 100 N. 20th St., Phila., PA 19103, 46.4%; PNC Bank, 200
Stevens Dr., Suite 260, Lester, PA 19113, 24.9%; Intermediate Government
Portfolio: PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113, 91.2%;
Short-Term Bond Portfolio: Medical Practice Account, 1020 Walnut St., Phila.,
PA 19107, 14.3%; PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113, 83.7%;
Intermediate-Term Bond Portfolio: PNC Bank, 200 Stevens Dr., Suite 260, Lester,
PA 19113, 92.9%; Government Income Portfolio: BHC Securities, 100 N. 20th St.,
Phila., PA 19103, 20.3%; International Emerging Markets Portfolio: First
Charter National Bank, P.O. Box 228, Concord, NC 28026, 5.6%; PNC Bank, 200
Stevens Dr., Suite 260, Lester, PA 19113, 88.7%; Growth Equity Portfolio: PNC
Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113, 96.4%; Index Equity
Portfolio: PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113, 91.5%; Small
Cap Value Equity Portfolio: BHC Securities, 100 N. 20th St., Phila., PA 19103,
5.0%; PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113, 81.6%;
International Equity Portfolio: PNC Bank, 200 Stevens Dr., Suite 260, Lester,
PA 19113, 91.6%; Balanced Portfolio: BHC Securities, 100 N. 20th St., Phila.,
PA 19103, 24.9%; PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113, 60.5%;
Value Equity Portfolio: PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113,
91.1%; Small Cap Growth Equity Portfolio: PNC Bank, 200 Stevens Dr., Suite 260,
Lester, PA 19113, 90.1%; and Core Equity Portfolio: PNC Bank, 200 Stevens Dr.,
Suite 260, Lester, PA 19113, 98.1%.
On September 29, 1995, PNC Bank held of record approximately 79% of
the Fund's outstanding shares, and may be deemed a controlling person of the
Fund under the 1940 Act. PNC Bank is a national bank organized under the laws
of the United States. All of the capital stock of PNC Bank is owned by PNC
Bancorp, Inc. All of the capital stock of PNC Bancorp, Inc. is owned by PNC
Bank Corp., a publicly-held bank holding company.
BANKING LAWS. Banking laws and regulations currently prohibit a bank
holding company registered under the Federal Bank Holding Company Act of 1956
or any bank or non-bank affiliate thereof from sponsoring, organizing,
controlling or distributing the shares of a registered, open-end investment
company continuously engaged in the issuance of its shares, and prohibit banks
generally from underwriting securities, but such banking laws and regulations
do not prohibit such a holding company or affiliate or banks generally from
acting as investment adviser, administrator, transfer agent or custodian to
such an investment company, or from purchasing shares of such a company as
agent for and upon the order of customers. PIMC, BlackRock, PCM, PEAC, PMFCO,
PFPC and PNC Bank are subject to such banking laws and regulations.
PIMC, BlackRock, PCM, PEAC, PMFCO, PFPC and PNC Bank believe they may
perform the services for the Fund contemplated by their
-39-
<PAGE> 627
respective agreements with the Fund without violation of applicable banking
laws or regulations. It should be noted, however, that there have been no
cases deciding whether bank and non-bank subsidiaries of a registered bank
holding company may perform services comparable to those that are to be
performed by these companies, and future changes in either Federal or state
statutes and regulations relating to permissible activities of banks and their
subsidiaries or affiliates, as well as further judicial or administrative
decisions or interpretations of present and future statutes and regulations,
could prevent these companies from continuing to perform such services for the
Fund. If such were to occur, it is expected that the Board of Trustees would
recommend that the Fund enter into new agreements or would consider the
possible termination of the Fund. Any new advisory or sub-advisory agreement
would be subject to shareholder approval.
SHAREHOLDER APPROVALS. As used in this Statement of Additional
Information and in the Prospectus, a "majority of the outstanding shares" of a
class, series or Portfolio means, with respect to the approval of an investment
advisory agreement, a distribution plan or a change in a fundamental investment
policy, the lesser of (1) 67% of the shares of the particular class, series or
Portfolio represented at a meeting at which the holders of more than 50% of the
outstanding shares of such class, series or Portfolio are present in person or
by proxy, or (2) more than 50% of the outstanding shares of such class, series
or Portfolio.
THE FUND'S NAME. PNC Bank Corp. is the owner of the registered
service mark "PNC." The Fund has entered into a licensing agreement with
respect to its non-exclusive use of "PNC," under which it has agreed not to
claim any interest to the name "PNC" except under the agreement. The license
will terminate if it is breached by the Fund or if neither PIMC nor any of PNC
Bank Corp.'s affiliates continues as the investment adviser or manager of the
Fund.
FINANCIAL STATEMENTS
The audited financial statements for the Predecessor Portfolio
contained in its Annual Report to Shareholders dated June 30, 1995 are
incorporated by reference in this Statement of Additional Information. No
other parts of the Annual Report are incorporated by reference herein.
Additional copies of the 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.
-40-
<PAGE> 628
THE BFM INSTITUTIONAL TRUST INC.
THE MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III
- --------------------------------------------------
ANNUAL REPORT
JUNE 30, 1995
<PAGE> 629
THE BFM INSTITUTIONAL TRUST INC.
THE MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III
PORTFOLIO OF INVESTMENTS
JUNE 30, 1995
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL
RATING* AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG-TERM INVESTMENTS - 97.3%
COMMERCIAL MORTGAGE-BACKED SECURITIES - 90.5%
A $4,000 American Southwest Financial Securities Corporation,
8.00%, Series 1994-C2, Class A4, 08/25/10 ................................ $ 3,946,394
AA 1,500 Bellaire Finance Incorporated,
8.97%, Class A, 02/01/08.................................................. 1,573,125
CBA Mortgage Corporation,
BBB 4,074 7.15%, Series 1993-C1, Class D, 12/25/03 ................................. 3,981,515
AAA 300 7.15%, Series 1993-C1, Class A2, 12/25/03 ................................ 306,906
Central Life Assurance Company,
AA+ 3,444 8.90%, Series 1994-1, Class A2, 11/01/20 ................................. 3,623,092
A 1,126 9.10%, Series 1994-1, Class B1, 11/01/20 ................................. 1,177,927
AA 4,887 Citibank of New York, Mortgage Pass-Through Certificate
8.00%, Series 1994-1 Class A, 01/25/19 ................................... 5,059,729
AA 3,988 Creekwood Capital Corporation, Collateral Note,
8.47%, 03/16/15........................................................... 4,257,438
AA 3,500 CS First Boston Mortgage Securities Corporation,
9.59%, Series 1995-M1, Class B, 04/25/25 ................................. 3,915,625
DLJ Mortgage Acceptance Corporation,
AA 5,000 7.86%, Series 1992-3, Class A, 06/18/07................................... 5,117,500
AA 1,000 7.65%, Series 1993-M12, Class A2, 09/18/03............................... 1,023,500
BBB 3,000 FSA Finance Incorporated,
8.31%,Class C, 06/01/02................................................... 3,068,174
A 4,000 Gentra Capital Commercial Real Estate,
8.50%, Series 1994-1, Class D, 07/25/28 .................................. 4,093,018
BB- 1,020 Kearny Street Real Estate L P,
9.56%, Series 1993-1, Class D, 07/15/03 .................................. 1,032,848
KP Acceptance Corporation I,
A 2,500 7.00%, Series 1994-C1, Class C, 02/01/06 ................................. 2,466,846
BBB 1,074 6.50%, Series 1993- M3, Class D, 11/25/25................................. 997,931
A 3,000 Lehman Brothers Mortgage Trust,
8.00%, Series 1992-M1, Class B, 12/25/01 ................................. 2,940,000
Lennar United States Partners Limited,
AA 2,906 6.66%, Series 1994-1, 09/15/01 ........................................... 2,909,614
BB 1,500 9.75%, Series 1995-1, Class E, 05/15/05................................... 1,510,524
B 1,000 11.70%, Series 1995-1, Class F, 05/15/05.................................. 1,005,587
A 2,125 LTC,
9.50%, Series 1994-1, Class C, 06/15/26 .................................. 2,345,326
Nomura Asset Capital Corporation,
AA 2,000 7.64%, Series 1993-M1, Class A1, 11/25/03................................. 2,045,249
BBB 2,000 7.64%, Series 1993-M1, Class A3, 11/25/03................................. 1,966,075
</TABLE>
THE BFM INSTITUTIONAL TRUST INC.
See Notes to Financial Statements.
4
<PAGE> 630
THE BFM INSTITUTIONAL TRUST INC.
THE MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III
PORTFOLIO OF INVESTMENTS
JUNE 30, 1995
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL
RATING* AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMERCIAL MORTGAGE-BACKED SECURITIES - (CONT.)
Resolution Trust Corporation,
AAA $ 2,682 6.58%, Series 1994-C2, Class A1, 04/25/25................................. $ 2,680,628
BBB 3,000 6.90%, Series 1995-C1, Class D, 02/25/27.................................. 2,754,375
Aa2 4,800 7.26%, Series 1992-C4, Class A2, 06/25/24................................. 4,886,671
AA- 1,433 7.70%, Series 1992-C6, Class B, 07/25/24.................................. 1,442,547
Baa2 1,950 8.00%, Series 1992-C6, Class C, 07/25/24.................................. 1,963,292
A 2,966 8.00%, Series 1994-C2, Class D, 04/25/25.................................. 2,946,561
AA- 5,795 8.13%, Series 1992-C1, Class B, 08/25/23.................................. 5,930,393
A 3,167 8.50%, Series 1993-C2, Class D, 03/25/23.................................. 3,234,020
A+ 2,602 8.85%, Series 1992-C5, Class C, 05/25/22.................................. 2,708,323
B+ 2,500 10.63%, Series 1994-N2, Class A, 12/15/04................................. 2,490,362
BB 3,000 SKW Real Estate,
9.05%, Series 1994, Class D, 04/15/04 .................................... 3,004,994
SKW Real Estate II,
B 500 11.00%, Class E, 04/15/05................................................. 502,099
B 2,222 12.80%, Class E, 04/15/05................................................. 2,236,168
A 4,500 TVO Southwest,
9.37%, Series 1994-MF1, Class A2, 11/18/09 ............................... 4,955,557
------------
102,099,933
------------
U.S. GOVERNMENT SECURITIES - 6.8%
U.S. Treasury Notes,
970 # 4.75%, 8/31/98............................................................ 944,693
2,135 6.88%, 3/31/00............................................................ 2,229,409
4,300 7.25%, 2/15/98............................................................ 4,467,313
-----------
7,641,415
Total long-term investments
(cost $106,007,269)....................................................... 109,741,348
------------
SHORT-TERM INVESTMENTS - 5.6%
REPURCHASE AGREEMENT
6,300 Lehman Brothers Inc., 6.15%, dated 6/30/95, due 7/03/95 in the
amount of $6,303,229 (cost $6,300,000, collateralized by
$5,000,000 U.S. Treasury Bond, 10.375%, due 11/15/09
with a value of $6,510,879)............................................... 6,300,000
</TABLE>
See Notes to Financial Statements.
5
<PAGE> 631
THE BFM INSTITUTIONAL TRUST INC.
THE MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III
PORTFOLIO OF INVESTMENTS
JUNE 30, 1995
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
VALUE
CONTRACTS## DESCRIPTION (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CALL OPTIONS PURCHASED- 0.0%
28 U.S. Treasury Bond Future, expiring December 1995
(cost $84,324)........................................................... $ 64,750
Total short-term investments
(cost $6,384,324)........................................................ 6,364,750
------------
Total investments - 102.9%
(cost $112,391,593)...................................................... 116,106,098
Liabilities in excess of other assets - (2.9%)...................................... (3,296,433)
------------
NET ASSETS - 100%................................................................... $112,809,665
============
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Using the higher of Standard & Poor's, Moody's, or Fitch's rating.
# A portion of the above denoted securities market value was segregated to
cover margin requirements for open financial futures contracts.
## One contract equals $100,000 face value.
See Notes to Financial Statements.
6
<PAGE> 632
THE BFM INSITUTIONAL TRUST INC.
THE MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1995
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Investments, at value (cost $112,391,593) (Note 1)............................................ $116,106,098
Cash.......................................................................................... 42,116
Interest receivable........................................................................... 765,887
Receivable for variation margin on futures.................................................... 83,531
Receivable for investments sold............................................................... 2,683
Other......................................................................................... 97
------------
117,000,412
------------
LIABILITIES
Payable for investments purchased............................................................. 4,105,014
Custodian fee payable......................................................................... 13,420
Other......................................................................................... 72,313
------------
4,190,747
------------
NET ASSETS.................................................................................... $112,809,665
============
Net assets were comprised of:
Common stock, at par (Note 5)............................................................ $ 10
Paid-in capital in excess of par......................................................... 105,744,127
------------
105,744,137
Accumulated net realized gain............................................................ 3,568,972
Net unrealized appreciation ............................................................. 3,496,556
------------
Net assets, June 30,1995................................................................. $112,809,665
============
Net asset value per share..................................................................... $ 1,068.11
============
Total shares outstanding at end of period..................................................... 105,616
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
7
<PAGE> 633
THE BFM INSTITUTIONAL TRUST INC.
THE MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III
STATEMENT OF OPERATIONS
FOR THE PERIOD OCTOBER 4, 1994* THROUGH JUNE 30, 1995
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
<S> <C>
Income
Interest (including discount accretion of $111,768)........................................ $ 6,000,734
-----------
Expenses
Investment advisory........................................................................ 189,677
Custodian.................................................................................. 41,989
Registration............................................................................... 34,574
Administration............................................................................. 32,948
Audit...................................................................................... 14,333
Legal...................................................................................... 9,555
Transfer agent............................................................................. 2,500
Directors.................................................................................. 1,970
Miscellaneous.............................................................................. 10,320
-----------
Total expenses.......................................................................... 337,866
Expenses waived by the Adviser (Note 2)................................................. (56,269)
-----------
Net expenses............................................................................ 281,597
-----------
Net investment income...................................................................... 5,719,137
-----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS (NOTE 3)
Net realized gain on:
Investments............................................................................. 2,332,081
Futures................................................................................. 1,236,891
-----------
Net realized gain....................................................................... 3,568,972
-----------
Net unrealized appreciation (depreciation) on:
Investments............................................................................. 3,714,505
Futures................................................................................. (217,949)
-----------
Net unrealized appreciation on investments.............................................. 3,496,556
-----------
Net gain on investments........................................................................ 7,065,528
-----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS...................................................................... $12,784,665
===========
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations.
See Notes to Financial Statements.
8
<PAGE> 634
THE BFM INSTITUTIONAL TRUST INC.
THE MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III
STATEMENT OF CASH FLOWS
FOR THE PERIOD OCTOBER 4, 1994* THROUGH JUNE 30, 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
<S> <C>
INCREASE (DECREASE) IN CASH
Cash flows used for operating activities:
Interest received ................................................ $ 5,123,709
Expenses paid .................................................... (195,865)
Variation margin paid............................................. (301,480)
Purchase of short-term portfolio
investments, net .............................................. (6,300,000)
Gain/loss on closed futures contracts ............................ 1,236,891
Purchase of long-term portfolio investments ...................... (278,912,706)
Proceeds from disposition of long-term
portfolio investments.......................................... 179,366,567
-------------
Net cash flows used for operating activities ..................... (99,982,884)
-------------
Cash flows provided by financing activities:
Dividends paid (excluding reinvestment of dividends
of $5,719,137)................................................. 0
Proceeds from Trust shares sold .................................. 100,000,000
-------------
Net cash flows provided by financing activities ............... 100,000,000
-------------
Net increase in cash ................................................. 17,116
Cash at beginning of period........................................... 25,000
-------------
Cash at end of period ................................................ $ 42,116
=============
RECONCILIATION OF NET INCREASE
IN NET ASSETS RESULTING FROM OPERATIONS
TO NET CASH FLOWS USED FOR
OPERATING ACTIVITIES
Net increase in net assets resulting from operations ................. $ 12,784,665
-------------
Increase in investments .............................................. (109,040,570)
Net realized gain .................................................... (3,568,972)
Increase in unrealized appreciation .................................. (3,496,556)
Increase in receivable for investments sold .......................... (2,683)
Increase in interest receivable ...................................... (765,887)
Increase in margin variation on futures .............................. (83,531)
Increase in other assets ............................................. (97)
Increase in payable for investments purchased ........................ 4,105,014
Increase in accrued expenses and other liabilities.................... 85,733
-------------
Total adjustments ................................................ (112,767,549)
-------------
Net cash flows used for operating activities ......................... $ (99,982,884)
=============
- ------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations.
See Notes to Financial Statements.
9
<PAGE> 635
THE BFM INSTITUTIONAL TRUST INC.
THE MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD OCTOBER 4, 1994* THROUGH JUNE 30, 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
<S> <C>
Operations:
Net investment income..................................................................... $ 5,719,137
Net realized gain on investments.......................................................... 3,568,972
Net unrealized appreciation
on investments......................................................................... 3,496,556
------------
Net increase in net assets resulting
from operations........................................................................ 12,784,665
------------
Dividends from net investment income.......................................................... (5,719,137)
------------
Capital share transactions:
Proceeds from shares subscribed........................................................ 100,000,000
Net asset value of shares issued in
reinvestment of dividends............................................................ 5,719,137
------------
Increase in net assets from capital
share transactions................................................................... 105,719,137
------------
Net increase.............................................................................. 112,784,665
NET ASSETS
Beginning of period........................................................................... 25,000
------------
End of period................................................................................. $112,809,665
============
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations.
See Notes to Financial Statements.
10
<PAGE> 636
THE BFM INSTITUTIONAL TRUST INC.
THE MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III
FINANCIAL HIGHLIGHTS
FOR THE PERIOD OCTOBER 6, 1994* THROUGH JUNE 30, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
PER SHARE OPERATING
PERFORMANCE:
<S> <C>
Net asset value, beginning of period............................................ $1,000.00
---------
Net investment income (a).................................................... 55.81
Net realized and unrealized gain on investments.............................. 68.11
---------
Net increase from investment operations......................................... 123.92
---------
Dividends from net investment income............................................ (55.81)
---------
Net asset value, end of period.................................................. $1,068.11
=========
TOTAL INVESTMENT RETURN (b)..................................................... 12.78%
RATIOS TO AVERAGE NET ASSETS:
Expenses (a).................................................................... 0.37% (c)
Net investment income (a)....................................................... 7.54% (c)
SUPPLEMENTAL DATA:
Average net assets (in thousands) .............................................. $103,332
Portfolio turnover ............................................................. 215%
Net assets, end of period (in thousands)........................................ $112,810
- --------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of investment operations.
(a) For the period ended June 30, 1995, the Adviser waived expenses amounting
to $56,269. Net investment income before waiver of fees would have been
$55.28 on a per share basis and the ratio of net operating expenses to
average net assets and the ratio of net investment income to average net
assets would have been 0.45% and 7.46%, respectively.
(b) Total investment return is calculated assuming a purchase of common stock
at net asset value per share on the first day and a sale at net asset value
per share on the last day of the period reported. Dividends are assumed,
for purposes of this calculation, to be reinvested at the net asset value
per share on the payment date.
(c) Annualized.
Contained above is audited operating performance based on an average share
of common stock outstanding, total investment return, ratios to average net
assets and other supplemental data, for each of the periods indicated. This
information has been determined based upon financial information provided
in the financial statements.
See Notes to Financial Statements.
11
<PAGE> 637
THE BFM INSTITUTIONAL TRUST INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1. ORGANIZATION AND ACCOUNTING POLICIES
The BFM Institutional Trust Inc. (the "Trust") is a no-load, open-end
management investment company organized as a Maryland corporation. The Articles
of Incorporation permit the Board of Directors to create an unlimited number of
series (or "Portfolios"), each of which issues a separate class of shares and
has its own investment objective and policies. The Trust was formed on November
27, 1991 and had no operations through June 18, 1992 other than those related to
organizational matters and the sale and issuance of 10,000 shares of The Short
Duration Portfolio to BlackRock Financial Management Inc. ( the "Adviser") for
$100,000 on June 18, 1992. The Multi-Sector Mortgage Securities Portfolio III
(the "Portfolio") commenced investment operations on October 6, 1994. The Short
Duration Portfolio and The Core Fixed Income Portfolio commenced investment
operations on July 17, 1992 and December 9, 1992, respectively.
As of June 30, 1995, 99.98% of the shares of capital stock of the Portfolio
are owned by Ameritech Pension/VEBA Trust.
The following is a summary of significant accounting policies followed by
the Trust.
SECURITIES VALUATION: The Trust values mortgage-backed, asset-backed and other
debt securities on the basis of current market quotations provided by dealers or
pricing services approved by the Trust's Board of Directors. In determining the
value of a particular security, pricing services may use certain information
with respect to transactions in such securities, quotations from dealers, market
transactions in comparable securities, various relationships observed in the
market between securities, and calculated yield measures based on valuation
technology commonly employed in the market for such securities. Exchange-traded
options are valued at their last sales price as of the close of options trading
on the applicable exchanges. In the absence of a last sale, options are valued
at the average of the quoted bid and asked prices as of the close of business. A
futures contract is valued at the last sale price as of the close of the
commodities exchange on which it trades unless the Trust's Board of Directors
determine that such price does not reflect its fair value, in which case it will
be valued at its fair value as determined by the Trust's Board of Directors. Any
securities or other assets for which such current market quotations are not
readily available are valued at fair value as determined in good faith under
procedures established by and under the general supervision and responsibility
of the Trust's Board of Directors.
Short-term securities which mature in more than 60 days are valued at
current market quotations. Short-term securities which mature in 60 days or less
are valued at amortized cost, if their term to maturity from date of purchase
was 60 days or less, or by amortizing their value on the 61st day prior to
maturity, if their original term to maturity from date of purchase exceeded 60
days.
In connection with transactions in repurchase agreements, the Trust's
custodian takes possession of the underlying collateral securities, the value of
which at least equals the principal amount of the repurchase transaction,
including accrued interest. To the extent that any repurchase transaction
exceeds one business day, the value of the collateral is marked-to-market on a
daily basis to ensure the adequacy of the collateral. If the seller defaults and
the value of the collateral declines or if bankruptcy proceedings are commenced
with respect to the seller of the security, realization of the collateral by the
Trust may be delayed or limited.
OPTION SELLING/PURCHASING: When the Trust sells or purchases an option, an
amount equal to the premium received or paid by the Trust is recorded as a
liability or an asset and is subsequently adjusted to the current market value
of the option written or purchased. Premiums received or paid from writing or
purchasing options which expire unexercised are treated by the Trust on the
expiration date as realized gains or losses. The difference between the premium
and the amount paid or received on effecting a closing purchase or sale
12
<PAGE> 638
transaction, including brokerage commissions, is also treated as a realized gain
or loss. If an option is exercised, the premium paid or received is added to the
proceeds from the sale or cost of the purchase in determining whether the Trust
has realized a gain or a loss on investment transactions. The Trust, as writer
of an option, may have no control over whether the underlying securities may be
sold (call) or purchased (put) and as a result bears the market risk of an
unfavorable change in the price of the security underlying the written option.
Options, when used by the Trust, help in maintaining a targeted duration.
Duration is a measure of the price sensitivity of a security or a portfolio to
relative changes in interest rates. For instance, a duration of "one" means that
a portfolio's or a security's price would be expected to change by approximately
one percent with a one percent change in interest rates, while a duration of
five would imply that the price would move approximately five percent in
relation to a one percent change in interest rates.
Option selling and purchasing is used by the Trust to effectively "hedge"
more volatile positions so that changes in interest rates do not change the
duration of the portfolio unexpectedly. In general, the Trust uses options to
hedge a long or short position or an overall portfolio that is longer or shorter
than the benchmark security. A call option gives the purchaser of the option the
right (but not obligation) to buy, and obligates the seller to sell (when the
option is exercised), the underlying position at the exercise price at any time
or at a specified time during the option period. A put option gives the holder
the right to sell and obligates the writer to buy, the underlying position at
the exercise price at any time or at a specified time during the option period.
Put options can be purchased to effectively hedge a position or a portfolio
against price declines if a portfolio is long. In the same sense, call options
can be purchased to hedge a portfolio that is shorter than its benchmark against
price changes. The Trust can also sell (or write) covered call options and put
options to hedge portfolio positions.
The main risk that is associated with purchasing options is that the option
expires without being exercised. In this case, the option expires worthless and
the premium paid for the option is considered the loss. The risk associated with
writing call options is that the Trust may forego the opportunity for a profit
if the market value of the underlying position increases and the option is
exercised. The risk in writing put options is that the Trust may incur a loss if
the market value of the underlying position decreases and the option is
exercised. In addition, as with futures contracts, the Trust risks not being
able to enter into a closing transaction for the written option as the result of
an illiquid market.
FINANCIAL FUTURES CONTRACTS: A futures contract is an agreement between two
parties to buy or sell a financial instrument for a set price on a future date.
Initial margin deposits are made upon entering into futures contracts and can be
either cash or securities. During the period that the futures contract is open,
changes in the value of the contract are recognized as unrealized gains or
losses by "marking-to-market" on a daily basis to reflect the market value of
the contract at the end of each day's trading. Variation margin payments are
made or received, depending upon whether unrealized gains or losses are
incurred. When the contract is closed, the Trust records a realized gain or loss
equal to the difference between the proceeds from (or cost of) the closing
transaction and the Trust's basis in the contract.
Financial futures contracts, when used by the Trust, to help in maintaining
a targeted duration. Futures contracts can be sold to effectively shorten an
otherwise longer duration portfolio. Duration is a measure of the price
sensitivity of a security or a portfolio to relative changes in interest rates.
For instance, a duration of "one" means that a portfolio's or a security's price
would be expected to change by approximately one percent with a one percent
change in interest rates, while a duration of "five" would imply that the price
would move approximately five percent in relation to a one percent change in
interest rates. In the same sense, futures contracts can be purchased to
lengthen a portfolio that is shorter than its duration target. Thus, by buying
or selling futures contracts, the Trust can effectively "hedge" more volatile
positions so that changes in interest do not change the duration of the
portfolio unexpectedly.
13
<PAGE> 639
The Trust may invest in financial futures contracts primarily for the
purpose of hedging its existing portfolio securities or securities the Trust
intends to purchase against fluctuations in value caused by changes in
prevailing market interest rates, or for risk management, duration management or
other portfolio management purposes. Should interest rates move unexpectedly,
the Trust may not achieve the anticipated benefits of the financial futures
contracts and may realize a loss. The use of futures transactions involves the
risk of imperfect correlation in movements in the price of futures contracts,
interest rates and the underlying hedged assets. The Trust is also at risk of
not being able to enter into a closing transaction for the futures contract
because of an illiquid secondary market. In addition, since futures are used to
shorten or lengthen a portfolio's duration, there is a risk that the portfolio
may have temporarily performed better without the hedge or that the Trust may
lose the opportunity to realize appreciation in the market price of the
underlying positions.
SECURITY TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on the trade date. Realized and unrealized gains and losses are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis and the Trust accretes premium or amortizes discount on securities
purchased using the interest method.
TAXES: It is the Trust's intention to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to shareholders.
Therefore, no federal income or excise tax provision is required.
DIVIDENDS AND DISTRIBUTIONS: The Trust declares dividends daily and pays
dividends and distributions monthly first from net investment income, then from
net realized short-term capital gains and other sources, if necessary. Net
long-term capital gains, if any, in excess of loss carryforwards are distributed
at least annually. Dividends and distributions are recorded on the ex-dividend
date. Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatments for mortgage-backed securities.
NOTE 2. AGREEMENTS
The Trust has an Investment Advisory Agreement with the Adviser which
provides that the Portfolio will pay to the Adviser for its services a monthly
fee in an amount equal to .25% of average daily net assets on an annualized
basis. The Adviser has agreed to waive a portion of its advisory fee from the
Portfolio to the extent that the expenses of the Portfolio exceed .37% of
average daily net assets. For the period ended June 30, 1995, the Adviser
reimbursed expenses of $56,269 from the Portfolio. The Trust has also entered
into an Administration Agreement with State Street Bank and Trust Company
("State Street"). State Street will receive an annual fee equal to .04% of the
Portfolio's average daily net asset value.
Pursuant to the agreements, the Adviser provides continuous supervision of
the investment portfolio and pays the compensation of officers of the Trust, who
are affiliated persons of the Adviser. State Street pays occupancy and certain
clerical and accounting costs of the Trust. The Trust bears all other costs and
expenses. The Adviser has agreed that, in any fiscal year, it will reimburse the
Trust for expenses (including the fees of the Adviser but excluding taxes,
interest, brokerage fees, commissions, litigation and indemnification expenses
and other extraordinary expenses) that exceed the most restrictive expense
limitation imposed by state securities commissions. The most restrictive expense
limitation is 2 1/2% of the average value of the Trust's net assets during the
year up to $30 million, 2% of the next $70 million of average net assets and 1
1/2% thereafter. Such expense reimbursement, if any, will be estimated and
accrued daily. No expense reimbursement was required due to such limitation for
the period ended June 30, 1995.
14
<PAGE> 640
The Trust has entered into a Distribution Agreement with Provident
Distributors, Inc. (the "Distributor"). Pursuant to the terms of the
Distribution Agreement, the Distributor serves as the principal underwriter and
distributor of the Trust's shares, and in that capacity makes a continuous
offering of the Trust's shares and bears the costs and expenses of printing and
distributing any copies of any prospectuses and annual and interim reports for
the Trust (after such items have been prepared and set in type) which are used
in connection with the offering of shares to securities dealers or investors,
and the cost and expenses of preparing, printing and distributing any other
literature used by the Distributor or furnished by it for use by securities
dealers in connection with the offering of the shares for sale to the public.
There is no fee payable by the Trust pursuant to the Distribution Agreement, and
there is no sales or redemption charge. The Distribution Agreement provides for
indemnification by the Trust of the Distributor, its partners, employees, agents
and affiliates for liabilities incurred by them in connection with their
services to the Trust, subject to certain limitations and conditions. The
continuance of the Distribution Agreement must be approved in the same manner as
the Investment Advisory Agreement, and the Distribution Agreement will terminate
automatically if assigned by either party thereto and is terminable with respect
to any Portfolio at any time without penalty by the Rule 12b-1 Directors (as
defined below) or by vote of a majority of the outstanding shares of the
Portfolio (as such term is defined in the Investment Company Act) on not more
than 60 days' nor less than 30 days' written notice to the Distributor and by
the Distributor on like notice to the Trust.
The Trust has adopted a Distribution and Stockholder Servicing Plan (the
"Plan") pursuant to Rule 12b-1 under the Investment Company Act pursuant to
which the Adviser is permitted to use a portion of the advisory fee it receives
from the Trust to promote the distribution of the Trust's shares and to enhance
the provision of stockholder services. The Plan was approved by a majority of
(i) the directors of the Trust and (ii) the directors of the Trust who are not
interested persons of the Trust and who have no direct or indirect financial
interest in the operation of the Plan or in any agreement related to the Plan
(Rule 12b-1 Directors). The Plan permits the Adviser to pay fees to the
Distributor. The Trust is not required or permitted under the Plan to make
payments over and above the amount of the advisory fee to promote the sale of
its shares; the Plan merely permits the reallocation of a portion of the
advisory fee the Adviser receives to pay for distribution-related activities.
From amounts received by it under the Plan, the Distributor is authorized
to make payments to securities dealers with which the Distributor has entered
into solicitation fee agreements. The Distributor may also use a portion of the
fee it receives under the Plan to cover the Distributor's cost of marketing
services and advertising on behalf of the Portfolios and to compensate
institutions who perform support services that would otherwise be performed by
the Trust or its agent. These support services may include providing such office
space, equipment, telephone facilities and various personnel as may be necessary
or beneficial to establish and maintain stockholders' accounts and records,
process purchase and redemption transactions, answer routine client inquiries
and provide such other services to the Trust as may reasonably be requested.
The Plan will continue from year to year, provided that each such
continuance is approved at least annually by a vote of the Board of Directors,
including a majority vote of the Rule 12b-1 Directors, cast in person at a
meeting called for the purpose of voting on such continuance. The Plan may be
terminated with respect to any Portfolio at any time, without penalty, by the
vote of a majority of the Rule 12b-1 Directors or by the vote of the holders of
a majority of the outstanding shares of the Portfolio. The Plan may not be
amended materially without the approval of the Board of Directors, including a
majority of the Rule 12b-1 Directors, cast in person at a meeting called for
that purpose. Any modification to the Plan which would materially increase the
amount of money to be spent by a Portfolio must also be submitted to the
stockholders of the Portfolio for approval.
Certain directors of the Trust who are not interested parties are paid a
fee for their services in the amount of $2,500 on an annual basis.
15
<PAGE> 641
On February 28, 1995, the Adviser was acquired by PNC Bank, NA.
Following the acquisition, the Adviser has become a wholly-owned corporate
subsidiary of PNC Asset Management Group, Inc., the holding company for PNC's
asset management businesses. Additionally, on July 1, 1995, the transfer agent,
custodial and administration function for Trust were assumed by PFPC (a wholly
owned corporate subsidiary of PNC Bank, NA) and PNC Bank NA.
16
<PAGE> 642
NOTE 3. PORTFOLIO SECURITIES
Purchases and sales of investment securities, other than short-term
investments and dollar rolls, for the period from October 6, 1994 (commencement
of investment operations) to June 30, 1995 were $282,858,655 and $179,295,235
respectively. The federal income tax bases of the investments of the Portfolio
at June 30, 1995 was $112,407,036, and accordingly, as of June 30, 1995, net
unrealized appreciation for Federal income tax purposes aggregated $3,699,062 of
which $3,758,064 related to appreciated securities and $59,002 related to
depreciated securities.
During the period ended June 30, 1995, the Trust entered into financial
futures contracts. Details of open contracts at June 30, 1995 are as follows:
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION VALUE AT VALUE AT UNREALIZED APPRECIATION/
CONTRACTS TYPE DATE TRADE DATE JUNE 30, 1995 (DEPRECIATION)
---------- ---- ---------- ---------- ------------- ------------------------
<S> <C> <C> <C> <C> <C>
SHORT POSITIONS:
30 yr. December
14 T-Bond 1995 $1,597,322 $1,583,313 $14,009
10 yr. September 1,217,840 1,211,031 6,809
11,000 T-Note 1995
LONG POSITIONS:
30 yr. September
166 T-Bond 1995 19,053,496 18,846,188 (207,308)
5 yr. September
94 T-Bond 1995 9,772,750 9,747,359 (25,391)
2 yr. September
7 T-Note 1995 757,474 751,406 (6,068)
---------
$(217,949)
=========
</TABLE>
NOTE 4. REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
Reverse Repurchase Agreements: The Trust may enter into reverse repurchase
agreements with qualified, third party broker-dealers as determined by and under
the direction of the Trust's Board of Directors. Interest on the value of
reverse repurchase agreements issued and outstanding will be based upon
competitive market rates at the time of issuance. At the time the Trust enters
into a reverse repurchase agreement, it will establish and maintain a segregated
account with the lender containing liquid high grade securities having a value
not less than the repurchase price, including accrued interest, of the reverse
repurchase agreement. There were no reverse repurchase agreements during the
period ended June 30, 1995.
Dollar Rolls: The Trust may enter into dollar rolls in which the Trust sells
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 the Trust forgoes principal and
interest paid on the securities. The Trust will be compensated by the interest
earned on the cash proceeds of the initial sale and by the lower repurchase
price at the future date. There were no dollar roll transactions during the
period ended June 30, 1995.
17
<PAGE> 643
NOTE 5. CAPITAL
The Trust is authorized to issue 2 billion shares of $.0001 par value
capital stock in one or more classes or series. The Portfolio is authorized to
issue 1 million shares. Of the 105,616 shares of the Portfolio outstanding at
June 30, 1995, the Adviser owned 25 shares. Transactions in shares were as
follows:
<TABLE>
<CAPTION>
OCTOBER 6, 1994*
THROUGH
JUNE 30, 1995
-------------
<S> <C>
Shares subscribed .......................................................... 100,000
Shares issued in connection with
the reinvestment of dividends .............................................. 5,591
-------
105,591
Shares redeemed ............................................................ 0
-------
Net increase ............................................................... 105,591
=======
</TABLE>
* Commencement of investment operations
NOTE 6. DIVIDENDS
Subsequent to June 30, 1995 the Board of Directors of the Trust declared a
dividend from undistributed earnings of $676.106 per share, payable July 31,
1995 to shareholders of record on July 31, 1995.
18
<PAGE> 644
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
- -------------------------------------------------------------------------------
The Shareholders and Board of Directors of
The BFM Institutional Trust Inc.:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of The Multi-Sector Mortgage Securities Portfolio
III of The BFM Institutional Trust Inc. as of June 30, 1995 and the related
statements of operations, cash flows and changes in net assets for the period
October 4, 1994 (commencement of operations) to June 30, 1995 and financial
highlights for the period October 6, 1994 (commencement of investment
operations) to June 30, 1995. These financial statements and financial
highlights are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at June 30,
1995 by correspondence with the custodian and brokers; where replies were not
received from brokers, we performed other auditing procedures. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of The Multi-Sector
Mortgage Securities Portfolio III of The BFM Institutional Trust Inc. at June
30, 1995 and the results of its operations, its cash flows, the changes in its
net assets and its financial highlights for the periods stated in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
New York, New York
August 7, 1995
18
<PAGE> 645
- -------------------------------------------------------------------------------
THE BFM INSTITUTIONAL TRUST INC.
THE MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III
ADDITIONAL INFORMATION
- -------------------------------------------------------------------------------
There have been no material changes in the Trust's investment objectives or
policies that have not been approved by the shareholders, or to its charter or
by-laws, or in the principal risk factors associated with investment in the
Trust. There have been no changes in the persons who are primarily responsible
for the day-to-day management of the Trust's portfolio.
At a Special Meeting of Trust Shareholders on February 15, 1995, the
Shareholders approved the investment advisory agreement for the Portfolio with
BlackRock Financial Management, Inc. The results of the voting is as follows:
<TABLE>
<CAPTION>
VOTES VOTES VOTES
FOR AGAINST WITHHELD
<S> <C> <C>
101,092 -- --
</TABLE>
19
<PAGE> 646
- -------------------------------------------------------------------------------
THE BFM INSTITUTIONAL TRUST INC.
GLOSSARY
- -------------------------------------------------------------------------------
ADJUSTABLE RATE Mortgage instruments with interest
MORTGAGE-BACKED rates that adjust at periodic intervals at a
SECURITIES fixed amount relative to the market levels
of interest rates as reflected in
(ARMS): specified indexes. ARMS are backed
by mortgage loans secured by real property.
ASSET-BACKED SECURITIES: Securities backed by various types of
receivables such as automobile and credit
card receivables.
COLLATERALIZED MORTGAGE Mortgage-backed securities which separate
OBLIGATIONS (CMOS): mortgage pools into short-, medium-,
and long-term securities with different
priorities for receipt of principal and
interest. Each class is paid a fixed or
floating rate of interest at regular
intervals. Also known as multiple-class
mortgage pass-throughs.
DIVIDEND: This is income generated by securities in a
portfolio and distributed to shareholders
after the deduction of expenses. This Trust
declares dividends daily and pays dividends
on a monthly basis.
DIVIDEND REINVESTMENT: Shareholders may elect to have all
distributions of dividends and capital gains
automatically reinvested into additional
shares of the Trust.
FHA: Federal Housing Administration, a government
agency that facilitates a secondary mortgage
market by providing an agency that
guarantees timely payment of interest and
principal on mortgages.
FHLMC: Federal Home Loan Mortgage Corporation, a
publicly owned, federally chartered
corporation that facilitates a secondary
mortgage market by purchasing mortgages from
lenders such as savings institutions and
reselling them to investors by means of
mortgage-backed securities. Obligations of
FHLMC are not guaranteed by the U.S.
government, however; they are backed by
FHLMC's authority to borrow from the U.S.
government. Also known as Freddie Mac.
20
<PAGE> 647
FNMA: Federal National Mortgage Association, a
publicly owned, federally chartered
corporation that facilitates a secondary
mortgage market by purchasing mortgages from
lenders such as savings institutions and
reselling them to investors by means of
mortgage-backed securities. Obligations of
FNMA are not guaranteed by the U.S.
government, however; they are backed by
FNMA's authority to borrow from the U.S.
government. Also known as Fannie Mae.
21
<PAGE> 648
- -------------------------------------------------------------------------------
THE BFM INSTITUTIONAL TRUST INC.
GLOSSARY
- -------------------------------------------------------------------------------
GNMA: Government National Mortgage Association, a
government agency that facilitates a
secondary mortgage market by providing an
agency that guarantees timely payment of
interest and principal on mortgages. GNMA's
obligations are supported by the full faith
and credit of the U.S. Treasury. Also known
as Ginnie Mae.
GOVERNMENT SECURITIES: Securities issued or guaranteed by the U.S.
government, or one of its agencies or
instrumentalities, such as GNMA (Government
National Mortgage Association), FNMA
(Federal National Mortgage Association) and
FHLMC (Federal Home Loan Mortgage
Corporation).
INTEREST-ONLY SECURITIES (I/O): Mortgage securities that receive only the
interest cash flows from an underlying pool
of mortgage loans or underlying pass-through
securities. Also known as a Strip.
MORTGAGE DOLLAR ROLLS: A mortgage dollar roll is a transaction in
which the Trust sells mortgage-backed
securities for delivery in the current month
and simultaneously contracts to repurchase
substantially similar (although not the
same) securities on a specified future date.
During the "roll" period, the Trust does not
receive principal and interest payments on
the securities, but is compensated for
giving up these payments by the difference
in the current sales price (for which the
security is sold) and lower price that the
Trust pays for the similar security at the
end date as well as the interest earned on
the cash proceeds of the initial sale.
MORTGAGE PASS-THROUGHS: Mortgage-backed securities issued by Fannie
Mae, Freddie Mac or Ginnie Mae.
MULTIPLE-CLASS PASS-THROUGHS: See Collateralized Mortgage Obligations.
NET ASSET VALUE (NAV): Net asset value is the total market value of
all securities and other assets held by the
Trust, plus income accrued on its
investments, minus any liabilities including
accrued expenses, divided by the total
number of outstanding shares. It is the
underlying value of a single share on a
given day. Net asset value for the Trust is
calculated daily and published in The New
York Times and The Wall Street Journal.
22
<PAGE> 649
OPEN-END FUND: Investment vehicle which continually offers
its shares to the public at net asset value
and redeems its shares anytime at the
prevailing net asset value. The fund invests
in a portfolio of securities in accordance
with its stated investment objectives and
policies.
23
<PAGE> 650
- -------------------------------------------------------------------------------
THE BFM INSTITUTIONAL TRUST INC.
GLOSSARY
- -------------------------------------------------------------------------------
PRINCIPAL-ONLY SECURITIES (P/O): Mortgage securities that receive only the
principal cash flows from an underlying pool
of mortgage loans of underlying pass-through
securities, also known as a strip.
PROJECT LOANS: Mortgages for multi-family, low- to
middle-income housing.
REMIC: Real Estate Mortgage Investment Conduit, a
multiple-class security backed by
mortgage-backed securities or whole mortgage
loans and formed as a trust, corporation,
partnership, or segregated pool of assets
that elects to be treated as a REMIC for
federal tax purposes. Generally, Fannie Mae
REMICs are formed as trusts and are backed
by mortgage-backed securities.
REVERSE REPURCHASE AGREEMENTS: In a reverse repurchase agreement, the Trust
sells securities and agrees to repurchase
them at a mutually agreed date and price.
During this time, the Trust continues to
receive the principal and interest payments
from that security. At the end of the term,
the Trust receives the same securities that
were sold for the same initial dollar amount
plus interest on the cash proceeds of the
initial sale.
RESIDUALS: Securities issued in connection with
collateralized mortgage obligations that
generally represent the excess cash flow
from the mortgage assets underlying the CMO
after payment of principal and interest on
the other CMO securities and related
administrative expenses.
STRIPS: Arrangements in which a pool of assets is
separated into two classes that receive
different proportions of the interest and
principal distribution from underlying
mortgage-backed securities. IO's and PO's
are examples of strips.
24
<PAGE> 651
- -------------------------------------------------------------------------------
BLACKROCK FINANCIAL MANAGEMENT, INC.
SUMMARY OF CLOSED-END FUNDS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TAXABLE TRUSTS
- ---------------------------------------------------------------------------------------------------------------
MATURITY
STOCK SYMBOL DATE
<S> <C> <C>
PERPETUAL TRUSTS
The BlackRock Income Trust Inc. ......................................... BKT N/A
The BlackRock North American Government Income Trust Inc, ............... BNA N/A
TERM TRUSTS
The BlackRock 1998 Term Trust Inc. ...................................... BBT 12/98
The BlackRock 1999 Term Trust Inc. ...................................... BNN 12/99
The BlackRock Target Term Trust Inc. .................................... BTT 12/00
The BlackRock 2001 Term Trust Inc. ...................................... BLK 06/01
The BlackRock Strategic Term Trust Inc. ................................. BGT 12/02
The BlackRock Investment Quality Term Trust Inc. ........................ BQT 12/04
The BlackRock Advantage Term Trust Inc. ................................. BAT 12/05
The BlackRock Broad Investment Grade 2009 Term Trust Inc. ............... BCT 12/09
<CAPTION>
TAX-EXEMPT TRUSTS
- -------------------------------------------------------------------------------------------------------------------
MATURITY
STOCK SYMBOL DATE
<S> <C> <C>
PERPETUAL TRUSTS
The BlackRock Investment Quality Municipal Trust Inc. ................... BKN N/A
The BlackRock California Investment Quality Municipal Trust Inc. ........ RAA N/A
The BlackRock Florida Investment Quality Municipal Trust................. RFA N/A
The BlackRock New Jersey Investment Quality Municipal
Trust Inc............................................................ RNJ N/A
The BlackRock New York Investment Quality Municipal
Trust Inc............................................................ RNY N/A
TERM TRUSTS
The BlackRock Municipal Target Term Trust Inc. .......................... BMN 12/06
The BlackRock Insured Municipal 2008 Term Trust Inc. .................... BRM 12/08
The BlackRock California Insured Municipal 2008 Term
Trust Inc. ......................................................... BFC 12/08
The BlackRock Florida Insured Municipal 2008 Term Trust.................. BRF 12/08
The BlackRock New York Insured Municipal 2008 Term
Trust Inc. ........................................................ BLN 12/08
The BlackRock Insured Municipal Term Trust Inc. ......................... BMT 12/10
</TABLE>
If would like further information
please call BlackRock
25
<PAGE> 652
at (800) 227-7BFM (7236) or
consult with your financial advisor.
26
<PAGE> 653
- -------------------------------------------------------------------------------
BLACKROCK FINANCIAL MANAGEMENT, INC.
AN OVERVIEW
- -------------------------------------------------------------------------------
BlackRock Financial Management, Inc. (BlackRock), is a registered
investment adviser which specializes in managing high quality fixed income
securities, both taxable and tax-exempt. BlackRock currently manages over $32
billion of assets in 80 portfolios of government, mortgage, corporate and
municipal securities. These assets are managed on behalf of many individual
investors in twenty-one closed-end funds and four open-end funds and on behalf
of more than 80 institutional clients in the United States and overseas.
BlackRock's institutional investor base includes Chrysler Corporation Master
Retirement Trust, General Retirement System of the City of Detroit, State
Treasurer of Florida, Ford Motor Company Pension Plan, General Electric Pension
Trust and Unisys Corporation Master Trust.
BlackRock was formed in April 1988 by fixed income professionals who
sought to create an asset management firm specializing in managing fixed income
securities for individual and institutional investors. The professionals at
BlackRock have extensive experience creating, analyzing and trading a variety of
fixed income instruments, including the most complex structured securities. In
fact, individuals at BlackRock are responsible for many of the major innovations
in the mortgage-backed and asset-backed securities markets, including the
creation of the CMO, the floating rate CMO, the senior/subordinated pass-through
and the multi-class asset-backed security.
BlackRock is unique among asset management and advisory firms in the
significant emphasis it places on the development of proprietary analytical
capabilities. A quarter of the professionals at BlackRock work full-time in the
design, maintenance and use of such systems which are otherwise not generally
available to investors. BlackRock's proprietary analytical tools are used for
evaluating, investing in and designing investment strategies and portfolios of
fixed income securities, including mortgage securities, corporate debt
securities or tax-exempt securities and a variety of hedging instruments.
BlackRock has developed investment products which respond to investors'
needs and has been responsible for several major innovations in closed-end
funds. BlackRock introduced the first closed-end mortgage fund, the first
taxable and tax-exempt closed-end funds to offer a finite term, the first
closed-end fund to achieve a AAAf rating by Standard & Poor's, and the first
closed-end fund to invest primarily in North American Government securities.
BlackRock's closed-end funds currently have dividend reinvestment plans which
are designed to provide an ongoing source of demand for the stock in the
secondary market. BlackRock manages a ladder of alternative investment vehicles,
with each fund having specific investment objectives and policies.
In view of our continued desire to provide a high level of service to all
our shareholders, BlackRock maintains a toll-free number for your questions. The
number is (800) 227-7BFM (7236). We encourage you to call us with any questions
you may have about your BlackRock funds and thank you for the continued trust
you place in our abilities.
27
<PAGE> 654
DIRECTORS
Kent Dixon
Frank J. Fabozzi
James Grosfeld
OFFICERS
James Grosfeld, President
Frank J. Fabozzi, Vice President
Kent Dixon, Treasurer and Secretary
INVESTMENT ADVISER
BlackRock Financial Management, Inc.
345 Park Avenue
New York, NY 10154
(800) 227-7BFM
ADMINISTRATOR, CUSTODIAN AND TRANSFER AGENT
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281-1434
LEGAL COUNSEL
Skadden, Arps, Slate, Meagher & Flom
919 Third Avenue
New York, NY 10022
This report is for shareholder information. This is not a prospectus intended
for use in the purchase or sale of Trust shares.
THE BFM INSTITUTIONAL TRUST INC.
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
(800) 227-7BFM
<PAGE> 655
THE PNC(R) FUND
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
(1) Included in Part A hereof:
Financial Highlights For:
- New Jersey Tax-Exempt Income Portfolio
- Core Fixed Income Portfolio
- Multi-Sector Mortgage Securities Portfolio
III
(2) Included in Part B hereof:
The Semi-Annual Financial Statements and
related notes thereto for the New Jersey
Municipal Bond Fund of the Compass Capital
Group of Funds for the Fiscal period ended
August 31, 1995 are incorporated herein by
reference.
The Audited Financial Statements and related
notes thereto for the New Jersey Municipal
Bond Fund of the Compass Capital Group of
Funds for the fiscal year ended February 28,
1995 are incorporated herein by reference.
The Audited Financial Statements and related
notes thereto for the Core Fixed Income
Portfolio, Short Duration Portfolio and
Multi-Sector Mortgage Securities Portfolio
III of the BFM Institutional Trust Inc. for
the fiscal year or period ended June 30, 1995
are incorporated herein by reference.
C-1
<PAGE> 656
(b) Exhibits:
(1) (a) Declaration of Trust of the
Registrant dated December 22, 1988
is incorporated herein by reference
to Exhibit (1) of Registrant's
Registration Statement on Form N-1A
filed on December 23, 1988.
(b) Amendment No. 1 to Declaration of
Trust is incorporated herein by
reference to Exhibit (1)(b) of
Pre-Effective Amendment No. 2 to
Registrant's Registration Statement
on Form N-1A filed on May 11, 1989.
(c) Amendment No. 2 to the Declaration
of Trust dated December 23, 1993 is
incorporated herein by reference to
Exhibit (1)(c) of Post-Effective
Amendment No. 12 to Registrant's
Registration Statement on Form N-1A
filed on July 8, 1994.
(2) Registrant's Code of Regulations is
incorporated herein by reference to
Exhibit (2) of Form N-1A, filed on
December 23, 1988.
(3) None.
(4) (a) Specimen Copies of Share
Certificates for Shares of
beneficial interest in Class A-1,
Class A-2, Class A-3, Class B-1,
Class B-2, Class B-3, Class C-1,
Class C-2, Class C-3, Class D-1,
Class D-2, Class D-3, Class E-1,
Class E-2, Class E-3, Class F-1,
Class F-2, Class F-3, Class G-1,
Class G-2, Class G-3, Class H-1,
Class H-2, Class H-3, Class I-1,
Class I-2, Class I-3, Class J-1,
Class J-2, Class J-3, Class K-1,
Class K-2, Class K-3, Class L-1,
Class L-2, Class L-3, Class M-1,
Class M-2, Class M-3, Class N-1,
Class N-2, Class N-3, Class O-1,
Class O-2, Class O-3, Class P-1,
Class P-2, Class P-3 of the
Registrant are incorporated herein
by
C-2
<PAGE> 657
reference to Exhibit 4 of
Post-Effective Amendment No. 6 to
Registrant's Registration Statement
on Form N-1A filed on May 8, 1992.
(b) Form of Share Certificates for
Shares of beneficial interest in
Class Q-1, Class Q-2, Class Q-3,
Class R-1, Class R-2, Class R-3,
Class S-1, Class S-2, Class S-3,
Class T-1, Class T-2, Class T-3,
Class U-1, Class U-2, Class U-3 of
the Registrant are incorporated
herein by reference to Exhibit 4(b)
of Post-Effective Amendment No. 8 to
Registrant's Registration Statement
on Form N-1A filed on January 22,
1993.
(c) Form of Share Certificates for
Shares of beneficial interest in
Class V-1, Class V-2, Class V-3,
Class W-1, Class W-2, Class W-3,
Class X-1, Class X-2, Class X-3,
Class Y-1, Class Y-2 and Class Y-3
of the Registrant is incorporated
herein by reference to Exhibit
(4)(c) of Post-Effective Amendment
No. 10 to Registrant's Registration
Statement on Form N-1A filed on
November 10, 1993.
(d) Form of Share Certificates for
Shares of beneficial interest in
Class Z-1, Class Z-2 and Class Z-3
of the Registrant is incorporated
herein by reference to Exhibit
(4)(d) of Post-Effective Amendment
No. 15 to Registrant's Registration
Statement on Form N-1A filed on May
11, 1995.
(e) Form of Share Certificates for
Shares of beneficial interest in
Class AA-1, Class AA-2, Class AA-3,
Class AA-4, Class BB-1, Class BB-2,
Class BB-3, Class BB-4, Class CC-1,
Class CC-2, Class CC-3, and Class
CC-4.
(5) (a) Investment Advisory Agreement
between Registrant and PNC
Institutional Management Corporation
with respect to the Money Market,
Government Money Market, Municipal
Money Market, Managed Income, Growth
Equity, International Equity and
Balanced Portfolios is incorporated
herein by reference to Exhibit 5(a)
of Post-Effective Amendment No. 1 to
Registrant's Registration Statement
on Form N-1A filed on December 29,
1989.
(b) Letter Agreement between Registrant
and PNC Institutional Management
Corporation
C-3
<PAGE> 658
relating to advisory services for the
Tax-Free Income Portfolio is
incorporated herein by reference to
Exhibit 5(b) of Post-Effective
Amendment No. 2 to Registrant's
Registration Statement on Form N-1A
filed on April 30, 1990.
(c) Sub-Advisory Agreement between PNC
Institutional Management Corporation
and PNC Bank, National Association
with respect to the Money Market
Portfolio and Government Money
Market Portfolio is incorporated
herein by reference to Exhibit 5(c)
of Post-Effective Amendment No. 1 to
Registrant's Registration Statement
on Form N-1A filed on December 29,
1989.
(d) Sub-Advisory Agreement between PNC
Institutional Management Corporation
and PNC Bank, National Association
with respect to the Balanced and
Tax-Free Income Portfolios is
incorporated herein by reference to
Exhibit 5(d) of Post-Effective
Amendment No. 2 to Registrant's
Registration Statement on Form N-1A
filed on April 30, 1990.
(e) Sub-Advisory Agreement dated April
20, 1992 between PNC Institutional
Management Corporation and Provident
Capital Management, Inc. with
respect to the International Equity
Portfolio is incorporated herein by
reference to Exhibit (5)(f) of
Post-Effective Amendment No. 10 to
Registrant's Registration Statement
on Form N-1A filed on November 10,
1993.
(f) Investment Advisory Agreement dated
February 3, 1992 between Registrant
and PNC Institutional Management
Corporation relating to the
Intermediate Government, Value
Equity, Small Cap Value Equity,
Pennsylvania Tax-Free Income, Ohio
Tax-Free Income, Pennsylvania
Municipal Money Market and Ohio
Municipal Money Market Portfolios is
incorporated herein by reference to
Exhibit (5)(g) of Post-Effective
Amendment No. 10 to
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<PAGE> 659
Registrant's Registration Statement
on Form N-1A filed on November 10,
1993.
(g) Investment Advisory Agreement dated
December 17, 1993 between the
Registrant and PNC Institutional
Management Corporation relating to
the Virginia Municipal Money Market,
Government Income, International
Fixed Income and International
Emerging Markets Portfolios is
incorporated herein by reference to
Exhibit (5)(h) of Post-Effective
Amendment No. 12 to Registrant's
Registration Statement on Form N-1A
filed on July 8, 1994.
(h) Sub-Advisory Agreement dated
February 3, 1992 between PNC
Institutional Management Corporation
and PNC Bank, National Association
with respect to the Ohio Municipal
Money Market Portfolio is
incorporated herein by reference to
Exhibit (5)(h) of Post-Effective
Amendment No. 10 to Registrant's
Registration Statement on Form N-1A
filed on November 10, 1993.
(i) Sub-Advisory Agreement dated
February 3, 1992 between PNC
Institutional Management Corporation
and PNC Bank, National Association
with respect to the Pennsylvania
Municipal Money Market Portfolio is
incorporated herein by reference to
Exhibit (5)(i) of Post-Effective
Amendment No. 10 to Registrant's
Registration Statement on Form N-1A
filed on November 10, 1993.
(j) Sub-Advisory Agreement dated
February 3, 1992 between PNC
Institutional Management Corporation
and Provident Capital Management,
Inc. with respect to the Value
Equity Portfolio is incorporated
herein by reference to Exhibit
(5)(m) of Post-Effective Amendment
No. 10 to Registrant's Registration
Statement on Form N-1A filed on
November 10, 1993.
(k) Sub-Advisory Agreement dated
February 3, 1992 between PNC
Institutional Management Corporation
and Provident
C-5
<PAGE> 660
Capital Management, Inc. with respect
to the Small Cap Value Equity
Portfolio is incorporated herein by
reference to Exhibit (5)(n) of
Post-Effective Amendment No. 10 to
Registrant's Registration Statement
on Form N-1A filed on November 10,
1993.
(l) Investment Advisory Agreement dated
March 1, 1993 between Registrant and
PNC Institutional Management
Corporation relating to the
Short-Term Bond, Intermediate-Term
Bond, Core Equity, Small Cap Growth
Equity and North Carolina Municipal
Money Market Portfolios is
incorporated herein by reference to
Exhibit (5)(p) of Post-Effective
Amendment No. 10 to Registrant's
Registration Statement on Form N-1A
filed on November 10, 1993.
(m) Sub-Advisory Agreement dated March
1, 1993 between PNC Institutional
Management Corporation and PNC Bank,
National Association relating to the
North Carolina Municipal Money
Market Portfolio is incorporated
herein by reference to Exhibit
(5)(r) of Post-Effective Amendment
No. 10 to Registrant's Registration
Statement on Form N-1A filed on
November 10, 1993.
(n) Sub-Advisory Agreement dated
September 10, 1993 between PNC
Institutional Management Corporation
and PNC Bank, National Association
relating to the Municipal Money
Market Portfolio is incorporated
herein by reference to Exhibit
(5)(s) of Post-Effective Amendment
No. 10 to Registrant's Registration
Statement on Form N-1A filed on
November 10, 1993.
(o) Sub-Advisory Agreement dated
December 17, 1993 between PNC
Institutional Management Corporation
and PNC Bank, National Association
with respect to the Virginia
Municipal Money Market Portfolio is
incorporated herein by reference to
Exhibit (5)(x) of Post-Effective
Amendment No. 12 to
C-6
<PAGE> 661
Registrant's Registration Statement
on Form N-1A filed on July 8, 1994.
(p) Sub-Advisory Agreement dated
December 17, 1993 between PNC
Institutional Management Corporation
and Provident Capital Management,
Inc. with respect to the
International Fixed Income Portfolio
is incorporated herein by reference
to Exhibit (5)(z) of Post-Effective
Amendment No. 12 to Registrant's
Registration Statement on Form N-1A
filed on July 8, 1994.
(q) Sub-Advisory Agreement dated
December 17, 1993 between PNC
Institutional Management Corporation
and Provident Capital Management,
Inc. with respect to the
International Emerging Markets
Portfolio is incorporated herein by
reference to Exhibit (5)(aa) of
Post-Effective Amendment No. 12 to
Registrant's Registration Statement
on Form N-1A filed on July 8, 1994.
(r) Form of Investment Advisory
Agreement between the Registrant and
PNC Institutional Management
Corporation relating to the New
Jersey Municipal Money Market
Portfolio is incorporated herein by
reference to Exhibit (5)(r) of
Post-Effective Amendment No. 15 to
Registrant's Registration Statement
on Form N-1A filed on May 11, 1995.
(s) Form of Sub-Advisory Agreement
between PNC Institutional Management
Corporation and PNC Bank, National
Association with respect to the New
Jersey Municipal Money Market
Portfolio is incorporated herein by
reference to Exhibit (5)(s) of
Post-Effective Amendment No. 15 to
Registrant's Registration Statement
on Form N-1A filed on May 11, 1995.
(t) Form of Sub-Advisory Agreement
between PNC Institutional Management
Corporation and PNC Equity Advisors
Company with respect to the Core
Equity Portfolio is incorporated
herein by reference to Exhibit
(5)(t) of Post-Effective Amendment
No. 15 to Registrant's
C-7
<PAGE> 662
Registration Statement on Form N-1A
filed on May 11, 1995.
(u) Form of Sub-Advisory Agreement
between PNC Institutional Management
Corporation and PNC Equity Advisors
Company with respect to the Growth
Equity Portfolio is incorporated
herein by reference to Exhibit
(5)(u) of Post-Effective Amendment
No. 15 to Registrant's Registration
Statement on Form N-1A filed on May
11, 1995.
(v) Form of Sub-Advisory Agreement
between PNC Institutional Management
Corporation and PNC Equity Advisors
Company with respect to the Small
Cap Growth Equity Portfolio is
incorporated herein by reference to
Exhibit (5)(v) of Post-Effective
Amendment No. 15 to Registrant's
Registration Statement on Form N-1A
filed on May 11, 1995.
(w) Form of Sub-Advisory Agreement
between PNC Institutional Management
Corporation and BlackRock Financial
Management, Inc. with respect to the
Managed Income Portfolio is
incorporated herein by reference to
Exhibit (5)(x) of Post-Effective
Amendment No. 15 to Registrant's
Registration Statement on Form N-1A
filed on May 11, 1995.
(x) Form of Sub-Advisory Agreement
between PNC Institutional Management
Corporation and BlackRock Financial
Management, Inc. with respect to the
Intermediate Government Portfolio is
incorporated herein by reference to
Exhibit (5)(y) of Post-Effective
Amendment No. 15 to Registrant's
Registration Statement on Form N-1A
filed on May 11, 1995.
(y) Form of Sub-Advisory Agreement
between PNC Institutional Management
Corporation and BlackRock Financial
Management, Inc. with respect to the
Ohio Tax-Free Income Portfolio is
incorporated herein by reference to
Exhibit (5)(z) of Post-Effective
Amendment No. 15 to Registrant's
Registration Statement on Form N-1A
filed on May 11, 1995.
C-8
<PAGE> 663
(z) Form of Sub-Advisory Agreement
between PNC Institutional Management
Corporation and BlackRock Financial
Management, Inc. with respect to the
Pennsylvania Tax-Free Income
Portfolio is incorporated herein by
reference to Exhibit (5)(aa) of
Post-Effective Amendment No. 15 to
Registrant's Registration Statement
on Form N-1A filed on May 11, 1995.
(aa) Form of Sub-Advisory Agreement
between PNC Institutional Management
Corporation and BlackRock Financial
Management, Inc. with respect to the
Short-Term Bond Portfolio is
incorporated herein by reference to
Exhibit (5)(bb) of Post-Effective
Amendment No. 15 to Registrant's
Registration Statement on Form N-1A
filed on May 11, 1995.
(bb) Form of Sub-Advisory Agreement
between PNC Institutional Management
Corporation and BlackRock Financial
Management, Inc. with respect to the
Intermediate-Term Bond Portfolio is
incorporated herein by reference to
Exhibit (5)(cc) of Post-Effective
Amendment No. 15 to Registrant's
Registration Statement on Form N-1A
filed on May 11, 1995.
(cc) Form of Sub-Advisory Agreement
between PNC Institutional Management
Corporation and BlackRock Financial
Management, Inc. with respect to the
Government Income Portfolio is
incorporated herein by reference to
Exhibit (5)(dd) of Post-Effective
Amendment No. 15 to Registrant's
Registration Statement on Form N-1A
filed on May 11, 1995.
(dd) Sub-Advisory Agreement between PNC
Institutional Management Corporation
and BlackRock Financial Management,
Inc. with respect to the Tax-Free
Income Portfolio.
(ee) Form of Investment Advisory
Agreement between Registrant and PNC
Asset Management Group, Inc.
relating to all Portfolios except
the Multi-Sector Mortgage Securities
Portfolio III.
(ff) Form of Investment Advisory
Agreement between Registrant and
BlackRock Financial Management, Inc.
with respect to the Multi-Sector
Mortgage Securities Portfolio III.
(gg) Form of Sub-Advisory Agreement
between PNC Asset Management Group,
Inc. and BlackRock Financial
Management, Inc./ Provident Capital
Management, Inc./ PNC Equity
Advisors Company/ and PNC
Institutional Management
Corporation.
(hh) Form of Sub-Advisory Agreement
between PNC Asset Management Group,
Inc. and Morgan Grenfell Investment
Series Limited with respect to the
International Fixed Income
Portfolio.
(6) (a) Distribution Agreement between
Registrant and Provident
Distributors, Inc. dated January 31,
1994 is incorporated herein by
reference to Exhibit (6)(a) of
Post-Effective Amendment No. 12 to
Registrant's Registration Statement
on Form N-1A filed on July 8, 1994.
(b) Appendix A to the Distribution
Agreement dated January 31, 1994
between Registrant and Provident
Distributors,
C-9
<PAGE> 664
Inc. is incorporated herein by
reference to Exhibit (6)(b) of
Post-Effective Amendment No. 15 to
Registrant's Registration Statement
on Form N-1A filed on May 11, 1995.
(c) Amendment No. 2 to the Distribution
Agreement between Registrant and
Provident Distributors, Inc. dated
October 18, 1994 is incorporated
herein by reference to Exhibit 6(c)
of Post-Effective Amendment No. 14
to Registrant's Registration
Statement on Form N-1A filed on
January 18, 1995.
(7) Fund Office Retirement
Profit-Sharing Plan and Related
Adoption Agreement is incorporated
herein by reference to Exhibit (7)
of Post-Effective Amendment No. 15
to Registrant's Registration
Statement on Form N-1A filed on May
11, 1995.
(8) (a) Custodian Agreement dated October 4,
1989 between Registrant and PNC
Bank, National Association is
incorporated herein by reference to
Exhibit 8(a) of Post-Effective
Amendment No. 1 to Registrant's
Registration Statement on Form N-1A
filed on December 29, 1989.
(b) Amendment No. 1 to Custodian
Agreement between Registrant and PNC
Bank, National Association is
incorporated herein by reference to
Exhibit 8(b) of Post-Effective
Amendment No. 4 to Registrant's
Registration Statement on Form N-1A
filed on December 13, 1991.
(c) Amendment No. 2 dated March 1, 1993
to Custodian Agreement between
Registrant and PNC Bank, National
Association with respect to the
Short-Term Bond, Intermediate-Term
Bond, Core Equity, Small Cap Growth
Equity and North Carolina Municipal
Money Market Portfolios is
incorporated herein by reference to
Exhibit (8)(c) of Post-Effective
Amendment No. 10 to Registrant's
Registration Statement on Form N-1A
filed on November 10, 1993.
C-10
<PAGE> 665
(d) Form of Appendix B to Custodian
Agreement dated October 4, 1989
between Registrant and PNC Bank,
National Association.
(e) Sub-Custodian Agreement dated April
27, 1992 among the Registrant, PNC
Bank, National Association and The
Chase Manhattan Bank is incorporated
herein by reference to Exhibit
(8)(e) of Post-Effective Amendment
No. 10 to Registrant's Registration
Statement on Form N-1A filed on
November 10, 1993.
(f) Global Sub-Custody Agreement between
Barclays Bank PLC and PNC Bank,
National Association dated October
28, 1992 is incorporated herein by
reference to Exhibit (8)(e) of
Post-Effective Amendment No. 14 to
Registrant's Registration Statement
on Form N-1A filed on January 18,
1995.
(g) Custodian Agreement between State
Street Bank and Trust Company and
PNC Bank, National Association dated
June 13, 1983 is incorporated herein
by reference to Exhibit (8)(f) of
Post-Effective Amendment No. 14 to
Registrant's Registration Statement
on Form N-1A filed on January 18,
1995.
(h) Amendment No. 1 to Custodian
Agreement between State Street Bank
and Trust Company and PNC Bank dated
November 21, 1989 is incorporated
herein by reference to Exhibit
(8)(g) of Post-Effective Amendment
No. 14 to Registrant's Registration
Statement on Form N-1A filed on
January 18, 1995.
(i) Letter Agreement between Registrant
and PNC Bank, National Association
relating to custodian services with
respect to the Tax-Free Income
Portfolio is incorporated herein by
reference to Exhibit 8(d) of
Post-Effective Amendment No. 7 to
Registrant's Registration
C-11
<PAGE> 666
Statement on Form N-1A filed on
December 1, 1992.
(j) Letter Agreement between Registrant
and PNC Bank, National Association
relating to custodian services with
respect to the Ohio Municipal Money
Market, Pennsylvania Municipal Money
Market, Intermediate Government,
Ohio Tax-Free Income, Pennsylvania
Tax-Free Income, Value Equity, Index
Equity and Small Cap Value Equity
Portfolios is incorporated herein by
reference to Exhibit (8)(e) of
Post-Effective Amendment No. 7 to
Registrant's Registration Statement
on Form N-1A filed on December 1,
1992.
(k) Letter Agreement dated March 1, 1993
between Registrant and PNC Bank,
National Association relating to
custodian services with respect to
the North Carolina Municipal Money
Market, Short-Term Bond,
Intermediate-Term Bond, Small Cap
Growth Equity and Core Equity
Portfolios is incorporated herein by
reference to Exhibit (8)(h) of
Post-Effective Amendment No. 10 to
Registrant's Registration Statement
on Form N-1A filed on November 10,
1993.
(9) (a) Administration Agreement dated
January 18, 1993 among Registrant,
PFPC Inc. and Provident
Distributors, Inc. is incorporated
herein by reference to Exhibit 9(a)
of Post-Effective Amendment No. 8 to
Registrant's Registration Statement
on Form N-1A filed on January 22,
1993.
(b) Amendment No. 1 to the
Administration Agreement dated
January 18, 1993 among Registrant,
PFPC Inc. and Provident
Distributors, Inc. dated September
23, 1994 is incorporated herein by
reference to Exhibit (9)(b) of
Post-Effective Amendment No. 14 to
Registrant's Registration Statement
on Form N-1A filed on January 18,
1995.
(c) Form of Appendix A to the
Administration Agreement dated
January 18, 1993 among Registrant,
PFPC Inc. and Provident
C-12
<PAGE> 667
Distributors, Inc..
(d) Amendment No. 2 to the
Administration Agreement dated
January 18, 1993 among Registrant,
PFPC Inc. and Provident
Distributors, Inc. is incorporated
herein by reference to Exhibit
(9)(d) of Post-Effective Amendment
No. 14 to Registrant's Registration
Statement on Form N-1A filed on
January 18, 1995.
(e) Form of Appendix A to the
Administration Agreement among
Registrant, PFPC Inc. and Provident
Distributors, Inc.
(f) Transfer Agency Agreement dated
October 4, 1989 between Registrant
and PFPC Inc. is incorporated herein
by reference to Exhibit 9(e) of
Post-Effective Amendment No. 1 to
Registrant's Registration Statement
on Form N-1A filed on December 29,
1989.
(g) Amendment No. 1 to Transfer Agency
Agreement dated October 4, 1989
between Registrant and PFPC Inc.
relating to the Tax-Free Income
Portfolio is incorporated herein by
reference to Exhibit 9(h) of
Post-Effective Amendment No. 5 to
Registrant's Registration Statement
on Form N-1A filed on February 5,
1992.
(h) Amendment No. 2 to Transfer Agency
Agreement dated October 4, 1989
between Registrant and PFPC Inc.
relating to the Pennsylvania
Municipal Money Market, Ohio
Municipal Money Market, Intermediate
Government, Ohio Tax-Free Income,
Pennsylvania Tax-Free Income, Value
Equity, Index Equity and Small Cap
Value Equity Portfolios is
incorporated herein by reference to
Exhibit 9(h) of Post-Effective
Amendment No. 4 to Registrant's
Registration Statement on Form N-1A
filed on December 13, 1991.
(i) Amendment No. 3 to Transfer Agency
Agreement dated October 4, 1989
between Registrant and PFPC Inc.
relating to the Short-Term Bond,
Intermediate-Term Bond, Core Equity,
Small Cap Growth Equity and
C-13
<PAGE> 668
North Carolina Municipal Money Market
Portfolios is incorporated herein by
reference to Exhibit (9)(e) of
Post-Effective Amendment No. 10 to
Registrant's Registration Statement
on Form N-1A filed on November 10,
1993.
(j) Amendment No. 4 to Transfer Agency
Agreement dated October 4, 1989
between Registrant and PFPC Inc.
relating to Series B Investor Shares
of the Money Market, Managed Income,
Tax-Free Income, Intermediate
Government, Ohio Tax-Free Income,
Pennsylvania Tax-Free Income, Value
Equity, Growth Equity, Index Equity,
Small Cap Value Equity,
Intermediate-Term Bond, Small Cap
Growth Equity, Core Equity,
International Fixed Income,
Government Income, International
Emerging Markets, International
Equity and Balanced Portfolios is
incorporated herein by reference to
Exhibit (9)(i) of Post-Effective
Amendment No. 14 to Registrant's
Registration Statement on Form N-1A
filed on January 18, 1995.
(k) Form of Appendix C to Transfer
Agency Agreement between Registrant
and PFPC Inc.
(l) Amended and Restated Service Plan
dated January 21, 1993 for Service
Shares and Form of Servicing
Agreement for Service Shares is
incorporated herein by reference to
Exhibit 9(f) of Post-Effective
Amendment No. 8 to Registrant's
Registration Statement on Form N-1A
filed on January 22, 1993.
(m) Series B Service Plan dated
September 23, 1994 is incorporated
herein by reference to Exhibit
(9)(l) of Post-Effective Amendment
No. 15 to Registrant's Registration
Statement on Form N-1A filed on May
11, 1995.
(n) Form of Amended and Restated
Distribution and Service Plan for
Service, Series A Investor, Series B
Investor, Series C Investor and
Institutional Shares.
(o) Trademark License Agreement between
Registrant and PNC Bank Corp. is
C-14
<PAGE> 669
incorporated herein by reference to
Exhibit 9(h) of Post-Effective
Amendment No. 1 to Registrant's
Registration Statement on Form N-1A
filed on December 29, 1989.
(10) Opinion and Consent of Counsel.(1)
(11) (a) Consent of Coopers & Lybrand.
(b) Consent of Deloitte & Touche LLP.
(c) Consent of Drinker Biddle & Reath.
(12) None.
(13) (a) Purchase Agreement between
Registrant and Shearson Lehman
Hutton Inc. ("Shearson") relating to
Classes A-1, B-1, C-1, D-2, E-2, F-2
and G-2 is incorporated herein by
reference to Exhibit 13(a) of
Post-Effective Amendment No. 1 to
Registrant's Registration Statement
on Form N-1A filed on December 29,
1989.
(b) Purchase Agreement between
Registrant and Shearson relating to
shares of Class H-2 is incorporated
herein by reference to Exhibit 13(b)
of Post-Effective Amendment No. 2 to
Registrant's Registration Statement
on Form N-1A filed on April 30,
1990.
(c) Purchase Agreement between
Registrant and Shearson relating to
shares of Class I-1, Class I-2,
Class J-1, Class J-2, Class K-2,
Class L-2, Class M-2, Class N-2,
Class O-2 and Class P-2 is
incorporated herein by reference to
Exhibit 13(c) of Post-Effective
Amendment No. 4 to Registrant's
Registration Statement on Form N-1A
filed on December 13, 1991.
(d) Purchase Agreement between
Registrant and Shearson relating to
shares of Class D-1, Class E-1,
Class F-1, Class G-1, Class H-1,
Class K-1, Class L-1, Class M-1,
Class N-1, Class O-1, Class P-1,
- ----------------------------------
1. Filed on October 7, 1994 under Rule 24f-2 as part of Registrant's Rule
24f-2 Notice.
C-15
<PAGE> 670
Class A-2, Class B-2, Class C-2,
Class I-2, Class J-2, Class A-3,
Class B-3, Class C-3, Class D-3,
Class E-3, Class F-3, Class G-3,
Class H-3, Class I-3, Class J-3,
Class K-3, Class L-3, Class M-3,
Class N-3, Class O-3 and Class P-3
is incorporated herein by reference
to Exhibit (13)(d) of Post-
Effective Amendment No. 7 to
Registrant's Registration Statement
on Form N-1A filed on December 1,
1992.
(e) Purchase Agreement between the
Registrant and Pennsylvania Merchant
Group Ltd relating to shares of
Class Q-1, Class Q-2, Class Q-3,
Class R-1, Class R-2, Class R-3,
Class S-1, Class S-2, Class S-3,
Class T-1, Class T-2, Class T-3,
Class U-1, Class U-2 and Class U-3
is incorporated herein by reference
to Exhibit (13)(e) of Post-Effective
No. 10 to Registrant's Registration
Statement on Form N-1A as filed on
November 10, 1993.
(f) Purchase Agreement dated September
30, 1994 between the Registrant and
Provident Distributors, Inc.
relating to shares of Class A-4,
Class D-4, Class E-4, Class F-4,
Class G-4, Class H-4, Class K-4,
Class L-4, Class M-4, Class N-4,
Class O-4, Class P-4, Class R-4,
Class S-4, Class T-4, Class U-4,
Class W-4, Class X-4, Class Y-4 is
incorporated herein by reference to
Exhibit (13)(f) of Post-Effective
Amendment No. 14 to Registrant's
Registration Statement on Form N-1A
filed on January 18, 1995.
(g) Purchase Agreement dated February 1,
1994 between the Registrant and
Provident Distributors, Inc.
relating to shares of Class V-1,
Class V-2, Class V-3, Class W-1,
Class W-2, Class W-3, Class X-1,
Class X-2, Class X-3, Class Y-1,
Class Y-2 and Class Y-3 is
incorporated herein by reference to
Exhibit (13)(g) of Post-Effective
Amendment No. 15 to Registrant's
Registration Statement on Form N-1A
filed on May 11, 1995.
C-16
<PAGE> 671
(h) Purchase Agreement dated August 1,
1995 between Registrant and
Provident Distributors, Inc.
relating to shares of Class Z-1,
Class Z-2 and Class Z-3 is
incorporated herein by reference to
Exhibit (13)(h) of Post-Effective
Amendment No. 15 to Registrant's
Registration Statement on Form N-1A
filed on May 11, 1995.
(i) Form of Purchasing Agreement
between Registrant and Provident
Distributors, Inc. relating to
shares of Class AA-1, Class AA-2,
Class AA-3, Class AA-4, Class BB-1,
Class BB-2, Class BB-3, Class BB-4,
Class CC-1, Class CC-2, Class CC-3
and Class CC-4.
(14) None.
(15) (a) Amended and Restated Series A
Distribution and Service Plan dated
January 21, 1993 and Form of Series
A Distribution and Servicing
Agreement is incorporated herein by
reference to Exhibit 15(a) of
Post-Effective Amendment No. 8 to
Registrant's Registration Statement
on Form N-1A filed on January 22,
1993.
(b) Series B Distribution Plan dated
September 23, 1994 is incorporated
herein by reference to Exhibit
(15)(b) of Post-Effective Amendment
No. 14 to Registrant's Registration
Statement on Form N-1A filed on
January 18, 1995.
(16) Schedules for computation of
performance quotations are
incorporated herein by reference to
Exhibit (16) of Post-Effective
Amendment No. 5 to Registrant's
Registration Statement on Form N-1A
filed on February 5, 1992.
(18) Plan Pursuant to Rule 18f-3 for
Operation of a Multi-Class
Distribution System is incorporated
herein by reference to Exhibit (18)
of Post-Effective Amendment No. 17
to the Registrant's Registration
Statement on Form N-1A filed on
October 6, 1995.
Item 25. Persons Controlled by or under Common Control with Registrant
Registrant is controlled by its Board of Trustees.
Item 26. Number of Holders of Securities
Provident Distributors, Inc. has provided the initial
capitalization for and holds all of the outstanding shares of beneficial
interest of the following classes as of September 29, 1995: D-4, F-4, H-4, K-4,
N-4, O-4, R-4, S-4, T-4, U-4, V-2, X-1, X-3 and Y-4.
C-17
<PAGE> 672
With regard to the other portfolios, the following information
is as of September 29, 1995.
<TABLE>
<CAPTION>
Title of Class Number of Record Holders
-------------- ------------------------
<S> <C>
Class A-1 29
Class B-1 48
Class C-1 11
Class D-1 6
Class E-1 1
Class F-1 5
Class G-1 6
Class H-1 2
Class I-1 2
Class J-1 7
Class K-1 1
Class L-1 1
Class M-1 1
Class N-1 7
Class O-1 1
Class P-1 6
Class Q-1 3
Class R-1 1
Class S-1 1
Class T-1 6
Class U-1 6
Class V-1 1
Class W-1 0
Class Y-1 6
Class A-2 357
Class B-2 44
Class C-2 8
Class D-2 352
Class E-2 2055
Class F-2 270
Class G-2 654
Class H-2 211
Class I-2 3
Class J-2 26
Class K-2 125
Class L-2 42
Class M-2 525
Class N-2 517
Class O-2 203
Class P-2 735
Class Q-2 2
Class R-2 16
Class S-2 24
Class T-2 249
Class U-2 57
Class W-2 0
Class X-2 21
</TABLE>
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<PAGE> 673
<TABLE>
<S> <C>
Class Y-2 90
Class A-3 4
Class B-3 2
Class C-3 3
Class D-3 10
Class E-3 6
Class F-3 21
Class G-3 23
Class H-3 2
Class I-3 5
Class J-3 20
Class K-3 8
Class L-3 2
Class M-3 1
Class N-3 31
Class O-3 6
Class P-3 26
Class Q-3 14
Class R-3 2
Class S-3 9
Class T-3 23
Class U-3 18
Class V-3 5
Class W-3 0
Class Y-3 6
Class A-4 1
Class E-4 359
Class G-4 263
Class L-4 7
Class M-4 139
Class P-4 246
Class W-4 0
Class X-4 522
</TABLE>
Item 27. Indemnification
Indemnification of Registrant's principal underwriter against
certain losses is provided for in Section 7 of the Distribution Agreement filed
herein as Exhibit (6)(a). Indemnification of PFPC Inc. and Provident
Distributors, Inc. in their capacity as co-administrators is provided for in
Section 7 of the Administration Agreement filed herein as Exhibit 9(e).
Indemnification of Registrant's Custodian and Transfer Agent is provided for,
respectively, in Section 22 of the Custodian Agreement filed herein as Exhibit
8(a) and Section 17 of the Transfer Agency Agreement filed herein as Exhibit
9(e). Registrant intends to obtain from a major insurance carrier a trustees'
and officers' liability policy covering certain types of errors and omissions.
In addition, Section 9.3 of the Registrant's Declaration of Trust incorporated
by reference herein as Exhibit 1(a) provides as follows:
C-19
<PAGE> 674
Indemnification of Trustees, Officers, Representatives and
Employees. The Trust shall indemnify each of its Trustees against all
liabilities and expenses (including amounts paid in satisfaction of
judgments, in compromise, as fines and penalties, and as counsel fees)
reasonably incurred by him in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or
criminal, in which he may be involved or with which he may be
threatened, while as a Trustee or thereafter, by reason of his being or
having been such a Trustee except with respect to any matter as to
which he shall have been adjudicated to have acted in bad faith,
willful misfeasance, gross negligence or reckless disregard of his
duties, provided that as to any matter disposed of by a compromise
payment by such person, pursuant to a consent decree or otherwise, no
indemnification either for said payment or for any other expenses shall
be provided unless the Trust shall have received a written opinion from
independent legal counsel approved by the Trustees to the effect that
if either the matter of willful misfeasance, gross negligence or
reckless disregard of duty, or the matter of bad faith had been
adjudicated, it would in the opinion of such counsel have been
adjudicated in favor of such person. The rights accruing to any person
under these provisions shall not exclude any other right to which he
may be lawfully entitled, provided that no person may satisfy any right
of indemnity or reimbursement hereunder except out of the property of
the Trust. The Trustees may make advance payments in connection with
the indemnification under this Section 9.3, provided that the
indemnified person shall have given a written undertaking to reimburse
the Trust in the event it is subsequently determined that he is not
entitled to such indemnification.
The Trustee shall indemnify officers, representatives and
employees of the Trust to the same extent that Trustees are entitled to
indemnification pursuant to this Section 9.3.
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to trustees, officers and controlling
persons of Registrant pursuant to the foregoing provisions, or otherwise,
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by Registrant
of expenses incurred or paid by a trustee, officer or controlling person of
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such trustee, officer or controlling person in connection with the
securities being registered, Registrant will, unless in the opinion of its
C-20
<PAGE> 675
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Section 9.6 of the Registrant's Declaration of Trust, filed
herein as Exhibit 1(a), also provides for the indemnification of shareholders
of the Registrant. Section 9.6 states as follows:
Indemnification of Shareholders. In case any Shareholder or
former Shareholder shall be held to be personally liable solely by
reason of his being or having been a Shareholder and not because of his
acts or omissions or for some other reason, the Shareholder or former
Shareholder (or his heirs, executors, administrators or other legal
representatives or, in the case of a corporation or other entity, its
corporate or other general successor) shall be entitled out of the
assets belonging to the classes of Shares with the same alphabetical
designation as that of the Shares owned by such Shareholder to be held
harmless from and indemnified against all loss and expense arising from
such liability. The Trust shall, upon request by the Shareholder,
assume the defense of any claim made against any Shareholder for any
act or obligations of the Trust and satisfy any judgment thereon from
such assets.
Item 28. Business and Other Connections of Investment Advisers
PNC Institutional Management Corporation ("PIMC") performs
investment advisory services for Registrant and certain other investment
companies. PIMC and its predecessors have been in the business of managing the
investments of fiduciary and other accounts in the Philadelphia area since
1847. In addition to its trust business, PIMC provides commercial banking
services.
(a) To Registrant's knowledge, none of the directors or
officers of PIMC, except those set forth below, is, or has been at any time
during Registrant's past two fiscal years, engaged in any other business,
profession, vocation or employment of a substantial nature, except that certain
directors and officers and certain executives of PIMC also hold various
positions with, and engage in business for, PNC Bank Corp, which indirectly
owns all the outstanding stock of PIMC, or other subsidiaries of PNC Bank Corp.
Set forth below are the names and principal businesses of the directors and
certain executives of PIMC who are engaged in any other business, profession,
vocation or employment of a substantial nature.
C-21
<PAGE> 676
(b) To Registrant's knowledge, none of the directors or
officers of PNC Bank, National Association, except those set forth below, is,
or has been at any time during Registrant's past two fiscal years, engaged in
any other business, profession, vocation or employment of a substantial nature,
except that certain directors and officers and certain executives of PNC Bank,
National Association also hold various positions with, and engage in business
for, PNC Bank Corp., which indirectly owns all the outstanding stock of PNC
Bank, National Association, or other subsidiaries of PNC Bank Corp. Set forth
below are the names and principal businesses of the directors and certain
executives of PNC Bank, National Association who are engaged in any other
business, profession, vocation or employment of a substantial nature.
(c) Provident Capital Management, Inc. ("PCM") is an
indirect wholly-owned subsidiary of PNC Bank Corp. PCM currently offers
investment advisory services to institutional investors such as pension and
profit-sharing plans or trusts, insurance companies and banks. To Registrant's
knowledge, none of the directors or officers of PCM, except those set forth
below, is, or has been at any time during the Registrant's past two fiscal
years, engaged in any business, profession, vocation or employment of a
substantial nature. Set forth below are the names and principal businesses of
the directors and certain executives of PCM who are engaged in any other
business, profession, vocation or employment of a substantial nature.
(d) BlackRock Financial Management, Inc. ("BlackRock") is an
indirect wholly-owned subsidiary of PNC Bank Corp. BlackRock currently offers
investment advisory services to institutional investors such as pension and
profit-sharing plans or trusts, insurance companies and banks. To Registrant's
knowledge, none of the directors or officers of PCM, except those set forth
below, is, or has been at any time during the Registrant's past two fiscal
years, engaged in any business, profession, vocation or employment of a
substantial nature. Set forth below are the names and principal businesses of
the directors and certain executives of PCM who are engaged in any other
business, profession, vocation or employment of a substantial nature.
(e) PNC Equity Advisors Company ("PEAC") is an indirect
wholly-owned subsidiary of PNC Bank Corp. PEAC currently offers investment
advisory services to institutional investors such as pension and profit-sharing
plans or trusts, insurance companies and banks. To Registrant's knowledge,
none of the directors or officers of PEAC, except those set forth below, is, or
has been at any time during the Registrant's past two fiscal years, engaged in
any business, profession, vocation or employment of a substantial nature. Set
forth below are the names and principal businesses of the directors and certain
executives of PEAC who
C-22
<PAGE> 677
are engaged in any other business, profession, vocation or employment of a
substantial nature.
(f) Morgan Grenfell Investment Services Limited ("MGIS") is a
subsidiary of Morgan Grenfell Asset Management. The list required by this Item
28 of officers and directors of MGIS, together with information as to any other
business, profession, vocation or employment of a substantial nature engaged in
by such officers and directors during the past two years, is incorporated by
reference to Schedules A and D of Form ADV, filed by MGIS pursuant to the
Investment Advisers Act of 1940 (SEC File No. 801-12880).
C-23
<PAGE> 678
PNC INSTITUTIONAL MANAGEMENT CORPORATION
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
POSITION WITH OTHER BUSINESS TYPE OF
PIMC NAME CONNECTIONS BUSINESS
- ------------- ------------------ -------------- --------
<S> <C> <C> <C>
Chairman and J. Richard Carnall Executive Vice President Banking
Director PNC Bank, National
Association (1)
Director Banking
PNC National Bank (2)
Chairman and Director Financial-
PFPC Inc. (3) Related
Services
Director Fiduciary
PNC Trust Company Activities
of New York (11)
Director Equipment
Hayden Bolts, Inc.*
Director Real
Parkway Real Estate Company* Estate
Director Investment
Provident Capital Management Advisory
Inc. (5)
Director Richard C. Caldwell Executive Vice President Banking
PNC Bank, National
Association (1)
Director, Chairman PNC Investment
Asset Management Group, Advisory
Inc. (30)
Director, PNC Equity Advisors Investment
Company * Advisory
Director PNC Bank, Banking
New England (26)
Director, PNC Bank, FSB (27) Fiduciary
Activities
Director, BlackRock Financial Investment
Management, Inc. (15) Advisory
Director Banking
PNC National Bank (2)
Director Fiduciary
PNC Trust Company Activities
of New York (11)
Director, Provident Investment
</TABLE>
C-24
<PAGE> 679
<TABLE>
<CAPTION>
POSITION WITH OTHER BUSINESS TYPE OF
PIMC NAME CONNECTIONS BUSINESS
- ------------- ------------------ -------------- --------
<S> <C> <C> <C>
Capital Management Inc. (5) Advisory
Executive Vice President Bank
PNC Bank Corp. (14) Holding
Company
Director Banking
PNC Bank, New Jersey,
National Association (16)
Director Financial-
PFPC Inc. (3) Related
Services
Director Richard L. Smoot President and Chief Banking
Executive Officer
PNC Bank, National
Association (1)
Senior Vice President Bank
PNC Bank Corp. (14) Holding
Company
Director Financial-
PFPC Inc. (3) Related
Services
Director Fiduciary
PNC Trust Company of NY (11) Activities
Director, Chairman and President Banking
PNC Bank, New Jersey, National
Association (16)
Director, Chairman, and CEO Banking
PNC National Bank (2)
Chairman & Director Leasing
PNC Credit Corp (13)
Secretary Michelle L. Petrilli Chief Counsel Banking
PNC Bank, DE (20)
Secretary Financial-
PFPC Inc. (3) Related
Services
</TABLE>
C-25
<PAGE> 680
<TABLE>
<CAPTION>
POSITION WITH OTHER BUSINESS TYPE OF
PIMC NAME CONNECTIONS BUSINESS
- ------------- ------------------ -------------- --------
<S> <C> <C> <C>
President and Thomas H. Nevin None.
Chief Investment
Officer
Chief Financial Nicholas M. Marsini,Jr. Senior Vice President Banking
Officer PNC Bank, National
Association (1)
Director Financial
PFPC Inc. (3) Related
Services
Senior Vice President and Banking
Chief Financial Officer
PNC Bank, Delaware (20)
Director, Vice President and Banking
Treasurer
PNC National Bank (2)
Director Banking
PNC Bank, New Jersey
National Association (16)
Director Fiduciary
PNC Trust Company of Activities
New York (11)
Director and Treasurer Holding
PNC Bancorp, Inc. (9) Company
Director and Treasurer Investment
PNC Capital Corp. (17) Activities
Director and Treasurer Banking
PNC Holding Corp. (18)
Director and Treasurer Investment
PNC Venture Corp. (19) Activities
Executive Vice Charles B. Landreth Vice President
President PNC Bank, National Association (1) Banking
Senior Vice Vincent J. Ciavardini President and Chief Financial-
President Financial Officer Related
PFPC Inc. (3) Services
</TABLE>
C-26
<PAGE> 681
<TABLE>
<CAPTION>
POSITION WITH OTHER BUSINESS TYPE OF
PIMC NAME CONNECTIONS BUSINESS
- ------------- ------------------ -------------- --------
<S> <C> <C>
Senior Vice Scott Moss None.
President
Senior Vice John N. Parthemore None.
President
Senior Vice Dushyant Pandit None.
President
Senior Vice James R. Smith None.
President
Group Vice William F. Walsh None.
President
Vice President, Stephen M. Wynne Executive Vice President and Financial-
Chief Chief Accounting Officer Related
Accounting PFPC Inc. (3) Services
Officer and
Assistant Secretary
Controller Pauline M. Heintz Vice President Financial-
PFPC Inc. (3) Related
Services
Vice President John R. Antczak None.
Vice President Jeffrey W. Carson None.
Vice President Katherine A. Chuppe None.
Vice President Mary J. Coldren None.
Vice President Michele C. Dillion None.
Vice President Patrick J. Ford None.
Vice President Richard Hoerner None.
Vice President Michael S. Hutchinson None.
Vice President Michael J. Milligan None.
Vice President Allyn Plambeck None.
Vice President W. Don Simmons None.
Vice President Charles Allen Stiteler None.
</TABLE>
- -------
*Information regarding this corporation can be obtained from the office of the
Secretary.
C-27
<PAGE> 682
PNC BANK, NATIONAL ASSOCIATION
DIRECTORS
<TABLE>
<CAPTION>
POSITION WITH OTHER BUSINESS TYPE OF
PNC BANK NAME CONNECTIONS BUSINESS
-------- ---- ----------- --------
<S> <C> <C> <C>
Director B.R. Brown President and C.E.O. of Coal
Consol, Inc.
Consol Plaza
Pittsburgh, PA 15241
Director Constance E. Clayton Chief, Division of Community Health Care Medical
Medical College of Pennsylvania
3300 Hinley Avenue, Office 4338
Philadelphia, PA 19129
Director Eberhard Faber, IV Chairman and C.E.O. Manufacturing
E.F.L., Inc.
450 Hedge Road
P.O. Box 49
Bearcreek, PA 18602
Director Dr. Stuart Heydt President and C.E.O. Medical
Geisinger Foundation
100 N. Academy Avenue
Danville, PA 17822
Director Edward P. Junker, III Vice Chairman Banking
PNC Bank, N.A.
Ninth and State Streets
Erie, PA 16553
Director Thomas A. McConomy President, C.E.O. and Manufacturing
Chairman, Calgon Carbon
Corporation
P.O. Box 717
Pittsburgh, PA 15230-0717
Director Robert C. Milsom Retired
PNC Bank, National Association
One PNC Plaza, Suite 2310
Pittsburgh, PA 15265
Director Thomas H. O'Brien Chairman Banking
PNC Bank, National Association
One PNC Plaza, 30th Floor
Pittsburgh, PA 15265
Director Dr. J. Dennis O'Connor Chancellor, University Education
of Pittsburgh
107 Cathedral of Learning
Pittsburgh, PA 15260
Director Rocco A. Ortenzio Chairman and C.E.O. Medical
Continental Medical
Systems, Inc.
P.O. Box 715
Mechanicsburg, PA 17055
</TABLE>
C-28
<PAGE> 683
<TABLE>
<S> <C> <C> <C>
Director Jane G. Pepper President Horticulture
Pennsylvania Horticultural Society
325 Walnut Street
Philadelphia, PA 19106
Director Robert C. Robb, Jr. President, Lewis, Eckert, Financial and
Robb & Company Management
425 One Plymouth Meeting Consultants
Plymouth Meeting, PA 19462
Director James E. Rohr President and C.E.O. Bank Holding
PNC Bank, National Association Company
One PNC Plaza, 30th Floor
Pittsburgh, PA 15265
Director Daniel M. Rooney President, Pittsburgh Steelers Football
Football Club of the National Football
League
300 Stadium Circle
Pittsburgh, PA 15212
Director Seth E. Schofield Chairman, President and C.E.O. Airline
USAir Group, Inc. and
USAir, Inc.
2345 Crystal Drive
Arlington, VA 22227
Director Robert M. Valentini President and C.E.O. Communications
Bell Atlantic - Pennsylvania, Inc.
One Parkway, 18th Floor
Philadelphia, PA 19102
</TABLE>
C-29
<PAGE> 684
PNC BANK, NATIONAL ASSOCIATION
OFFICERS
<TABLE>
<CAPTION>
POSITION
WITH
NAME PNC BANK OTHER BUSINESS CONNECTIONS
---- -------- --------------------------
<S> <C> <C>
John W. Atkinson Executive Vice President None
Richard C. Caldwell Executive Vice President Director, D.R. Corp. *
Investment Officer, J.L. Caldwell Company *
Council Member, Pennsylvania Horticultural Society (32)
Director, PFPC Inc. (3)
Executive Vice President, Investment Management and Trust, PNC
Bank Corp. (14)
J. Richard Carnall Executive Vice President Director, Franklin Institute (The) *
Director, Hayden Bolts,
Inc. *
Director, Parkway Real Estate Company *
Director, PNC Trust Company of New York (11)
Director, Provident Capital Management, Inc. (5)
Chairman and Director, PFPC
Inc. (3)
Chairman and Director,
PIMC (29)
Frederick C. Frank, III Executive Vice President Director, PNC National
Bank (2)
Director, PNC National Bank of New Jersey (16)
William J. Friel Executive Vice President Director, Cedarbrook Country Club *
Advisory Board Member, Chicago Title & Abstract *
Director, National Adoption Agency *
</TABLE>
C-30
<PAGE> 685
<TABLE>
<CAPTION>
POSITION
WITH
NAME PNC BANK OTHER BUSINESS CONNECTIONS
---- -------- --------------------------
<S> <C> <C>
G. Robert Hoffman Executive Vice President Director, J.W. Pepper & Sons, Inc. *
Director, Land Holding Corp. of PA *
Chairman, President and Director, Provident Realty Management,
Inc. (7)
Chairman, President and Director, Provident Realty, Inc. (8)
</TABLE>
C-31
<PAGE> 686
<TABLE>
<CAPTION>
POSITION
WITH
NAME PNC BANK OTHER BUSINESS CONNECTIONS
---- -------- --------------------------
<S> <C> <C>
Joe R. Irwin Executive Vice President Member of the Executive Committee and Director
Blue Cross of Western Pennsylvania *
Director
Civic Light Opera
(Non-Profit Enterprise) *
Chairman of the Board
Dinamo
(Non-Profit Enterprise) *
Treasurer and Director
Girls' Hope
(Non-Profit Organization) *
Member of the Executive Committee and Director
Greater Pittsburgh Chamber of Commerce *
Member of the Governing Council
Pennsylvania Bankers Association *
Chairman
Pennsylvania Economy League, Inc. *
Chairman, Annual Sustaining Fund Campaign
Pittsburgh Opera *
Executive Vice President and Chief Investment Officer
PNC Bank Corp. (14)
Chairman, Chief Executive Officer and Director
PNC Funding Corp. *
Chairman and Director
PNC International Bank *
Chairman and Director
PNC International Bank (New York) *
Chairman and Director
PNC International Investment Corporation *
Director
PNC Mortgage Bank, N.A. *
</TABLE>
C-32
<PAGE> 687
<TABLE>
<CAPTION>
POSITION
WITH
NAME PNC BANK OTHER BUSINESS CONNECTIONS
---- -------- --------------------------
<S> <C> <C>
Joe R. Irwin (Cont'd.) Director
PNC Mortgage Corp. of
America *
Director
Ruffed Grouse Society, The
(Non-Profit Enterprise) *
Edward P. Junker, III Vice Chairman Vice Chairman, PNC Bank
and Director Corp. (14)
Director, PNC Mortgage Bank, N.A. *
Director, PNC Mortgage Corp. of America *
Louis J. Myers President and CEO, PNC None
Bank, Northeast, PA
</TABLE>
C-33
<PAGE> 688
<TABLE>
<CAPTION>
POSITION
WITH
NAME PNC BANK OTHER BUSINESS CONNECTIONS
---- -------- --------------------------
<S> <C> <C>
Thomas H. O'Brien Chairman and Director Director, Allegheny Club (Non-Profit Corporation) *
Chairman and Director, Allegheny Conference on Community
Development (Non-Profit Organization) *
Director, Alpine Indemnity Limited *
Director, Bell Atlantic Corporation (31)
Trustee, Carnegie (The) *
Director, Central Bancorporation, Inc. (The) *
Director, Children's Hospital (Non-Profit Corporation) *
Director, Governor Casey's Pennsylvania Economic Development
Partnership *
Director, Hilb, Rogal and Hamilton Co. *
Chairman - Board of Visitors, Katz Graduate School of Business *
Director, Laurel Valley Golf Club *
Director, Pittsburgh Baseball, Inc. *
Co-Chairman of the Board of Directors, Pittsburgh Opera (The) *
President, PNC Bancorp,
Inc. (9)
Chairman, CEO & Director, PNC Bank Corp. (14)
Director, PNC Investment Corp. (6)
Chairman and Director, PNC Trust Company of Florida, N.A. (27)
Director, United Way of S.W. PA (Non-Profit Organization)
</TABLE>
C-34
<PAGE> 689
<TABLE>
<CAPTION>
POSITION
WITH
NAME PNC BANK OTHER BUSINESS CONNECTIONS
---- -------- --------------------------
<S> <C> <C>
Trustee, University of Pittsburgh (31)
Charles C. Pearson, Jr. President and CEO, PNC Director and Chairman, Chamber of Business and Industry of
Bank, Central, PA Centre County *
Partner, Charrob
Investments *
Trustee, Juniata College *
Partner, LPNS c/o Cir
Realty *
Director, Second Mile *
Director, Uni-Marts, Inc. *
Partner, University Drive Associates *
John V. Petrycki President and CEO, PNC Director, Allied Arts Fund, Inc. (of Harrisburg) *
Bank, Southcentral, PA
Director, Capital Region Economic Development Corporation *
Director, Channels *
Director, Keystone Sports Foundation *
Director, West Short YMCA *
</TABLE>
C-35
<PAGE> 690
<TABLE>
<CAPTION>
POSITION
WITH
NAME PNC BANK OTHER BUSINESS CONNECTIONS
---- -------- --------------------------
<S> <C> <C>
Edward V. Randall, Jr. President and CEO, PNC Board of Trustees, Carlow College *
Bank, Pittsburgh
Board Member, Cities in Schools *
Board of Trustees, Landmarks Financial Corporation *
Board of Trustees, Landmarks Real Estate Corporation *
Board Member, Pittsburgh Downtown Partnership *
Board Member, Pittsburgh History & Landmarks Foundation *
Director Emeritus, Pittsburgh Partnership for Neighborhood
Development *
Member, Advisory Committee Transportation & Technology Museum *
Member, Board of Visitors University of Pittsburgh School of
Social Work (Non-Profit Organization) *
</TABLE>
C-36
<PAGE> 691
<TABLE>
<CAPTION>
POSITION
WITH
NAME PNC BANK OTHER BUSINESS CONNECTIONS
---- -------- --------------------------
<S> <C> <C>
James E. Rohr President, CEO and Director, Allegheny Ludlum Corporation *
Director
Director, Alpine Indemnity Limited *
Committee Member, American Bankers Association Commercial Lending
Div. Exec. Com. *
Director, American Cancer Society *
Director, Boy Scouts of America *
Business Advisory Council, Graduate School of Industrial Adm.
Carnegie Mellon University *
Trustee, Penn's Southwest Association *
President and Director, Pittsburgh National Bank Foundation *
Chairman and Director, PNB Holdings, Inc. *
President and Director, PNC Bank Corp. (14)
Director, PNC International Bank (New York) *
Chairman, President, CEO and Director, PNC Mortgage Bank, N.A. *
Director, PNC Mortgage Corp. of America *
Director, River City Brass Bank (Non-Profit
Corporation) *
Chairman - Advisory Board, Salvation Army (Non-Profit
Organization) *
Director, Shady Side Health, Education and Research
Center *
Director, St. Vincent College
</TABLE>
C-37
<PAGE> 692
<TABLE>
<CAPTION>
POSITION
WITH
NAME PNC BANK OTHER BUSINESS CONNECTIONS
---- -------- --------------------------
<S> <C> <C>
A. William Schenck, III Vice Chairman Board of Directors, Allegheny General Hospital (Non-Profit
Organization) *
Director, Consumer Bankers Association *
Board of Directors, Forward Products, Inc. *
Board of Directors, Health & Welfare Planning Association
(Non-Profit Organization) *
Chairman, Leadership Pittsburgh Steering
Committee *
Director, Massachusetts Company, (The) *
Board of Directors, Metropolitan Pittsburgh Public Broadcasting,
Inc. (Non-Profit Organization) *
Joint Ownership with wife Mikell Schenck, Mikell Schenck
Associates *
1989 PBA Convention Committee Member, Pennsylvania Bankers
Association Group 8 (Non-Profit Organization) *
Chairman and Director, Pinaco, Inc. *
Board of Trustees, Pittsburgh Ballet Theater (Non-Profit
Organization) *
Regional Advisory Council Member, Pittsburgh Cancer Institute
(Non-Profit Organization) *
Board of Trustees, Pittsburgh Center for the Arts (Non-Profit
Organization) *
Vice President and Director, Pittsburgh National Bank
Foundation *
Chairman and Director, Pittsburgh National Life Insurance Co.
</TABLE>
C-38
<PAGE> 693
<TABLE>
<CAPTION>
POSITION
WITH
NAME PNC BANK OTHER BUSINESS CONNECTIONS
---- -------- --------------------------
<S> <C>
Director, Pittsburgh Theological Seminary *
Committee Member, Pittsburgh Trust for Cultural Resources
(Non-Profit Organization) *
Executive Vice President - PNC Retail Banking, PNC Bank Corp.
(14)
Director, PNC Mortgage Bank, N.A. *
Director, PNC Mortgage Corp. of America *
Board of Trustee, Three Rivers Shakespeare Festival (Non-Profit
Organization) *
Board of Directors, Urban League of Pittsburgh, Inc. (Non-Profit
Organization) *
Director, Visa U.S.A., Inc. *
Director, Wiser Oil Company *
Board of Trustee, YMCA of Pittsburgh (Non-Profit Organization) *
</TABLE>
C-39
<PAGE> 694
<TABLE>
<CAPTION>
POSITION
WITH
NAME PNC BANK OTHER BUSINESS CONNECTIONS
---- -------- --------------------------
<S> <C> <C>
Richard L. Smoot President and CEO of PNC Trustee, Agnes Irwin School (32)
Bank, Philadelphia
Board of Council, Episcopal Community Services (33)
Director, Greater Philadelphia Chamber of Commerce (34)
Director, Greater Philadelphia First Corporation (The) (35)
Director, Greater Philadelphia Urban Affairs Coalition (The) (42)
Director, Pennsylvania
Ballet (36)
Director, Philadelphia Orchestra (The) (37)
Chairman and Director, PNC Credit Corp. (13)
Chairman, CEO and Director, PNC National Bank (1)
Chairman, President and Director, PNC National Bank of
New Jersey (16)
Director, PNC Service
Corp. (4)
Director, PNC Trust Company of New York (11)
Director, Police Athletic League of Philadelphia (38)
Director, PFPC Inc. (3)
Director, PIMC (29)
Director, Settlement Music School (39)
Director, St. John's
College *
Director, United Negro College Fund, Inc. (41)
Director, Widener Univ. (40)
</TABLE>
C-40
<PAGE> 695
<TABLE>
<CAPTION>
POSITION
WITH
NAME PNC BANK OTHER BUSINESS CONNECTIONS
---- -------- --------------------------
<S> <C> <C>
Herbert G. Summerfield, Jr. Executive Vice President Director, CBM-Old York Associates, Inc. *
Director, CBM-Walnut Hill, Inc. *
Director, Pennsylvania Mountain, Inc. *
Executive Vice President - PNC Real Estate, PNC Bank Corp. (14)
Chairman and Director, PNC Realty Holding Corp. *
Director, PNC Realty Holding Corp. of Georgia *
Director, PNC Realty Holding Corp. of Florida *
Director, PNC Realty Holding Corp. of Kentucky *
Director, PNC Realty Holding Corp. of Mississippi *
Director, PNC Realty Holding Corp. of New Jersey *
Director, PNC Realty Holding Corp. of Ohio *
Director, PNC Realty Holding Corp. of Pennsylvania *
Director, PNC Realty Holding Corp. of Texas *
Director, PNC Realty Mortgage Company *
Director, Regional Industrial Development Corp. of
Southwestern, PA *
Director, Special Asset Holdings of Michigan, Inc. *
Malcolm C. Wilson Executive Vice President Board of Trustees, People's Light & Theatre Company *
Senior Vice President and Director, PNC National Bank of
New Jersey (16)
</TABLE>
C-41
<PAGE> 696
PROVIDENT CAPITAL MANAGEMENT INC.
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
NAME TITLE OTHER BUSINESS CONN.
---- ----- --------------------
<S> <C> <C>
Richard C. Caldwell Director See PIMC list
Ernest E. Ceilia Director Director, CIO, President, CEO, PNC
Equity Advisors Company (28)
Director, Equity Research, PNC Asset
Management Group,
Inc. (30)
Director, Equity Research, PNC Bank,
National Association (1)
Robert J. Christian Director Chairman, Director, PNC Equity
Advisors
Company (28)
Director, President, CIO, PNC Asset
Management Group, Inc. (30)
Chief Investment Officer, PNC Bank,
National Association (1)
Young D. Chin Director, President & CEO Director, PNC Asset Management
Group,
Inc. (30)
Director, PNC Equity Advisors
Company (28)
Senior Vice President, Investment
Strategy, PNC Bank, National
Association (1)
</TABLE>
C-42
<PAGE> 697
PROVIDENT CAPITAL MANAGEMENT INC.
DIRECTORS AND OFFICERS
<TABLE>
<S> <C> <C>
Timothy M. Alles Treasurer Director, PNC Trust Company of New
York (11)
Treasurer, PNC Service Corp. (4)
Vice President, PNC Bank Corp. (14)
Vice President and Controller, PNC
Bank, FSB (27)
Controller, Provident National
Financial Corp.*
Treasurer, Provident Realty Inc. (8)
Treasurer, PNC New Jersey Credit
Corp. (10)
Beth Wagner-Coyne Vice President None
Lynn K. Shipman Secretary None
Earl J. Gaskins Vice President None
Larry Bernstein Vice President None
J. H. Hill, Jr. Vice President None
Susan D. Menzies Vice President None
Edwin B. Powell Vice President None
Herve Van Caloen Vice President None
</TABLE>
C-43
<PAGE> 698
BLACKROCK FINANCIAL MANAGEMENT INC.
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
NAME TITLE OTHER BUSINESS CONN.
---- ----- --------------------
<S> <C> <C>
Scott M. Amero Managing Director VP of 10 BlackRock closed end funds
Keith T. Anderson Managing Director VP of 21 BlackRock closed end funds
Richard C. Caldwell Director See PIMC List
Wesley R. Edens Managing Director COO & Director of 4 BlackRock closed
end funds
Laurence D. Fink Chairman and Director Chairman & Director of 25 BlackRock
closed end funds; and Director of
PNC Asset Management Group, Inc.
Hugh R. Frater Managing Director None
Henry Gabbay Chief Operating Officer and Managing Treasurer of 25 BlackRock closed end
Director funds
Bennett W. Golub, Ph.D. Managing Director None
Charles S. Hallac Managing Director None
Michael C. Huebsch Managing Director VP of 21 BlackRock closed end funds
Robert S. Kapito Managing Director VP of 21 BlackRock closed end funds
P. Phillip Matthews Managing Director None
Barbara G. Novick Managing Director Secretary of 21 BlackRock closed end
funds
Karen H. Sabath Managing Director Assistant Secretary of 21 BlackRock
closed end funds
Ralph L. Schlosstein President & Director President & Director of 21 BlackRock
closed end funds; and President of 4
BlackRock closed end funds
Joel M. Shaiman Managing Director None
J. Robert Small Principal & Controller Assistant Secretary of 4 BlackRock
closed end funds
Susan L. Wagner Managing Director Secretary of 4 BlackRock closed end
funds
</TABLE>
C-44
<PAGE> 699
PNC EQUITY ADVISORS COMPANY
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
NAME TITLE OTHER BUSINESS CONN.
---- ----- --------------------
<S> <C> <C>
Timothy M. Alles CFO, Treasurer See Provident Capital Management
List
Richard C. Caldwell Director See PIMC List
Ernest E. Cecilia Director, CIO, President & CEO See Provident Capital Management
List
Young D. Chin Director See Provident Capital Management
List
Robert J. Christian Chairman and Director See Provident Capital Management
List
Lisa P. Howard Chief Compl. Officer None
Leah L. Tompkins Secretary, Chief Legal Counsel Senior Counsel, PNC Bank, National
Association (1)
Thomas H. O'Brien CEO, PNC Bank Corp. None
</TABLE>
C-45
<PAGE> 700
(1) PNC Bank, National Association, 120 S. 17th Street, Philadelphia, PA
19103; Broad & Chestnut Streets, Philadelphia, PA 19101; and 17th and
Chestnut Streets, Philadelphia, PA 19103.
(2) PNC National Bank, 103 Bellevue Parkway, Wilmington, DE 19809.
(3) PFPC Inc., 400 Bellevue Parkway, Wilmington, DE 19809.
(4) PNC Service Corp, 103 Bellevue Parkway, Wilmington, DE 19809.
(5) Provident Capital Management, Inc., 30 S. 17th Street, Suite 1500,
Philadelphia, PA 19103.
(6) PNC Investment Corp., Broad and Chestnut Streets, Philadelphia, PA
19101.
(7) Provident Realty Management, Inc., Broad and Chestnut Streets,
Philadelphia, PA 19101.
(8) Provident Realty, Inc., Broad and Chestnut Streets, Philadelphia, PA
19101.
(9) PNC Bancorp, Inc., 3411 Silverside Road, Wilmington, DE 19810.
(10) PNC New Jersey Credit Corp, 1415 Route 70 East, Suite 604, Cherry
Hill, NJ 08034.
(11) PNC Trust Company of New York, 40 Broad Street, New York, NY 10084.
(12) Provcor Properties, Inc., Broad and Chestnut Streets, Philadelphia, PA
19101.
(13) PNC Credit Corp, 103 Bellevue Parkway, Wilmington, DE 19809.
(14) PNC Bank Corp., 5th Avenue and Wood Streets, Pittsburgh, PA 15265.
(15) BlackRock Financial Management Inc., 435 Park Avenue, New York, NY
10154.
(16) PNC Bank, New Jersey, National Association, Woodland Falls Corporate
Park, 210 Lake Drive East, Cherry Hill, NJ 08002.
(17) PNC Capital Corp, 5th Avenue and Woods Streets, Pittsburgh, PA 15265.
(18) PNC Holding Corp, 222 Delaware Avenue, P.O. Box 791, Wilmington, DE
19899.
(19) PNC Venture Corp, 5th Avenue and Woods Streets, Pittsburgh, PA 15265.
(20) Bank of Delaware, 200 Delaware Avenue, Wilmington, DE 19801.
(21) Bank of Delaware Corp., 300 Delaware Avenue, Wilmington, DE 19801.
(22) Del-Vest, Inc., 300 Delaware Avenue, Wilmington, DE 19801.
(23) Marand Corp., 222 Delaware Avenue, Wilmington, DE 19801.
(24) Millsboro Insurance Agency, 300 Delaware Avenue, Wilmington, DE
19801.
(25) Roney-Richards, Inc., 300 Delaware Avenue, Wilmington, DE 19801.
(26) PNC Bank, New England (f/k/a The Massachusetts Company), 125 High
Street, Boston, MA.
(27) PNC Bank, FSB, P.O. Box 4026, Vero Beach, FL.
(28) PNC Equity Advisors Company, 1835 Market Street, 15th Floor, Eleven
Penn Center, Philadelphia, PA 19103.
C-46
<PAGE> 701
(29) PNC Institutional Management Corporation 400 Bellevue Parkway,
Wilmington, DE 19809.
(30) PNC Asset Management Group, Inc. 1835 Market Street, 15th Floor,
Eleven Penn Center, Philadelphia, PA 19103.
(31) Bell Atlantic Corporation, 1717 Arch Street, Philadelphia, PA 19102.
(32) Agnes Irwin School, Ithan Avenue and Conestoga Road, P. O. Box 407,
Rosemont, PA 19010.
(33) Episcopal Community Services, 225 South 3rd Street, Philadelphia, PA
19106.
(34) Greater Philadelphia Chamber of Commerce, 1234 Market Street,
Philadelphia, PA 19107.
(35) The Greater Philadelphia First Corporation, 1818 Market Street,
Philadelphia, PA 19103.
(36) Pennsylvania Ballet, 1101 South Broad Street, Philadelphia, PA 19147.
(37) The Philadelphia Orchestra, 1420 Locust Street, Philadelphia, PA
19102.
(38) Police Athletic League of Philadelphia, 3201 North 5th Street,
Philadelphia, PA 19140.
(39) Settlement Music School, 416 Queen Street, Philadelphia, PA 19147.
(40) Widener University, One University Plaza, Chester, PA 19013.
(41) United Negro College Fund Inc., 1650 Arch Street, Philadelphia, PA
19103.
(42) The Greater Philadelphia Urban Affairs Coalition, 1207 Chestnut
Street, Philadelphia, PA 19107.
* address unavailable
C-47
<PAGE> 702
Item 29. Principal Underwriter
(a) Provident Distributors, Inc. currently acts as
distributor for, in addition to the Registrant, Temporary Investment Fund,
Inc., Municipal Fund for Temporary Investment, Municipal Fund for California
Investors, Inc., and Municipal Fund for New York Investors, Inc.
(b) The information required by this Item 29 with respect
to each director, officer or partner of Provident Distributors, Inc. is
incorporated by reference to Schedule A of FORM BD filed by Provident
Distributors, Inc. with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934.
(c) Not applicable.
Item 30. Location of Accounts and Records
(1) PNC Bank, National Association, Broad and
Chestnut Streets, Philadelphia, Pennsylvania
19102 (records relating to its functions as
custodian and as sub-investment adviser.
(2) Provident Capital Management, Inc., 30 South
17th Street, Philadelphia, Pennsylvania 19103
(records relating to its functions as
sub-investment adviser to the International
Equity Portfolio).
(3) Provident Distributors, Inc., 259
Radnor-Chester Road, Suite 135, Radnor,
Pennsylvania 19807 (records relating to its
functions as distributor and
co-administrator).
(4) PNC Institutional Management Corporation,
Bellevue Corporate Center, 103 Bellevue
Parkway, Wilmington, Delaware 19809 (records
relating to its functions as investment
adviser).
(5) BlackRock Financial Management, Inc., 345
Park Avenue, New York, New York 10154
(records relating to its functions as
sub-adviser).
(6) PNC Equity Advisors Company, 1835 Market
Street, 15th Floor, Philadelphia,
Pennsylvania 19103 (records relating to its
functions as sub-adviser).
C-48
<PAGE> 703
(7) PFPC Inc., Bellevue Corporate Center, 400
Bellevue Parkway, Wilmington, Delaware 19809
(records relating to its functions as
co-administrator, transfer agent and dividend
disbursing agent).
(8) The Chase Manhattan Bank, N.A., 1285 Avenue
of the Americas, New York, New York 10019
(records relating to its function as
sub-custodian).
(9) State Street Bank and Trust Company, P.O. Box
1631, Boston, Massachusetts (records relating
to its function as sub-custodian).
(10) Barclays Bank PLC, 75 Wall Street, New York,
New York 10265 (records relating to its
function as sub-custodian).
(11) Morgan Grenfell Investment Services Limited,
20 Finsbury Circus, London, England ECZM1NB
(records relating to its functions as sub-
adviser).
(12) PNC Mutual Fund Company, 345 Park Avenue,
New York, New York 10154
(records relating to its functions as co-
administrator).
(13) Drinker Biddle & Reath, Philadelphia National
Bank Building, 1345 Chestnut Street,
Philadelphia, Pennsylvania 19107-3496
(registrant's declaration of trust, code of
regulations and minute books).
Item 31. Management Services
None.
Item 32. Undertakings
Registrant undertakes to furnish each person to whom a
prospectus is delivered with a copy of Registrant's latest
annual report to shareholders upon request and without charge.
C-49
<PAGE> 704
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933
(the "1933 Act") and the Investment Company Act of 1940, the Registrant has
duly caused this Amendment No. 18 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Philadelphia and the
Commonwealth of Pennsylvania on the 12th day of October, 1995.
THE PNC FUND
Registrant
By /s/ G. Willing Pepper
--------------------------------
G. Willing Pepper, Chairman of
the Board and President
(Principal Executive Officer)
Pursuant to the requirements of the 1933 Act, this
Post-Effective Amendment No. 18 to the Registration Statement has been signed
by the following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ G. Willing Pepper Chairman of the
- --------------------- Board and President October 12, 1995
(G. Willing Pepper) (Principal Executive
Officer)
*David R. Wilmerding, Jr. Vice-Chairman of October 12, 1995
- -------------------------- the Board
(David R. Wilmerding, Jr.)
/s/ Edward J. Roach Vice-President
- -------------------- and Treasurer
(Edward J. Roach) (Principal
Financial and
Accounting Officer) October 12, 1995
*Robert R. Fortune Trustee October 12, 1995
- ------------------------
(Robert R. Fortune)
*Philip E. Coldwell Trustee October 12, 1995
- ------------------------
(Philip E. Coldwell)
*Rodney D. Johnson Trustee October 12, 1995
- ------------------------
(Rodney D. Johnson)
*Anthony M. Santomero Trustee October 12, 1995
- ------------------------
(Anthony M. Santomero)
</TABLE>
*By: /s/ Edward J. Roach
---------------------------------
Edward J. Roach, Attorney-in-Fact
<PAGE> 705
The PNC(R) Fund
POWER OF ATTORNEY
Robert R. Fortune, whose signature appears below, hereby
constitutes and appoints G. Willing Pepper and Edward J. Roach, and either of
them, his true and lawful attorneys and agents, with power of substitution or
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorneys and agents, or either of them, may deem
necessary or advisable or which may be required to enable The PNC Fund (the
"Company") to comply with the Investment Company Act of 1940, as amended, and
the Securities Act of 1933, as amended (collectively, the "Acts"), and any
rules, regulations or requirements of the Securities and Exchange Commission in
respect thereof, in connection with the filing and effectiveness of any and all
amendments (including post-effective amendments) to the Company's Registration
Statement pursuant to said Acts, including specifically, but without limiting
the generality of the foregoing, the power and authority to sign in the name
and on behalf of the undersigned as a trustee and/or officer of the Company any
and all such amendments filed with the Securities and Exchange Commission under
said Acts, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorneys and agents,
or either of them, shall do or cause to be done by virtue hereof.
/s/ Robert R. Fortune
---------------------
Date: January 21, 1993
<PAGE> 706
The PNC(R) Fund
POWER OF ATTORNEY
G. Willing Pepper, whose signature appears below, hereby
constitutes and appoints Edward J. Roach his true and lawful attorney and
agent, with power of substitution or resubstitution, to do any and all acts and
things and to execute any and all instruments which said attorney and agent may
deem necessary or advisable or which may be required to enable The PNC Fund
(the "Company") to comply with the Investment Company Act of 1940, as amended,
and the Securities Act of 1933, as amended (collectively, the "Acts"), and any
rules, regulations or requirements of the Securities and Exchange Commission in
respect thereof, in connection with the filing and effectiveness of any and all
amendments (including post-effective amendments) to the Company's Registration
Statement pursuant to said Acts, including specifically, but without limiting
the generality of the foregoing, the power and authority to sign in the name
and on behalf of the undersigned as a trustee and/or officer of the Company any
and all such amendments filed with the Securities and Exchange Commission under
said Acts, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorney and agent
shall do or cause to be done by virtue hereof.
/s/ G. Willing Pepper
---------------------
Date: January 21, 1993
<PAGE> 707
The PNC(R) Fund
POWER OF ATTORNEY
David R. Wilmerding, Jr., whose signature appears below, hereby
constitutes and appoints G. Willing Pepper and Edward J. Roach, and either of
them, his true and lawful attorneys and agents, with power of substitution or
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorneys and agents, or either of them, may deem
necessary or advisable or which may be required to enable The PNC Fund (the
"Company") to comply with the Investment Company Act of 1940, as amended, and
the Securities Act of 1933, as amended (collectively, the "Acts"), and any
rules, regulations or requirements of the Securities and Exchange Commission in
respect thereof, in connection with the filing and effectiveness of any and all
amendments (including post-effective amendments) to the Company's Registration
Statement pursuant to said Acts, including specifically, but without limiting
the generality of the foregoing, the power and authority to sign in the name
and on behalf of the undersigned as a trustee and/or officer of the Company any
and all such amendments filed with the Securities and Exchange Commission under
said Acts, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorneys and agents,
or either of them, shall do or cause to be done by virtue hereof.
/s/ David R. Wilmerding, Jr.
----------------------------
Date: January 21, 1993
<PAGE> 708
The PNC(R) Fund
POWER OF ATTORNEY
Philip E. Coldwell, whose signature appears below, hereby
constitutes and appoints G. Willing Pepper and Edward J. Roach, and either of
them, his true and lawful attorneys and agents, with power of substitution or
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorneys and agents, or either of them, may deem
necessary or advisable or which may be required to enable The PNC Fund (the
"Company") to comply with the Investment Company Act of 1940, as amended, and
the Securities Act of 1933, as amended (collectively, the "Acts"), and any
rules, regulations or requirements of the Securities and Exchange Commission in
respect thereof, in connection with the filing and effectiveness of any and all
amendments (including post-effective amendments) to the Company's Registration
Statement pursuant to said Acts, including specifically, but without limiting
the generality of the foregoing, the power and authority to sign in the name
and on behalf of the undersigned as a trustee and/or officer of the Company any
and all such amendments filed with the Securities and Exchange Commission under
said Acts, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorneys and agents,
or either of them, shall do or cause to be done by virtue hereof.
/s/ Philip E. Coldwell
----------------------
Date: September 15, 1993
<PAGE> 709
The PNC(R) Fund
POWER OF ATTORNEY
Rodney D. Johnson, whose signature appears below, hereby
constitutes and appoints G. Willing Pepper and Edward J. Roach, and either of
them, his true and lawful attorneys and agents, with power of substitution or
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorneys and agents, or either of them, may deem
necessary or advisable or which may be required to enable The PNC Fund (the
"Company") to comply with the Investment Company Act of 1940, as amended, and
the Securities Act of 1933, as amended (collectively, the "Acts"), and any
rules, regulations or requirements of the Securities and Exchange Commission in
respect thereof, in connection with the filing and effectiveness of any and all
amendments (including post-effective amendments) to the Company's Registration
Statement pursuant to said Acts, including specifically, but without limiting
the generality of the foregoing, the power and authority to sign in the name
and on behalf of the undersigned as a trustee and/or officer of the Company any
and all such amendments filed with the Securities and Exchange Commission under
said Acts, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorneys and agents,
or either of them, shall do or cause to be done by virtue hereof.
/s/ Rodney D. Johnson
---------------------
Date: September 15, 1993
<PAGE> 710
The PNC(R) Fund
POWER OF ATTORNEY
Anthony M. Santomero, whose signature appears below, hereby
constitutes and appoints G. Willing Pepper and Edward J. Roach, and either of
them, his true and lawful attorneys and agents, with power of substitution or
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorneys and agents, or either of them, may deem
necessary or advisable or which may be required to enable The PNC Fund (the
"Company") to comply with the Investment Company Act of 1940, as amended, and
the Securities Act of 1933, as amended (collectively, the "Acts"), and any
rules, regulations or requirements of the Securities and Exchange Commission in
respect thereof, in connection with the filing and effectiveness of any and all
amendments (including post-effective amendments) to the Company's Registration
Statement pursuant to said Acts, including specifically, but without limiting
the generality of the foregoing, the power and authority to sign in the name
and on behalf of the undersigned as a trustee and/or officer of the Company any
and all such amendments filed with the Securities and Exchange Commission under
said Acts, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorneys and agents,
or either of them, shall do or cause to be done by virtue hereof.
/s/ Anthony Santomero
---------------------
Date: March 30, 1994
<PAGE> 711
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
- ----------- ----------- --------
<S> <C> <C>
(4) (e) Form of Share Certificates for Shares of beneficial
interest in Class AA-1, Class AA-2, Class AA-3; Class
AA-4; Class BB-1, Class BB-2, Class BB-3 and Class
BB-4; and Class CC-1, Class CC-2, Class CC-3 and
Class CC-4.
(5) (dd) Sub-Advisory Agreement between PNC Institutional
Management Corporation and BlackRock Financial
Management, Inc. with respect to the Tax-Free Income
Portfolio.
(ee) Form of Investment Advisory Agreement between
Registrant and PNC Asset Management Group, Inc.
relating to all Portfolios except the Multi-Sector
Mortgage Secuurities Portfolio.
(ff) Form of Investment Advisory Agreement between
Registrant and BlackRock Financial Management, Inc.
with respect to the Multi-Sector Mortgage Securities
Portfolio III.
(gg) Form of Sub-Advisory Agreement between PNC Asset
Management Group, Inc. and BlackRock Financial
Management, Inc./ Provident Capital Management Inc./
PNC Equity Advisors Company/ and PNC Institutional
Management Corporation.
(hh) Form of Sub-Advisory Agreement between PNC Asset
Management Group, Inc. and Morgan Grenfell Investment
Series Limited with respect to the International
Fixed Income Portfolio.
(6) (b) Form of Appendix A to the Distribution Agreement
between Registrant and Provident Distributors, Inc.
</TABLE>
<PAGE> 712
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
- ----------- ----------- --------
<S> <C> <C>
(8) (d) Form of Appendix B to Custodian Agreement between
Registrant and PNC Bank, National Association.
(9) (c) Form of Appendix A to the Administration Agreement
among Registrant, PFPC Inc. and Provident
Distributors, Inc.
(e) Form of Co-Administration Agreement among Registrant
and PNC Mutual Fund Company.
(k) Form of Appendix C to Transfer Agency Agreement
between Registrant and PFPC Inc.
(n) Form of Amended and Restated Distribution and Service
Plan for Service, Series A Investor,
<CAPTION>
Series B Investor, Series C Investor and Institutional Shares.
<S> <C> <C>
(11) (a) Consent of Coopers & Lybrand, L.L.P.
(b) Consent of Deloitte & Touche LLP
(c) Consent of Drinker Biddle & Reath.
(13) (i) Form of Purchase Agreement between Registrant and
Provident Distributors, Inc. relating to shares of
Class AA-1, Class AA-2, Class AA-3, Class AA-4; Class
BB-1, Class BB-2, Class BB-3 and Class BB-4; and
Class CC-1, Class CC-2, Class CC-3 and Class CC-4.
</TABLE>
<PAGE> 1
EXHIBIT (5)(dd)
SUB-ADVISORY AGREEMENT
(Tax-Free Income Portfolio)
AGREEMENT dated as of July 1, 1995 between PNC Institutional
Management Corporation, a Delaware corporation ("Advisor"), and BlackRock
Financial Management, Inc., a Delaware corporation ("Sub-Advisor").
WHEREAS, Advisor has agreed to furnish investment advisory
services to the Tax-Free Income Portfolio (the "Portfolio") of The PNC(R) Fund
(the "Fund"), an open-end, management investment company registered under the
Investment Company Act of 1940 ("1940 Act"); and
WHEREAS, Advisor wishes to retain the Sub-Advisor to provide
it with investment research and statistical services in connection with
Advisor's advisory activities on behalf of the Portfolio;
WHEREAS, the advisory agreement between Advisor and the Fund
dated as of October 4, 1989 (such Agreement or the most recent successor
agreement between such parties relating to advisory services to the Portfolio
is referred to herein as the "Advisory Agreement") specifically provides that
Advisor will sub-contract investment advisory services with respect to the
Portfolio to Sub-Advisor pursuant to a sub-advisory agreement agreeable to the
Fund and approved in accordance with the provisions of the 1940 Act;
WHEREAS, the Board of Trustees of the Fund and the Fund's
shareholders have approved this Agreement, and Sub-Advisor is willing to
furnish such services upon the terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the promises and mutual
covenants herein contained, it is agreed between the parties hereto as follows:
1. Appointment. Advisor hereby appoints Sub-Advisor to
act as sub-advisor with respect to the Portfolio as provided in Section 2 of
the Advisory Agreement. Sub-Advisor accepts such appointment and agrees to
render the services herein set forth for the compensation herein provided.
2. Services of Sub-Advisor. Subject to the oversight
and supervision of Advisor and the Fund's Board of Trustees, Sub-Advisor will
supervise the day-to-day operations of the Portfolio and perform the following
services: (i) provide investment research and credit analysis concerning the
Portfolio's investments, (ii) conduct a continual program of investment of
<PAGE> 2
the Portfolio's assets, (iii) determine what portion of the Portfolio's assets
will be invested in cash, cash equivalents and money market instruments, (iv)
place orders for all purchases and sales of the investments made for the
Portfolio, and (v) maintain the books and records as are required to support
Fund operations (in conjunction with record-keeping and accounting functions
performed by Advisor). In addition, Sub-Advisor will keep the Fund and Advisor
informed of developments materially affecting the Fund and shall, on its own
initiative, furnish to the Fund from time to time whatever information
Sub-Advisor believes appropriate for this purpose. Sub-Advisor will
communicate to Advisor on each day that a purchase or sale of an instrument is
effected for the Portfolio (i) the name of the issuer, (ii) the amount of the
purchase or sale, (iii) the name of the broker or dealer, if any, through which
the purchase or sale will be effected, (iv) the CUSIP number of the instrument,
if any, and (v) such other information as Advisor may reasonably require for
purposes of fulfilling its obligations to the Fund under the Advisory
Agreement. Sub-Advisor will provide the services rendered by it under this
Agreement in accordance with the Portfolio's investment objective, policies and
restrictions as stated in the Portfolio's Prospectus and Statement of
Additional Information (as currently in effect and as they may be amended or
supplemented from time to time), and the resolutions of the Fund's Board of
Trustees.
3. Other Sub-Advisor Covenants. Sub-Advisor further
agrees that it:
(a) will comply with all applicable Rules and
Regulations of the Securities and Exchange Commission (the "SEC") and will in
addition conduct its activities under this Agreement in accordance with other
applicable law;
(b) will place orders either directly with the
issuer or with any broker or dealer. Subject to the other provisions of this
paragraph, in placing orders with brokers and dealers, Sub-Advisor will attempt
to obtain the best price and the most favorable execution of its orders. In
placing orders, Sub-Advisor will consider the experience and skill of the
firm's securities traders as well as the firm's financial responsibility and
administrative efficiency. Consistent with this obligation, Sub-Advisor may,
subject to the approval of the Fund's Board of Trustees, select brokers on the
basis of the research, statistical and pricing services they provide to the
Portfolio and other clients of Advisor or Sub-Advisor. Information and
research received from such brokers will be in addition to, and not in lieu of,
the services required to be performed by Sub-Advisor hereunder. 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
Sub-Advisor determines in good faith that such commission is
-2-
<PAGE> 3
reasonable in terms either of the transaction or the overall responsibility of
Advisor and Sub-Advisor to the Portfolio and their other clients and that the
total commissions paid by the Portfolio will be reasonable in relation to the
benefits to the Portfolio over the long-term. In addition, Sub-Advisor is
authorized to take into account the sale of shares of the Fund in allocating
purchase and sale orders for portfolio securities to brokers or dealers
(including brokers and dealers that are affiliated with Advisor, Sub-Advisor or
the Fund's distributor), provided that Sub-Advisor believes that the quality of
the transaction and the commission are comparable to what they would be with
other qualified firms. In no instance, however, will the Portfolio's
securities be purchased from or sold to the Advisor, Sub-Advisor, the Fund's
distributor or any affiliated person thereof, except to the extent permitted by
the SEC or by applicable law;
(c) will maintain or cause Advisor to maintain
books and records with respect to the Portfolio's securities transactions and
will render to Advisor and the Fund's Board of Trustees such periodic and
special reports as they may request;
(d) will maintain a policy and practice of
conducting its investment advisory services hereunder independently of the
commercial banking operations of its affiliates. When Sub-Advisor makes
investment recommendations for the Portfolio, its investment advisory personnel
will not inquire or take into consideration whether the issuer of securities
proposed for purchase or sale for the Portfolio's account are customers of the
commercial department of its affiliates; and
(e) will treat confidentially and as proprietary
information of the Fund all records and other information relative to the Fund,
the Portfolio and the Fund's prior, current or potential shareholders, and will
not use such records and information for any purpose other than performance of
its responsibilities and duties hereunder, except after prior notification to
and approval in writing by the Fund, which approval shall not be unreasonably
withheld and may not be withheld where Sub-Advisor may be exposed to civil or
criminal contempt proceedings for failure to comply, when requested to divulge
such information by duly constituted authorities, or when so requested by the
Fund.
4. Services Not Exclusive. Sub-Advisor's services
hereunder are not deemed to be exclusive, and Sub-Advisor shall be free to
render similar services to others so long as its services under this Agreement
are not impaired thereby.
-3-
<PAGE> 4
5. Books and Records. In compliance with the
requirements of Rule 31a-3 under the 1940 Act, Sub-Advisor hereby agrees that
all records which it maintains for the Portfolio are the property of the Fund
and further agrees to surrender promptly to the Fund any such records upon the
Fund's request. Sub-Advisor further agrees to preserve for the periods
prescribed by Rule 31a-2 under the 1940 Act the records required to be
maintained by Rule 31a-1 under the 1940 Act.
6. Expenses. During the term of this Agreement,
Sub-Advisor will pay all expenses incurred by it in connection with its
activities under this Agreement other than the cost of securities, commodities,
and other investments (including brokerage commissions and other transaction
charges, if any) purchased or sold for the Portfolio.
7. Compensation. For the services which the Sub-Advisor
will render to Advisor under this Agreement, Advisor will pay to Sub-Advisor a
fee, computed daily and payable monthly, at the following annual rates for the
Portfolio: .35% of its first $1 billion of average daily net assets; .30% of
its next $1 billion of average daily net assets; .275% of its next $1 billion
of average daily net assets; and .25% of its average daily net assets in excess
of $3 billion.
If the Advisor waives any or all of its advisory fee payable
under the Advisory Agreement, or reimburses the Fund pursuant to Section 8(b)
of that Agreement, with respect to the Portfolio, the Sub-Advisor will bear its
share of the amount of such waiver or reimbursement by waiving fees otherwise
payable to it hereunder on a proportionate basis to be determined by comparing
the aggregate fees otherwise payable to it hereunder with respect to the
Portfolio to the aggregate fees otherwise payable by the Fund to the Advisor
under the Advisory Agreement with respect to the Portfolio. Advisor shall
inform Sub-Advisor prior to waiving any advisory fees.
8. Limitation on Liability. Sub-Advisor will not be
liable for any error of judgment or mistake of law or for any loss suffered by
Advisor or by the Portfolio in connection with the performance of this
Agreement, except a loss resulting from a breach of fiduciary duty with respect
to the receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on its part in the performance of
its duties or from reckless disregard by it of its obligations or duties under
this Agreement.
9. Duration and Termination. This Agreement will become
effective as of the date hereof and, unless sooner terminated with respect to
the Portfolio as provided herein, shall continue in effect with respect to the
Portfolio until March 31, 1996. Thereafter, if not terminated, this Agreement
-4-
<PAGE> 5
shall continue in effect with respect to the Portfolio for successive annual
periods ending on March 31, provided such continuance is specifically approved
at least annually (a) by the vote of a majority of those members of the Fund's
Board of Trustees who are not interested persons of any party to this
Agreement, cast in person at a meeting called for the purpose of voting on such
approval, and (b) by the Fund's Board of Trustees or by a vote of a majority of
the outstanding voting securities of the Portfolio. Notwithstanding the
foregoing, this Agreement may be terminated with respect to the Portfolio at
any time, without the payment of any penalty, by the Fund (by vote of the
Fund's Board of Trustees or by vote of a majority of the outstanding voting
securities of the Portfolio), or by Advisor or Sub-Advisor, on 60 days' written
notice and will terminate automatically upon any termination of the Advisory
Agreement between the Fund and Advisor. This Agreement will also immediately
terminate in the event of its assignment. (As used in this Agreement, the
terms "majority of the outstanding voting securities," "interested person" and
"assignment" shall have the same meanings of such terms in the 1940 Act.)
10. Amendment of this Agreement. No provision of this
Agreement may be changed, waived, discharged or terminated orally, but only by
an instrument in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought. Any amendment of this
Agreement shall be subject to the 1940 Act.
11. Miscellaneous. The captions in this Agreement are
included for convenience of reference only and in no way define or delimit any
of the provisions hereof or otherwise affect their construction or effect. If
any provision of this Agreement shall be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement shall not
be affected thereby. This Agreement shall be binding on, and shall inure to
the benefit of the parties hereto and their respective successors and shall be
governed by Delaware law.
12. Counterparts. This Agreement may be executed in
counterparts by the parties hereto, each of which shall constitute an original
counterpart, and all of which, together, shall constitute one Agreement.
-5-
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be executed by their officers designated below as of the day and
year first above written.
PNC INSTITUTIONAL
MANAGEMENT CORPORATION
By:
-----------------------------
BLACKROCK FINANCIAL MANAGEMENT, INC.
By:
------------------------------
-6-
<PAGE> 1
EXHIBIT (5)(ee)
[FORM]
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made as of _____________, 1995 between THE PNC(R)
FUND, a Massachusetts business trust (the "Fund"), and PNC ASSET MANAGEMENT
GROUP, INC., a Delaware corporation (the "Adviser").
WHEREAS, the Fund is registered as an open-end, management
investment company under the Investment Company Act of 1940, as amended ("1940
Act"); and
WHEREAS, the Fund desires to retain Adviser to furnish
investment advisory services to the Fund and the Adviser is willing to so
furnish such services;
NOW THEREFORE, in consideration of the promises and mutual
covenants herein contained, it is agreed between the parties hereto as follows:
1. Appointment.
a. The Fund hereby appoints Adviser to act as
investment adviser to the Fund's Money Market Portfolio; Government Money
Market Portfolio; Municipal Money Market Portfolio; Pennsylvania Municipal
Money Market Portfolio; North Carolina Municipal Money Market Portfolio;
Virgina Municipal Money Market Portfolio; Ohio Municipal Money Market
Portfolio; New Jersey Municipal Money Market Portfolio; Tax-Free Income
Portfolio; Managed Income Portfolio; Intermediate Government Portfolio;
Intermediate-Term Bond Portfolio; Short-Term Bond Portfolio; Government Income
Portfolio; Pennsylvania Tax-Free Income Portfolio; Ohio Tax-Free Income
Portfolio; New Jersey Tax-Free Income Portfolio; Core Fixed Income Portfolio;
International Fixed Income Portfolio; Balanced Portfolio; International Equity
Portfolio; International Emerging Markets Portfolio; Core Equity Portfolio;
Growth Equity Portfolio; Small Cap Growth Equity Portfolio; Value Equity
Portfolio; and Small Cap Value Equity Portfolio (the "Portfolios") for the
period and on the terms set forth in this Agreement. Adviser accepts such
appointment and agrees to furnish the services herein set forth for the
compensation herein provided.
b. In the event that the Fund establishes one or
more portfolios other than the Portfolios with respect to which it desires to
retain Adviser to act as investment adviser hereunder, the Fund shall notify
Adviser in writing. If Adviser is willing to render such services under this
Agreement it shall notify the Fund in writing whereupon, subject to such
shareholder approval as may be required pursuant to Paragraph 10 hereof, such
portfolio shall become a Portfolio hereunder and shall be subject
1
<PAGE> 2
to the provisions of this Agreement to the same extent as the Portfolios named
above in subparagraph (a) except to the extent that said provisions (including
those relating to the compensation payable by the Fund to Adviser) are modified
with respect to such portfolio in writing by the Fund and Adviser at the time.
2. Sub-Contractors. It is understood that Adviser will
from time to time employ or associate with such person or persons as Adviser
may believe to be particularly fitted to assist it in the performance of this
Agreement; provided, however, that the compensation of such person or persons
shall be paid by Adviser and that Adviser shall be as fully responsible to the
Fund for the acts and omissions of any subcontractor as it is for its own acts
and omissions. Such person or persons shall be employed pursuant to
sub-advisory agreements agreeable to the Fund and approved in accordance with
the provisions of the 1940 Act.
3. Delivery of Documents. The Fund has furnished
Adviser with copies, properly certified or authenticated, of each of the
following:
a. Resolutions of the Fund's Board of Trustees
authorizing the appointment of Adviser as the Portfolio's
adviser and approving this Agreement;
b. The Fund's Declaration of Trust as filed with
the State Secretary of the Commonwealth of Massachusetts and
the Boston City Clerk on December 22, 1988;
c. The Fund's Code of Regulations;
d. The Fund's Notification of Registration on
Form N-8A under the 1940 Act as filed with the Securities and
Exchange Commission ("SEC") on December 23, 1988;
e. The Fund's Registration Statement on Form
N-1A under the Securities Act of 1933 and the 1940 Act, as
filed with the SEC on December 23, 1988, and all amendments
thereto (the "Registration Statement"); and
f. The Fund's most recent prospectuses for the
Portfolios (such prospectuses together with the related
statements of additional information, as currently in effect
and all amendments and supplements thereto, are herein called
"Prospectuses").
2
<PAGE> 3
The Fund will furnish Adviser from time to time with copies,
properly certified or authenticated, of all amendments of or supplements to the
foregoing, if any.
4. Services. Subject to the supervision of the Fund's
Board of Trustees, Adviser will (either directly or through the sub-advisers
and other sub-contractors employed by it in accordance with Section 2 hereof)
provide a continuous investment program for the Portfolio, including investment
research and management with respect to all securities, investments, cash and
cash equivalents in the Portfolios. Adviser will (either directly or through
the sub-advisers and other sub-contractors employed by it in accordance with
Paragraph 2 hereof) determine from time to time what securities and other
investments will be purchased, retained or sold by the Portfolios and will
place the daily orders for the purchase or sale of securities. Adviser will
provide the services rendered by it under this Agreement in accordance with
each Portfolio's investment objective, policies and restrictions as stated in
such Portfolio's Prospectus (as currently in effect and as it may be amended or
supplemented from time to time) and the resolutions of the Fund's Board of
Trustees. Adviser further agrees that it:
a. will comply with all applicable rules and
regulations of the SEC and will in addition conduct its
activities under this Agreement in accordance with other
applicable law;
b. will place orders either directly with the
issuer or with any broker or dealer. Subject to the other
provisions of this paragraph, in placing orders with brokers
and dealers, Adviser will attempt to obtain the best price and
the most favorable execution of its orders. In placing
orders, Adviser will consider the experience and skill of the
firm's securities traders as well as the firm's financial
responsibility and administrative efficiency. Consistent with
this obligation, Adviser may, subject to the approval of the
Fund's Board of Trustees, select brokers on the basis of the
research, statistical and pricing services they provide to a
Portfolio and other clients of Adviser or a sub-adviser.
Information and research received from such brokers will be in
addition to, and not in lieu of, the services required to be
performed by Adviser hereunder. 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 Adviser determines in good faith that such
commission is reasonable in terms of either the transaction or
the overall responsibility of Adviser and sub-advisers to the
Portfolios and their other clients and that the total
commissions paid by a
3
<PAGE> 4
Portfolio will be reasonable in relation to the benefits to
the Portfolio over the long-term. In addition, Adviser is
authorized to take into account the sale of shares of the Fund
in allocating purchase and sale orders for portfolio
securities to brokers or dealers (including brokers and
dealers that are affiliated with Adviser, the sub-advisers or
the Fund's distributor) in compliance with applicable law. In
no instance, however, will a Portfolio's securities be
purchased from or sold to Adviser, the sub-advisers, the
Fund's distributor or any affiliated person thereof, except to
the extent permitted by the SEC or by applicable law;
c. will maintain books and records with respect
to each Portfolio's securities transactions and will furnish
the Fund's Board of Trustees such periodic and special reports
as the Board may request;
d. will maintain a policy and practice of
conducting its investment advisory services hereunder
independently of the commercial banking operations of its
affiliates. When Adviser makes investment recommendations for
a Portfolio, its investment advisory personnel will not
inquire or take into consideration whether the issuer of
securities proposed for purchase or sale for the Portfolio's
account are customers of the commercial departments of its
affiliates. In dealing with commercial customers, Adviser and
the sub-advisers will not inquire or take into consideration
whether securities of those customers are held by the Fund;
and
e. will treat confidentially and as proprietary
information of the Fund all records and other information
relative to the Fund, any of the Portfolio's and the Fund's
prior, current or potential shareholders, and will not use
such records and information for any purpose other than
performance of its responsibilities and duties hereunder,
except after prior notification to and approval in writing by
the Fund, which approval shall not be unreasonably withheld
and may not be withheld where Adviser may be exposed to civil
or criminal contempt proceedings for failure to comply, when
requested to divulge such information by duly constituted
authorities, or when so requested by the Fund.
5. Services Not Exclusive. Adviser's services hereunder
are not deemed to be exclusive, and Adviser shall be free to render similar
services to others so long as its services under this Agreement are not
impaired thereby.
4
<PAGE> 5
6. Books and Records. In compliance with the
requirements of Rule 31a-3 under the 1940 Act, Adviser hereby agrees that all
records which it maintains for each Portfolio are the property of the Fund and
further agrees to surrender promptly to the Fund any of such records upon the
Fund's request. Adviser further agrees to preserve for the periods prescribed
by Rule 31a-2 under the 1940 Act the records required to be maintained by Rule
31a-1 under the 1940 Act.
7. Expenses. During the term of this Agreement, Adviser
will pay all expenses incurred by it in connection with its activities under
this Agreement other than the cost of securities, commodities and other
investments (including brokerage commissions and other transaction charges, if
any) purchased or sold for the Portfolios.
8. Compensation.
a. For the services provided and the expenses
assumed pursuant to this Agreement, the Fund will pay Adviser and Adviser will
accept as full compensation therefor a fee, computed daily and paid monthly, at
the following annual rates: for the Money Market, Municipal Money Market,
Government Money Market, Ohio Municipal Money Market, Pennsylvania Municipal
Money Market, North Carolina Municipal Money Market, Virginia Municipal Money
Market and New Jersey Municipal Money Market Portfolios: .45% of the first $1
billion of each Portfolio's average daily net assets, .40% of the next $1
billion of each Portfolio's average daily net assets, .375% of the next $1
billion of each Portfolio's average daily net assets and .35% of the average
daily net assets of the Portfolio in excess of $3 billion; for the Value
Equity, Growth Equity, Small Cap Value Equity, Balanced, Small Cap Growth
Equity, Core Equity and International Fixed Income Portfolios: .55% of the
first $1 billion of each Portfolio's average daily net assets, .50% of the next
$1 billion of each Portfolio's average daily net assets, .475% of the next $1
billion of each Portfolio's average daily net assets and .45% of the average
daily net assets of the Portfolio in excess of $3 billion; for the Core Fixed
Income, Managed Income, Tax-Free Income, Intermediate Government, New Jersey
Tax-Free Income, Ohio Tax-Free Income, Pennsylvania Tax-Free Income, Short-Term
Bond, Intermediate-Term Bond and Government Income Portfolios: .50% of the
first $1 billion of each Portfolio's average daily net assets, .45% of the next
$1 billion of each Portfolio's average daily net assets, .425% of the next $1
billion of each Portfolio's average daily net assets and .40% of the average
daily net assets of the Portfolio in excess of $3 billion; for the
International Equity Portfolio: .75% of the first $1 billion of the Portfolio's
average daily net assets, .70% of the next $1 billion of the Portfolio's
average daily net assets, .675% of the next $1 billion of the Portfolio's
average daily net assets and .65% of the average daily net assets of the
Portfolio in excess
5
<PAGE> 6
of $3 billion; and for the International Emerging Markets Portfolio: 1.25% of
the first $1 billion of the Portfolio's average daily net assets, 1.20% of the
next $1 billion of the Portfolio's average daily net assets, 1.155% of the next
$1 billion of the Portfolio's average daily net assets and 1.10% of the average
daily net assets of the Portfolio in excess of $3 billion. Such fee as is
attributable to each Portfolio shall be a separate charge to such Portfolio and
shall be the several (and not joint or joint and several) obligation of such
Portfolio.
b. If in any fiscal year the aggregate expenses
of the Portfolios (as defined under the securities regulations of any state
having jurisdiction over the Fund) exceeds the expense limitations of any such
state, Adviser will bear its share of the amount of such excess in proportion
to the aggregate fees otherwise payable to it hereunder and to the Fund's
co-administrators under their administration agreements with the Fund. The
obligation of the Adviser to reimburse the Fund under this Paragraph 8(b) is
limited in any fiscal year to the amount of its fees otherwise payable
hereunder attributable to the Portfolio for such fiscal year, provided,
however, that notwithstanding the foregoing, Adviser shall reimburse the Fund
for the full amount of its share of any such excess expenses regardless of the
amount of fees otherwise payable to it during such fiscal year to the extent
that the securities regulations of any state having jurisdiction over the Fund
so require. Such expense reimbursement, if any, will be estimated, reconciled
and paid on a monthly basis.
9. Limitation of Liability. Adviser shall not be liable
for any error of judgment or mistake of law or for any loss suffered by the
Fund in connection with the performance of this Agreement, except a loss
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations or duties under this Agreement.
10. Duration and Termination. This Agreement will become
effective as of the date hereof with respect to each Portfolio listed in
Section 1(a) hereof and, with respect to any additional Portfolio, on the date
of receipt by the Fund of notice from the Adviser in accordance with Section
1(b) hereof that the Adviser is willing to serve as investment adviser with
respect to such portfolio, provided that this Agreement (as supplemented by the
terms specified in any notice and agreement pursuant to Section 1(b) hereof)
shall have been approved by the shareholders of the Portfolio in accordance
with the requirements of the 1940 Act, and, unless sooner terminated as
provided herein, shall continue in effect with respect to each such Portfolio
until March 31, 1997. Thereafter, if not terminated,
6
<PAGE> 7
this Agreement shall continue in effect with respect to the particular
Portfolio for successive annual periods ending on March 31, provided such
continuance is specifically approved at least annually (a) by vote of a
majority of those members of the Fund's Board of Trustees who are not
interested persons of any party to this Agreement, cast in person at a meeting
called for the purpose of voting on such approval, and (b) by the Fund's Board
of Trustees or by vote of a majority of the outstanding voting securities of
such Portfolio. Notwithstanding the foregoing, this Agreement may be
terminated with respect to the Portfolio at any time, without the payment of
any penalty, by the Fund (by vote of the Fund's Board of Trustees or by vote of
a majority of the outstanding voting securities of the Portfolio), or by
Adviser on sixty days' written notice. This Agreement will immediately
terminate in the event of its assignment. (As used in this Agreement, the
terms "majority of the outstanding voting securities," "interested persons" and
"assignment" shall have the same meanings as such terms in the 1940 Act.)
11. Amendment of this Agreement. No provision of this
Agreement may be changed, waived, discharged or terminated orally, but only by
an instrument in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought. Any amendment of this
Agreement shall be subject to the 1940 Act.
12. Release. "The PNC Fund" and "Trustees of The PNC
Fund" refer respectively to the trust created and the Trustees, as trustees but
not individually or personally, acting from time to time under a Declaration of
Trust dated December 22, 1988 which is hereby referred to and a copy of which
is on file at the office of the State Secretary of the Commonwealth of
Massachusetts and at the principal office of the Fund. The obligations of "The
PNC Fund" entered into in the name or on behalf thereof by any of the Trustees,
officers, representatives or agents are made not individually, but in such
capacities, and are not binding upon any of the Trustees, Shareholders,
officers, representatives or agents of the Fund personally, but bind only the
Trust Property (as defined in the Declaration of Trust), and all persons
dealing with any class of shares of the Fund must look solely to the Trust
Property belonging to such class for the enforcement of any claims against the
Fund.
13. Miscellaneous. The captions in this Agreement are
included for convenience or reference only and in no way define or delimit any
of the provisions hereof or otherwise affect their construction or effect. If
any provision of this Agreement shall be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement shall not
be affected thereby. This Agreement shall be binding on, and shall inure to
the benefit of, the parties hereto and their respective successors and shall be
governed by Delaware law.
7
<PAGE> 8
14. Counterparts. This Agreement may be executed in
counterparts by the parties hereto, each of which shall constitute an original
counterpart, and all of which, together, shall constitute one Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
<TABLE>
<S> <C>
Attest: THE PNC FUND
[SEAL] By:
------------------
PNC ASSET MANAGEMENT
GROUP, INC.
[SEAL] By:
-------------------------
its:
</TABLE>
8
<PAGE> 1
EXHIBIT (5)(ff)
[FORM]
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made as of ___________, 1995 between THE PNC(R) FUND, a
Massachusetts business trust (the "Fund"), and BLACKROCK FINANCIAL MANAGEMENT,
INC., a Delaware corporation (the "Adviser").
WHEREAS, the Fund is registered as an open-end, management investment
company under the Investment Company Act of 1940, as amended ("1940 Act"); and
WHEREAS, the Fund desires to retain Adviser to furnish investment
advisory services to the Fund and the Adviser is willing to so furnish such
services.
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment.
(a) The Fund hereby appoints Adviser to act as
investment advisor to the Fund's Multi-Sector Mortgage Securities Portfolio III
(the "Portfolio") for the period and on the terms set forth in this Agreement.
Adviser accepts such appointment and agrees to furnish the services herein set
forth for the compensation herein provided.
(b) In the event that the Fund establishes one or
more portfolios other than the Portfolio named above with respect to which it
desires to retain Adviser to act as investment adviser hereunder, the Fund
shall notify the Adviser in writing. If Adviser is willing to render such
services under this Agreement it shall notify the Fund in writing whereupon,
subject to such approval as may be required pursuant to Paragraph 10 hereof,
such portfolio shall become a "Portfolio" hereunder and shall be subject to the
provisions of this Agreement to the same extent as the Portfolio named above in
subparagraph (a) except to the extent that said provisions (including those
relating to the compensation payable by the Fund to Adviser) are modified with
respect to such portfolio in writing by the Fund and Adviser at the time.
2. Sub-Contractors. It is understood that from time to
time Adviser may, but is not required to, employ or associate with such person
or persons as Adviser may believe to be particularly fitted to assist it in the
performance of this Agreement; provided, however, that the compensation of such
person or persons shall be paid by Adviser and that Adviser shall be as fully
responsible to the Fund for the acts and omissions of
<PAGE> 2
any subcontractor as it is for its own acts and omissions. Such person or
persons shall be employed pursuant to sub-advisory agreements agreeable to the
Fund and approved in accordance with the provisions of the 1940 Act.
3. Delivery of Documents. The Fund has furnished the
Adviser with copies, properly certified or authenticated, of each of the
following:
(a) Resolutions of the Fund's Board of Trustees
authorizing the appointment of Adviser as the
Portfolio's advisor and approving this
Agreement;
(b) The Fund's Declaration of Trust as filed with
the State Secretary of the Commonwealth of
Massachusetts and the Boston City Clerk on
December 22, 1988:
(c) The Fund's Code of Regulations;
(d) The Fund's Notification of Registration on
Form N-8A under the 1940 Act as filed with
the Securities and Exchange Commission
("SEC") on December 23, 1988;
(e) The Fund's Registration Statement on Form
N-1A (the "Registration Statement") under the
Securities Act of 1933 and 1940 Act, as filed
with the SEC on December 23, 1988, and all
amendments thereto; and
(f) The Fund's most recent prospectus for the
Portfolio (such prospectus together with the
related statement of additional information,
as currently in effect and all amendments and
supplements thereto, are herein called
"Prospectus").
The Fund will furnish Adviser from time to time with copies,
properly certified or authenticated, of all amendments of or supplements to the
foregoing, if any.
4. Services. Subject to the supervision of the Fund's
Board of Trustees, Adviser will (either directly or through the sub-advisors
and other sub-contractors employed by it in accordance with Section 2 hereof)
provide a continuous investment program for the Portfolio, including investment
research and management with respect to all securities, investments, cash and
cash equivalents in the Portfolio. Adviser will (either directly or through a
sub-advisor and/or other sub-contractors employed by it in accordance with
Paragraph 2 hereof)
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<PAGE> 3
determine from time to time what securities and other investments will be
purchased, retained or sold by the Portfolio and will place the daily orders
for the purchase or sale of securities. Adviser will provide the services
rendered by it under this Agreement in accordance with the Portfolio's
investment objective, policies and restrictions as stated in the Portfolio's
Prospectus (as currently in effect and as it may be amended or supplemented
from time to time) and the resolutions of the Fund's Board of Trustees.
Adviser further agrees that it:
(a) will comply with all applicable rules and
regulations of the SEC and will in addition
conduct its activities under this Agreement
in accordance with other applicable law;
(b) will place orders either directly with the
issuer or with any broker or dealer. Subject
to the other provisions of this paragraph, in
placing orders with brokers and dealers,
Adviser will attempt to obtain the best price
and the most favorable execution of its
orders. In placing orders, Adviser will
consider the experience and skill of the
firm's securities traders as well as the
firm's financial responsibility and
administrative efficiency. Consistent with
this obligation, Adviser may, subject to the
approval of the Fund's Board of Trustees,
select brokers on the basis of the research,
statistical and pricing services they provide
to the Portfolio and other clients of Adviser
or a sub-advisor. Information and research
received from such brokers will be in
addition to, and not in lieu of, the services
required to be performed by Adviser
hereunder. 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
Adviser determines in good faith that such
commission is reasonable in terms of either
the transaction or the overall responsibility
of Adviser and sub-advisor to the Portfolio
and their other clients and that the total
commissions paid by the Portfolio will be
reasonable in relation to the benefits to the
Portfolio over the long-term. In addition,
Adviser is authorized to take into account
the sale of shares of the Fund in allocating
purchase and sale orders for portfolio
securities to brokers or dealers (including
brokers and dealers that are affiliated with
-3-
<PAGE> 4
Adviser, the sub-advisor or the Fund's
distributor) in compliance with applicable
law. In no instance, however, will the
Portfolio's securities be purchased from or
sold to Adviser, the sub-advisor, the Fund's
distributor or any affiliated person thereof,
except to the extent permitted by the SEC or
by applicable law;
(c) will maintain books and records with respect
to each Portfolio's securities transactions
and will furnish the Fund's Board of Trustees
such periodic and special reports as the
Board may request;
(d) will maintain a policy and practice of
conducting its investment advisory services
hereunder independently of the commercial
banking operations of its affiliates. When
Adviser makes investment recommendations for
the Portfolio, its investment advisory
personnel will not inquire or take into
consideration whether the issuer of
securities proposed for purchase or sale for
the Portfolio's account are customers of the
commercial departments of its affiliates. In
dealing with commercial customers, Adviser
and the sub-advisors will not inquire or take
into consideration whether securities of
those customers are held by the Fund; and
(e) will treat confidentially and as proprietary
information of the Fund all records and other
information relative to the Fund, the
Portfolio and the Fund's prior, current or
potential shareholders, and will not use such
records and information for any purpose other
than performance of its responsibilities and
duties hereunder, except after prior
notification to and approval in writing by
the Fund, which approval shall not be
unreasonably withheld and may not be withheld
where Adviser may be exposed to civil or
criminal contempt proceedings for failure to
comply, when requested to divulge such
information by duly constituted authorities,
or when so requested by the Fund.
5. Services Not Exclusive. Adviser's services hereunder
are not deemed to be exclusive, and Adviser shall be free to render similar
services to others so long as its services under this Agreement are not
impaired thereby.
-4-
<PAGE> 5
6. Books and Records. In compliance with the
requirements of Rule 31a-3 under the 1940 Act, Adviser hereby agrees that all
records which it maintains for the Portfolio are the property of the Fund and
further agrees to surrender promptly to the Fund any of such records upon the
Fund's request. Adviser further agrees to preserve for the periods prescribed
by Rule 31a-2 under the 1940 Act the records required to be maintained by Rule
31a-1 under the 1940 Act.
7. Expenses. During the term of this Agreement, Adviser
will pay all expenses incurred by it in connection with its activities under
this Agreement other than the cost of securities, commodities and other
investments (including brokerage commissions and other transaction changes, if
any) purchased or sold for the Portfolio.
8. Compensation.
(a) For the services provided and the expenses
assumed pursuant to this Agreement the Fund will pay Adviser and Adviser will
accept as full compensation therefor a fee, computed daily and payable monthly,
at .25% of the Portfolio's average daily net assets.
(b) If in any fiscal year the aggregate expenses
of the Portfolio (as defined under the securities regulations of any state
having jurisdiction over the Fund) exceed the expense limitations of any such
state, Adviser will bear its share of the amount of such excess in proportion
to the aggregate fees otherwise payable to it hereunder and to the Fund's
co-administrators under their administration agreements with the Fund. The
obligation of the Adviser to reimburse the Fund under this Paragraph 8(b) is
limited in any fiscal year to the amount of its fees otherwise payable
hereunder attributable to the Portfolio for such fiscal year, provided,
however, that notwithstanding the foregoing, Adviser shall reimburse the Fund
for the full amount of its share of any such excess expenses regardless of the
amount of fees otherwise payable to it during such fiscal year to the extent
that the securities regulations of any state having jurisdiction over the Fund
so require. Such expense reimbursement, if any, will be estimated, reconciled
and paid on a monthly basis.
9. Limitation of Liability. Adviser shall not be liable
for any error of judgment or mistake of law or for any loss suffered by the
Fund in connection with the performance of this Agreement, except a loss
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations or duties under this Agreement.
-5-
<PAGE> 6
10. Duration and Termination. This Agreement will become
effective as of the date hereof with respect to the Portfolio listed in Section
1(a) hereof and, with respect to any additional portfolio, on the date of
receipt by the Fund of notice from the Adviser in accordance with Section 1(b)
hereof that the Adviser is willing to serve as investment adviser with respect
to such portfolio, provided that this Agreement (as supplemented by the terms
specified in any notice and agreement pursuant to Section 1(b) hereof) shall
have been approved by the shareholders of the Portfolio in accordance with the
requirements of the 1940 Act, and, unless sooner terminated as provided herein,
shall continue in effect with respect to each such Portfolio until March 31,
1997. Thereafter, if not terminated, this Agreement shall continue in effect
with respect to the Portfolio for successive annual periods ending on March 31,
provided such continuance is specifically approved at least annually (a) by
vote of a majority of those members of the Fund's Board of Trustees who are not
interested persons of any party to this Agreement, cast in person at a meeting
called for the purpose of voting on such approval, and (b) by the Fund's Board
of Trustees or by vote of a majority of the outstanding voting securities of
the Portfolio. Notwithstanding the foregoing, this Agreement may be terminated
with respect to the Portfolio at any time, without the payment of any penalty,
by the Fund (by vote of the Fund's Board of Trustees or by vote of a majority
of the outstanding voting securities of the Portfolio), or by Adviser on sixty
days' written notice. This Agreement will immediately terminate in the event
of its assignment (As used in this Agreement, the terms "majority of the
outstanding voting securities," "interested persons" and "assignment" shall
have the same meaning as such terms in the 1940 Act.)
11. Amendment to this Agreement. No provision of this
Agreement may be changed, waived, discharged or terminated orally, but only by
an instrument in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought. Any amendment of this
Agreement shall be subject to the 1940 Act.
12. Release. "The PNC(R) Fund" and "Trustees of The
PNC(R) Fund" refer respectively to the trust created and the Trustees, as
trustees but not individually or personally, acting from time to time under a
Declaration of Trust dated December 22, 1988 which is hereby referred to and a
copy of which is on file at the office of the State Secretary of the
Commonwealth of Massachusetts and at the principal office of the Fund. The
obligations of "The PNC Fund" entered into in the name or on behalf thereof by
any of the Trustees, officers, representatives or agents are made not
individually, but in such capacities, and are not binding upon any of the
Trustees, Shareholders, officers, representatives or agents of the Fund
personally, but bind only the Trust Property (as defined in the Declaration of
Trust), and
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<PAGE> 7
all persons dealing with any class of shares of the Fund must look solely to
the Trust Property belonging to such class for the enforcement of any claims
against the Fund.
13. Miscellaneous. The captions in this Agreement are
included for convenience of reference only and in no way define or delimit any
of the provisions hereof or otherwise affect their construction or effect. If
any provision of this Agreement shall be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement shall not
be affected thereby. This Agreement shall be binding on, and shall inure to
the benefit of, the parties hereto and their respective successors and shall be
governed by Delaware law.
14. Counterparts. This Agreement may be executed in
counterparts by the parties hereto, each of which shall constitute an original
counterpart, and all of which, together, shall constitute one Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be executed by their officers designated below as of the day and
year first above written.
THE PNC FUND
By: ______________________________
BLACKROCK FINANCIAL MANAGEMENT, INC.
By: ______________________________
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<PAGE> 1
EXHIBIT (5)(gg)
[FORM]
SUB-ADVISORY AGREEMENT
(_________________ Portfolio)
AGREEMENT dated as of ______________, 199_ between PNC Asset Managment
Group, Inc., a Delaware corporation ("Advisor"), and
____________________________________, a ________ corporation ("Sub-Advisor").
WHEREAS, Advisor has agreed to furnish investment advisory
services to the _________________ Portfolio (the "Portfolio") of The PNC(R)
Fund (the "Fund"), an open-end, management investment company registered under
the Investment Company Act of 1940 ("1940 Act"); and
WHEREAS, Advisor wishes to retain the Sub-Advisor to provide it
with sub-advisory services as described below in connection with Advisor's
advisory activities on behalf of the Portfolio;
WHEREAS, the advisory agreement between Advisor and the Fund of
even date herewith (such Agreement or the most recent successor agreement
between such parties relating to advisory services to the Portfolio is referred
to herein as the "Advisory Agreement") contemplates that Advisor may
sub-contract investment advisory services with respect to the Portfolio to a
sub-advisor pursuant to a sub-advisory agreement agreeable to the Fund and
approved in accordance with the provisions of the 1940 Act;
WHEREAS, this Agreement has been approved in accordance with the
provisions of the 1940 Act, and Sub-Advisor is willing to furnish such services
upon the terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the promises and mutual
covenants herein contained, it is agreed between the parties hereto as follows:
1. Appointment. Advisor hereby appoints Sub-Advisor to act
as sub-advisor with respect to the Portfolio as provided in Section 2 of the
Advisory Agreement. Sub-Advisor accepts such appointment and agrees to render
the services herein set forth for the compensation herein provided.
2. Services of Sub-Advisor. Subject to the oversight and
supervision of Advisor and the Fund's Board of Trustees, Sub-Advisor will
supervise the day-to-day operations of the Portfolio and perform the following
services: (i) provide investment research and credit analysis concerning the
Portfolio's investments, (ii) conduct a continual program of investment of the
Portfolio's assets, (iii) determine what portion of the
<PAGE> 2
Portfolio's assets will be invested in cash, cash equivalents and money market
instruments, (iv) place orders for all purchases and sales of the investments
made for the Portfolio, and (v) maintain the books and records as are required
to support Fund operations (in conjunction with record-keeping and accounting
functions performed by Advisor). In addition, Sub-Advisor will keep the Fund
and Advisor informed of developments materially affecting the Fund and shall,
on its own initiative, furnish to the Fund from time to time whatever
information Sub-Advisor believes appropriate for this purpose. Sub-Advisor
will communicate to Advisor on each day that a purchase or sale of an
instrument is effected for the Portfolio (i) the name of the issuer, (ii) the
amount of the purchase or sale, (iii) the name of the broker or dealer, if any,
through which the purchase or sale will be effected, (iv) the CUSIP number of
the instrument, if any, and (v) such other information as Advisor may
reasonably require for purposes of fulfilling its obligations to the Fund under
the Advisory Agreement. Sub-Advisor will provide the services rendered by it
under this Agreement in accordance with the Portfolio's investment objective,
policies and restrictions as stated in the Portfolio's Prospectus and Statement
of Additional Information (as currently in effect and as they may be amended or
supplemented from time to time), and the resolutions of the Fund's Board of
Trustees.
3. Other Sub-Advisor Covenants. Sub-Advisor further agrees
that it:
(a) will comply with all applicable Rules and
Regulations of the Securities and Exchange Commission (the "SEC") and will in
addition conduct its activities under this Agreement in accordance with other
applicable law;
(b) will place orders either directly with the issuer
or with any broker or dealer. Subject to the other provisions of this
paragraph, in placing orders with brokers and dealers, Sub-Advisor will attempt
to obtain the best price and the most favorable execution of its orders. In
placing orders, Sub-Advisor will consider the experience and skill of the
firm's securities traders as well as the firm's financial responsibility and
administrative efficiency. Consistent with this obligation, Sub-Advisor may,
subject to the approval of the Fund's Board of Trustees, select brokers on the
basis of the research, statistical and pricing services they provide to the
Portfolio and other clients of Advisor or Sub-Advisor. Information and
research received from such brokers will be in addition to, and not in lieu of,
the services required to be performed by Sub-Advisor hereunder. 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
Sub-Advisor determines in good faith that such commission is reasonable in
terms either of the transaction or the overall
-2-
<PAGE> 3
responsibility of Advisor and Sub-Advisor to the Portfolio and their other
clients and that the total commissions paid by the Portfolio will be reasonable
in relation to the benefits to the Portfolio over the long-term. In addition,
Sub-Advisor is authorized to take into account the sale of shares of the Fund
in allocating purchase and sale orders for portfolio securities to brokers or
dealers (including brokers and dealers that are affiliated with Advisor,
Sub-Advisor or the Fund's distributor), provided that Sub-Advisor believes that
the quality of the transaction and the commission are comparable to what they
would be with other qualified firms. In no instance, however, will the
Portfolio's securities be purchased from or sold to the Advisor, Sub-Advisor,
the Fund's distributor or any affiliated person thereof, except to the extent
permitted by the SEC or by applicable law;
(c) will maintain or cause Advisor to maintain books
and records with respect to the Portfolio's securities transactions and will
render to Advisor and the Fund's Board of Trustees such periodic and special
reports as they may request;
(d) will maintain a policy and practice of conducting
its investment advisory services hereunder independently of the commercial
banking operations of its affiliates. When Sub-Advisor makes investment
recommendations for the Portfolio, its investment advisory personnel will not
inquire or take into consideration whether the issuer of securities proposed
for purchase or sale for the Portfolio's account are customers of the
commercial department of its affiliates; and
(e) will treat confidentially and as proprietary
information of the Fund all records and other information relative to the Fund,
the Portfolio and the Fund's prior, current or potential shareholders, and will
not use such records and information for any purpose other than performance of
its responsibilities and duties hereunder, except after prior notification to
and approval in writing by the Fund, which approval shall not be unreasonably
withheld and may not be withheld where Sub-Advisor may be exposed to civil or
criminal contempt proceedings for failure to comply, when requested to divulge
such information by duly constituted authorities, or when so requested by the
Fund.
4. Services Not Exclusive. Sub-Advisor's services hereunder
are not deemed to be exclusive, and Sub-Advisor shall be free to render similar
services to others so long as its services under this Agreement are not
impaired thereby.
5. Books and Records. In compliance with the requirements
of Rule 31a-3 under the 1940 Act, Sub-Advisor hereby
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<PAGE> 4
agrees that all records which it maintains for the Portfolio are the property
of the Fund and further agrees to surrender promptly to the Fund any such
records upon the Fund's request. Sub-Advisor further agrees to preserve for
the periods prescribed by Rule 31a-2 under the 1940 Act the records required to
be maintained by Rule 31a-1 under the 1940 Act.
6. Expenses. During the term of this Agreement, Sub-Advisor
will pay all expenses incurred by it in connection with its activities under
this Agreement other than the cost of securities, commodities, and other
investments (including brokerage commissions and other transaction charges, if
any) purchased or sold for the Portfolio.
7. Compensation. For the services which the Sub-Advisor
will render to Advisor under this Agreement, Advisor will pay to Sub-Advisor a
fee, computed daily and payable monthly, at the following annual rates for the
Portfolio: [to be provided].
If the Advisor waives any or all of its advisory fee payable
under the Advisory Agreement, or reimburses the Fund pursuant to Section 8(b)
of that Agreement, with respect to the Portfolio, the Sub-Advisor will bear its
share of the amount of such waiver or reimbursement by waiving fees otherwise
payable to it hereunder on a proportionate basis to be determined by comparing
the aggregate fees that would otherwise be paid to it hereunder with respect to
the Portfolio to the aggregate fees that would otherwise be paid by the Fund to
the Advisor under the Advisory Agreement with respect to the Portfolio.
Advisor shall inform Sub-Advisor prior to waiving any advisory fees.
8. Limitation on Liability. Sub-Advisor will not be liable
for any error of judgment or mistake of law or for any loss suffered by Advisor
or by the Portfolio in connection with the performance of this Agreement,
except a loss resulting from a breach of fiduciary duty with respect to the
receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on its part in the performance of
its duties or from reckless disregard by it of its obligations or duties under
this Agreement.
9. Duration and Termination. This Agreement will become
effective as of the date hereof and, unless sooner terminated with respect to
the Portfolio as provided herein, shall continue in effect with respect to the
Portfolio until March 31, 1997. Thereafter, if not terminated, this Agreement
shall continue in effect with respect to the Portfolio for successive annual
periods ending on March 31, provided such continuance is specifically approved
at least annually (a) by the vote of a majority of those members of the Fund's
Board of Trustees who are not interested persons of any party to this
-4-
<PAGE> 5
Agreement, cast in person at a meeting called for the purpose of voting on such
approval, and (b) by the Fund's Board of Trustees or by a vote of a majority of
the outstanding voting securities of the Portfolio. Notwithstanding the
foregoing, this Agreement may be terminated with respect to the Portfolio at
any time, without the payment of any penalty, by the Fund (by vote of the
Fund's Board of Trustees or by vote of a majority of the outstanding voting
securities of the Portfolio), or by Advisor or Sub-Advisor, on 60 days' written
notice and will terminate automatically upon any termination of the Advisory
Agreement between the Fund and Advisor. This Agreement will also immediately
terminate in the event of its assignment. (As used in this Agreement, the
terms "majority of the outstanding voting securities," "interested person" and
"assignment" shall have the same meanings of such terms in the 1940 Act.)
10. Amendment of this Agreement. No provision of this
Agreement may be changed, waived, discharged or terminated orally, but only by
an instrument in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought. Any amendment of this
Agreement shall be subject to the 1940 Act.
11. Miscellaneous. The captions in this Agreement are
included for convenience of reference only and in no way define or delimit any
of the provisions hereof or otherwise affect their construction or effect. If
any provision of this Agreement shall be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement shall not
be affected thereby. This Agreement shall be binding on, and shall inure to
the benefit of the parties hereto and their respective successors and shall be
governed by Delaware law.
12. Counterparts. This Agreement may be executed in
counterparts by the parties hereto, each of which shall constitute an original
counterpart, and all of which, together, shall constitute one Agreement.
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<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be executed by their officers designated below as of the day and
year first above written.
PNC INSTITUTIONAL
MANAGEMENT CORPORATION
By:_____________________________
BLACKROCK FINANCIAL MANAGEMENT, INC.
By:______________________________
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<PAGE> 1
EXHIBIT (5)(hh)
[FORM]
INVESTMENT SUB-ADVISORY AGREEMENT
AGREEMENT executed as of _______________, 1995 by and between PNC
Asset Management Group, Inc., a Delaware corporation, and Morgan Grenfell
Investment Services, Ltd. A London based company and registered investment
adviser ("Sub-Adviser").
WHEREAS, PNC Asset Management Group, Inc. is the investment manager
for The PNC Fund ("Trust"), an open-end management investment company
registered under the Investment Company Act of 1940, as amended ("1940 Act");
and
WHEREAS, PNC Asset Management Group, Inc. desires to retain
Sub-Adviser as its agent to furnish investment advisory services for the
International Fixed Income Fund, a diversified investment portfolio of the
Trust (the "Fund").
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
1. Appointment. PNC Asset Management Group, Inc. hereby appoints
Sub-Adviser to provide certain sub-investment advisory services to the Fund for
the period and on the terms set forth in this Agreement. Sub-Adviser accepts
such appointment and agrees to furnish the services herein set forth for the
compensation herein provided.
2. Delivery of Document. PNC Asset Management Group, Inc. has
furnished Sub-Adviser with copies properly certified or authenticated of each of
the following:
(a) Resolutions of the Fund's Board of Trustees authorizing the
appointment of Advisor as the Portfolio's advisor and
approving this Agreement;
(b) The Fund's Declaration of Trust as filed with the State
Secretary of the Commonwealth of Massachusetts and the Boston
City Clerk on December 22, 1988:
(c) The Fund's Code of Regulations;
(d) The Fund's Notification of Registration on Form N-8A under the
1940 Act as filed with the Securities and Exchange Commission
("SEC") on December 23, 1988;
<PAGE> 2
(e) The Fund's Registration Statement on Form N-1A (the
"Registration Statement") under the Securities Act of 1933 and
1940 Act, as filed with the SEC on December 23, 1988, and all
amendments thereto;
(f) The Fund's most recent prospectus for the Portfolios (such
prospectus together with the related statement of additional
information, as currently in effect and all amendments and
supplements thereto, are herein called "Prospectus"); and
(g) Any other information reasonably needed by Sub-Adviser to
satisfy its obligations under this Agreement.
PNC Asset Management Group, Inc. will furnish Sub-Adviser from
time to time with copies of all amendments of or supplements to the foregoing.
3. Management. Subject always to the supervision of Trust's
Board of Trustees and PNC Asset Management Group, Inc., Sub-Adviser will
furnish an investment program in respect of, and make investment decisions for,
all assets of the Fund and place all orders for the purchase and sale of
securities, all on behalf of the Fund. In the performance of its duties,
Sub-Adviser will satisfy its fiduciary duties to the Fund (as set forth in
Section 8, below), and will monitor the Fund's investments, and will comply
with the provisions of Trust's Declaration of Trust and By-Laws, as amended
from time to time, and the stated investment objectives, policies and
restrictions of the Fund. Sub-Adviser and PNC Asset Management Group, Inc.
will each make its officers and employees available to the other from time to
time at reasonable times to review investment policies of the Fund and to
consult with each other regarding the investment affairs of the Fund.
Sub-Adviser shall also make itself reasonably available to the Board of
Trustees at such times as the Board of Trustees shall request.
Sub-Adviser represents and warrants that it is in compliance with all
applicable Rules and Regulations of the SEC pertaining to its investment
advisory activities and agrees that it:
(a) will use the same skill and care in providing such
services as it uses in providing services to fiduciary accounts for
which it has investment responsibilities;
(b) will conform with all applicable Rules and
Regulations of the SEC pertaining to its investment advisory
activities;
(c) will place orders pursuant to its investment
determinations for the Fund either directly with the issuer or with
any broker or dealer. In placing orders with
-2-
<PAGE> 3
brokers or dealers, Sub-Adviser will attempt to obtain the best
combination of prompt execution of orders in an effective manner and
at the most favorable price. Consistent with this obligation, when
the execution and price offered by two or more brokers or dealers are
comparable Sub-Adviser may, in its discretion, purchase and sell
portfolio securities to and from brokers and dealers who provide
Sub-Adviser with research advice and other services. In no instance
will portfolio securities be purchased from or sold to PNC Asset
Management Group, Inc., Sub-Adviser or any affiliated person of either
the Trust, PNC Asset Management Group, Inc. or Sub-Adviser, except as
may be permitted under the 1940 Act;
(d) will report regularly to PNC Asset Management Group,
Inc. and will make appropriate persons available for the purpose of
reviewing at reasonable times with representatives of PNC Asset
Management Group, Inc. and the Board of Trustees the management of the
Fund, including, without limitation, review of the general investment
strategy of the Fund, the performance of the Fund in relation to
standard industry indices, interest rate considerations and general
conditions affecting the marketplace and will provide various other
reports from time to time as reasonably requested by PNC Asset
Management Group, Inc.;
(e) will maintain books and records with respect to
Trust's securities transactions and will furnish PNC Asset Management
Group, Inc. and the Trust's Board of Trustees such periodic and
special reports as the Board or PNC Asset Management Group, Inc. may
request;
(f) will act upon instructions from PNC Asset Management
Group, Inc. not inconsistent with the fiduciary duties hereunder; and
(g) will treat confidentially and as proprietary
information of Trust all such records and other information relative
to Trust maintained by the Sub-Adviser, and will not use such records
and information for any purpose other than performance of its
responsibilities and duties hereunder, except after prior notification
to and approval in writing by Trust, which approval shall not be
unreasonably withheld and may not be withheld where Sub-Adviser may be
exposed to civil or criminal contempt proceedings for failure to
comply, when requested to divulge such information by duly constituted
authorities, or when so requested by Trust.
Sub-Adviser shall have the right to execute and deliver, or cause its
nominee to execute and deliver, all proxies and notices
-3-
<PAGE> 4
of meetings and other notices affecting or relating to the securities of the
Fund.
4. Books and Records. In compliance with the requirements of
Rule 31a-3 under the 1940 Act, Sub-Adviser hereby agrees that all records which
it maintains for Trust are the property of Trust and further agrees to
surrender promptly to Trust any of such records upon Trust's request.
Sub-Adviser further agrees to preserve for the periods prescribed by Rule 31 a-2
under the 1940 Act the records required to be maintained by Rule 31a-1 under
the 1940 Act.
5. Expenses. During the term of this Agreement, Sub-Adviser will
pay all expenses incurred by it in connection with its activities under this
Agreement other than the cost of securities (including brokerage commissions,
if any) purchased for Trust.
6. Compensation. For the services provided and the expenses
assumed pursuant to this Agreement, PNC Asset Management Group, Inc. will pay
the Sub-Adviser, and the Sub-Adviser agrees to accept as full compensation
therefor, a sub-advisory fee, accrued daily and payable quarterly, in
accordance with Schedule A hereto. From time to time, Sub-Adviser may
voluntarily agree to waive or reduce some or all of the compensation to which
it is entitled under this Agreement.
7. Services to Others. PNC Asset Management Group, Inc.
understands, and has advised Trust's Board of Trustees, that Sub-Adviser now
acts, and may in the future act, as an investment adviser to fiduciary and
other management accounts, and as investment adviser, sub-investment adviser,
and/or administrator to other investment companies, provided, however, that the
Sub-Adviser shall not provide advisory or sub-advisory services to any
bank-advised investment company without the express written consent of PNC
Asset Management Group, Inc. which will not be unreasonably withheld. With the
exception previously noted, PNC Asset Management Group, Inc. has no objection
to Sub-Adviser's acts in such capacities, provided that whenever the Fund and
one or more other investment companies advised by Sub-Adviser have available
funds for investment, investments suitable and appropriate for each will be
allocated in accordance with a formula believed by Sub-Adviser to be equitable
to each company. PNC Asset Management Group, Inc. recognizes, and has advised
the Trust's Board of Trustees, that in some cases this procedure may adversely
affect the size of the position that the Fund may obtain in a particular
security. In addition, PNC Asset Management, Group, Inc. understands, and has
advised Trust's Board of Trustees, that the persons employed by Sub-Adviser to
assist in Sub-Adviser's duties under this Agreement will not devote their full
time to such service and nothing contained in this Agreement will be deemed to
limit or restrict the right of Sub-
-4-
<PAGE> 5
Adviser or any of its affiliates to engage in and devote time and attention to
other businesses or to render services of whatever kind or nature.
8. Limitation of Liability. PNC Asset Management Group, Inc.
will not take any action against Sub-Adviser to hold Sub-Adviser liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the performance of Sub-Adviser's duties under this Agreement,
except a loss resulting from Sub-Adviser's willful misfeasance, bad faith, or
gross negligence in the performance of its duties under this Agreement.
9. Indemnification. PNC Asset Management Group, Inc. and Sub-Adviser
each agree to indemnify the other against any claim against, loss or liability
to such other party (including reasonable attorneys' fees) arising out of any
action on the part of the indemnifying party which constitutes willful
misfeasance, bad faith or gross negligence.
10. Duration and Termination. This Agreement will become
effective as to the Fund on the first day the Fund's shares are offered to the
public provided that it has been approved by vote of a majority of the
outstanding voting securities of the Fund in accordance with the requirements
under the 1940 Act, and, unless sooner terminated as provided herein, will
continue in effect until March 31, 1997.
Thereafter, if not terminated, this Agreement will continue in
effect for the Fund for successive periods of 12 months, each ending on March
31, provided that such continuation is specifically approved at least annually
(a) by the vote of a majority of those members of Trust's Board of Trustee who
are not interested persons of Trust, Sub-Adviser, or PNC Asset Management
Group, Inc., cast in person at a meeting called for the purpose of voting on
such approval, and (b) by the vote of a majority of Trust's Board of Trustees
or by the vote of a majority of all votes attributable to the outstanding
Shares of the Fund. Notwithstanding the foregoing, this Agreement may be
terminated as to the Fund at any time, without the payment of any penalty, on
sixty (60) days' written notice by PNC Asset Management Group, Inc. or by
Sub-Adviser. This Agreement will immediately terminate in the event of its
assignment. (As used in this Agreement, the terms "majority of the outstanding
voting securities, "interested persons" and "assignment" have the same meaning
of such terms in the 1940 Act.)
This Agreement will terminate automatically if the advisory
agreement between the Fund and PNC Asset Management Group, Inc. is terminated.
-5-
<PAGE> 6
11. Amendment of this Agreement. No provision of this Agreement
may be changed, waived, discharged or terminated orally, but only by an
instrument in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought.
12. Miscellaneous. The captions in this Agreement are included
for convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement is held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement will not be
affected thereby. This Agreement will be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and will be
governed by the laws of the State of New Jersey.
"The PNC Fund" and "Trustees of the The PNC Fund" refer
respectively to the trust created and the Trustees, as trustees but not
individually or personally, acting from time to time under a Declaration of
Trust dated December 22, 1988 which is hereby referred to and a copy of which
is on file at the office of the State Secretary of The Commonwealth of
Massachusetts and at the principal office of the Fund. The obligations of "The
PNC Fund" entered into in the name or on behalf thereof by any of the Trustees,
officers, representatives or agents are made not individually, but in such
capacities, and are not binding upon any of the Trustees, Shareholders,
officers, representatives or agents of the Fund personally, but bind only the
Trust Property (as defined in the Declaration of Trust), and all persons
dealing with any class of shares of the Fund must look solely to the
-6-
<PAGE> 7
Trust Property belonging to such class for the enforcement of any claims
against the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be executed by their officers designated below as of the day and
year first above written.
PNC ASSET MANAGEMENT GROUP, INC.
By:
-------------------------------------------------------
Name:
-----------------------------------------------------
Title:
----------------------------------------------------
MORGAN GRENFELL INVESTMENT SERVICES, LTD.
By:
-------------------------------------------------------
Name:
-----------------------------------------------------
Title:
----------------------------------------------------
-7-
<PAGE> 8
SCHEDULE A
___________________, 1995
The International Fixed Income Fund.
Compensation will be paid at an annual rate of average annual
daily net assets.
PNC ASSET MANAGEMENT GROUP, INC.
By:
-------------------------------------------------------
Name:
-----------------------------------------------------
Title:
----------------------------------------------------
MORGAN GRENFELL INVESTMENT SERVICES, LTD.
By:
-------------------------------------------------------
Name:
-----------------------------------------------------
Title:
----------------------------------------------------
-8-
<PAGE> 1
EXHIBIT (6)(b)
APPENDIX A
to the
DISTRIBUTION AGREEMENT
BETWEEN
THE PNC(R) FUND
and
Provident Distributors, Inc.
- ------------------------------------------------------------------------------
Money Market Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
Municipal Money Market Portfolio (Institutional Shares, Service Shares, Series
A Investor Shares and Series C Investor Shares)
Government Money Market Portfolio (Institutional Shares, Service Shares, Series
A Investor Shares and Series C Investor Shares)
Ohio Municipal Money Market Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares and Series Investor C Shares)
New Jersey Municipal Money Market Portfolio (Institutional Shares, Service
Shares, Series A Investor Shares and Series C Investor Shares)
Pennsylvania Municipal Money Market Portfolio (Institutional Shares, Service
Shares, Series A Investor Shares and Series C Investor Shares)
North Carolina Municipal Money Market Portfolio (Institutional Shares, Service
Shares, Series A Investor Shares and Series C Investor Shares)
Virginia Municipal Money Market Portfolio (Institutional Shares, Service
Shares, Series A Investor Shares and Series C Investor Shares)
Managed Income Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Tax-Free Income Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Intermediate Government Portfolio (Institutional Shares, Service Shares, Series
A Investor Shares, Series B Investor Shares and Series C Investor Shares)
<PAGE> 2
New Jersey Tax-Free Income Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor
Shares)
Ohio Tax-Free Income Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Pennsylvania Tax-Free Income Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor
Shares)
Core Fixed Income Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Short-Term Bond Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Intermediate-Term Bond Portfolio (Institutional Shares, Service Shares, Series
A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Government Income Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
International Fixed Income Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor
Shares)
Multi-Sector Mortgage Securities Portfolio III (Institutional Shares)
Value Equity Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
Growth Equity Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Index Equity Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
Small Cap Value Equity Portfolio (Institutional Shares, Service Shares, Series
A Investor Shares, Series B Investor Shares and Series C Investor Shares)
-2-
<PAGE> 3
International Equity Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Balanced Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
Small-Cap Growth Equity Portfolio (Institutional Shares, Service Shares, Series
A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Core Equity Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
International Emerging Markets Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor
Shares)
Agreed to and accepted as of ________________, 1996.
THE PNC(R) FUND
By:
-------------------------------
PROVIDENT DISTRIBUTORS, INC.
By:
-------------------------------
-3-
<PAGE> 1
EXHIBIT (8)(d)
The PNC(R) Fund
Appendix B to Custodian
Agreement dated as of October 4, 1989
The Fund hereby appoints Bank to act as custodian of the
securities, cash and other property belonging to the additional Portfolios
listed below ("Additional Portfolios") for the period and on the terms set
forth in this Agreement. Bank accepts such appointment and agrees to furnish
the services herein set forth in return for the compensation as provided in
Paragraph 21 of this Agreement. Bank agrees to comply with all relevant
provisions of the 1940 Act and applicable rules and regulations thereunder.
The additional Portfolios are as follows:
- Government Income Portfolio
- International Emerging Markets Portfolio
- International Fixed Income Portfolio
- Virginia Municipal Money Market Portfolio
- New Jersey Municipal Money Market Portfolio
- New Jersey Tax-Free Income Portfolio
- Core Fixed Income Portfolio
- Multi-Sector Mortage Securities Portfolio III
Agreed to and accepted as of
_____________________, 1996
The PNC(R) Fund
By:
-------------------------------
PNC Bank, National Association
By:
-------------------------------
<PAGE> 1
EXHIBIT (9)(c)
APPENDIX A
to the
ADMINISTRATION AGREEMENT
between
The PNC(R) Fund
and
PFPC Inc.
and
Provident Distributors, Inc.
- -----------------------------------------------------------------------------
Money Market Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
Municipal Money Market Portfolio (Institutional Shares, Service Shares, Series
A Investor Shares and Series C Investor Shares)
Government Money Market Portfolio (Institutional Shares, Service Shares, Series
A Investor Shares and Series C Investor Shares)
New Jersey Municipal Money Market Portfolio (Institutional Shares, Service
Shares, Series A Investor Shares and Series C Investor Shares)
Ohio Municipal Money Market Portfolio (Institutional Shares, Services Shares,
Series A Investor Shares and Series C Investor Shares)
Pennsylvania Municipal Money Market Portfolio (Institutional Shares, Service
Shares, Series A Investor Shares and Series C Investor Shares)
North Carolina Municipal Money Market Portfolio (Institutional Shares, Service
Shares, Series A Investor Shares and Series C Investor Shares)
Virginia Municipal Money Market Portfolio (Institutional Shares, Service
Shares, Series A Investor Shares and Series C Investor Shares)
Managed Income Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Tax-Free Income Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Intermediate Government Portfolio (Institutional Shares, Service Shares, Series
A Investor Shares, Series B Investor Shares and Series C Investor Shares)
<PAGE> 2
New Jersey Tax-Free Income Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor
Shares)
Ohio Tax-Free Income Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Pennsylvania Tax-Free Income Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor
Shares)
Government Income Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Core Fixed Income Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Short-Term Bond Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Intermediate-Term Bond Portfolio (Institutional Shares, Service Shares, Series
A Investor Shares, Series B Investor Shares and Series C Investor Shares)
International Fixed Income Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor
Shares)
Multi-Sector Mortgage Securities Portfolio III (Institutional Shares)
Value Equity Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
Growth Equity Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Index Equity Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
Small Cap Value Equity Portfolio (Institutional Shares, Service Shares, Series
A Investor Shares, Series B Investor Shares and Series C Investor Shares)
International Equity Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Balanced Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
<PAGE> 3
Small Cap Growth Equity Portfolio (Institutional Shares, Service Shares, Series
A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Core Equity Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
International Emerging Markets Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor
Shares)
Agreed to and accepted as of ________________, 1996
THE PNC(R) FUND
By:
---------------------------------------
PFPC INC.
By:
---------------------------------------
PROVIDENT DISTRIBUTORS, INC.
By:
---------------------------------------
<PAGE> 4
APPENDIX B
Administration Fees Payable
With Respect to the PNC(R) Fund
<TABLE>
<CAPTION>
Portfolios Administration Fees
---------- -------------------
<S> <C>
Managed Income, Core Fixed Income, Intermediate Administrators are entitled to receive a combined
Government, Tax-Free Income, New Jersey Tax-Free fee, computed daily and payable monthly, at an
Income, Ohio Tax-Free Income, Pennsylvania Tax- annual rate of .20% of the first $500 million of
Free Income, Short-Term Bond, Intermediate-Term each Portfolio's average daily net assets; .18% of
Bond, International Fixed Income and Government the next $500 million of each Portfolio's average
Income Portfolios. daily net assets; .16% of the next $1 billion of
each Portfolio's average daily net assets; and
.15% of each Portfolio's average daily net assets
in excess of $2 billion.
Money Market, Municipal Money Market, Government Administrators are entitled to receive a combined
Money Market, Ohio Municipal Money Market, New fee, computed daily and payable monthly, at an
Jersey Municipal Money Market, Pennsylvania annual rate of .15% of the first $500 million of
Municipal Money Market, North Carolina Municipal each Portfolio's average daily net assets; .13% of
Money Market and Virginia Municipal Money Market the next $500 million of each Portfolio's average
Portfolios. daily net assets; .11% of the next $1 billion of
each Portfolio's average daily net assets and .10%
of each Portfolio's average daily net assets in
excess of $2 billion.
Value Equity, Growth Equity, Small Cap Value Administrators are entitled to receive a combined
Equity, International Equity, Balanced, Small Cap fee, computed daily and payable monthly, at an
Growth Equity, Core Equity and International annual rate of .20% of the first $500 million of
Emerging Markets Portfolios. each Portfolio's average daily net assets; .18% of
the next $500 million of each Portfolio's average
daily net assets; .16% of the next $1 billion of
each Portfolio's average daily net assets; and
.15% of each Portfolio's average daily net assets
in excess of $2 billion.
Multi-Sector Mortgage Securities Portfolio III. [Fees to be determined.]
Index Equity Portfolio [Fees to be determined.]
</TABLE>
Agreed to and accepted as of ______________, 1996
THE PNC(R) Fund
By:
-------------------------
PFPC INC.
By:
-------------------------
PROVIDENT DISTRIBUTORS, INC.
By:
-------------------------
<PAGE> 1
EXHIBIT (9)(e)
DRAFT - 9/27/95
THE PNC(R) FUND
CO-ADMINISTRATION AGREEMENT
AGREEMENT dated as of __________________, 1995 between THE PNC(R) FUND,
a Massachusetts business trust (the "Company"), and PNC MUTUAL FUND COMPANY, a
Delaware corporation (the "Co-Administrator").
WHEREAS, the Company is registered as an open-end, diversified
management investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"); and
WHEREAS, the Company desires to retain the Co-Administrator certain
administration services and the Co-Administrator is willing to furnish such
administration services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained and intending to be legally bound, it is agreed between the
parties hereto as follows:
1. Appointment of Co-Administrator. The Company hereby appoints the
Co-Administrator to provide certain administration services, as more fully
described herein, for each class and series of shares in each of the Company's
Funds on the terms and for the period set forth in this Agreement. The
Co-Administrator accepts such appointment and agrees to perform the services and
duties set forth in Section 3 below in return for the compensation provided in
Section 5 below. In the event that the Company establishes additional class or
investment portfolios other than the Funds listed on Appendix A with respect to
which it desires to retain the Co-Administrator to act as an administrator
hereunder, the Company shall notify the Co-Administrators, whereupon such
Appendix A shall be supplemented (or amended) and such portfolio shall become a
Fund hereunder and shall be subject to the provisions of this Agreement to the
same extent as the Funds (except to the extent that said provisions, including
the compensation payable on behalf of such new Fund, may be modified in writing
by the Company and the Co-Administrator at the time).
2. Delivery of Documents. The Company has furnished the
Co-Administrator with copies, properly certified or authenticated, of each of
the following documents and will deliver to it all future amendments and
supplements, if any:
a. The Company's Declaration of Trust, filed with the Secretary
of State of the Commonwealth of Massachusetts on December 22, 1988, as amended
(the "Charter");
<PAGE> 2
b. The Company's Code of Regulations, as amended ("Code");
c. Resolutions of the Company's Board of Trustees authorizing
the execution and delivery of this Agreement;
d. The Company's most recent amendment to its Registration
Statement under the Securities Act of 1933, as amended, and under the 1940 Act
on Form N-1A as filed with the Securities and Exchange Commission (the
"Commission") on ______________, 1995 relating to its Funds (the Registration
Statement, as presently in effect and as amended or supplemented from time to
time, is herein called the "Registration Statement"); and
e. The Company's most recent Prospectuses and Statements of
Additional Information and all amendments and supplements thereto (such
Prospectuses and Statements of Additional Information and supplements thereto,
as presently in effect and as from time to time amended and supplemented, are
herein called the "Prospectuses").
3. Services and Duties.
a. Subject to the supervision and control of the Company's
Board of Trustees, the Co-Administrator shall be responsible for the
performance of the following services:
(1) The oversight and coordination of the
performance of each of the service providers to the Company,
including without limitation, its investment advisers,
sub-investment advisers, other administrators, transfer agent,
custodian, distributor, shareholder servicing agents, legal
counsel and independent auditors.
(2) The negotiation of service contracts and
arrangements between the Company and each of its service
providers;
(3) Acting as liaison between the Company's Board of
Trustees and its service providers;
(4) Assisting in the preparation of materials for
meetings of the Company's Board of Trustees and shareholders;
and
(5) Providing general ongoing business management and
support services in connection with the Company's operations.
-2-
<PAGE> 3
b. In performing all of its services and duties hereunder, the
Co-Administrator will act in conformity with the Charter, Code, Prospectuses
and resolutions and other instructions of the Company's Board of Trustees and
will comply with the requirements of the 1940 Act and other applicable federal
or state law.
4. Expenses Assumed as Co-Administrator. The Co-Administrator
will bear all expenses incurred by it in performing its services and duties
hereunder, except as otherwise expressly provided herein. Other expenses to be
incurred in the operation of the Funds, including taxes, interest, brokerage
fees and commissions, if any, salaries and fm of officers and trustees who are
not officers, directors, shareholders or employees of the Company's
administrators, or the Company's investment adviser, other administration or
distributor for the Funds, Commission fees and state Blue Sky qualification
fees, advisory and administration fees, charges of custodians, transfer and
dividend disbursing agents' fees, certain insurance premiums, outside auditing
and legal expenses, costs of maintaining corporate existence, typesetting and
printing of prospectuses for regulatory purposes and for distribution to
current shareholders of the Funds, costs of shareholders' reports and corporate
meetings and any extraordinary expenses, will be borne by the Company,
provided, however, that the Company will not bear, directly or indirectly, the
cost of any activity which is primarily intended to result in the sale of shares
of the Funds otherwise than pursuant to its Amended and Restated Distribution
and Service Plan.
5. Compensation.
a. For the services provided and the expenses assumed as
Co-Administrator pursuant to Section 4 above, the Company will pay to the Co-
Administrator a monthly fee at an annual rate equal to 0.03% of the average
daily net assets of each Fund, as modified by agreement of the Co-
Administrator and the Company from time to time. The fee attributable to each
Fund shall be the several (and not joint or joint and several) obligation of
each portfolio.
b. For the purpose of determining fees payable to the
Co-Administrator for the services provided hereunder, the value of each Fund's
net assets shall be computed as required by its Prospectuses, generally
accepted accounting principles and resolutions of the Company's Board of
Trustees. The fee attributable to each Fund shall be the several (and not
joint or joint and several) obligation of each such Fund.
c. The Co-Administrator will from time to time employ or
associate with itself such person or persons as it may believe to be fitted
to assist them in the performance of this
-3-
<PAGE> 4
Agreement. Such person or persons may be officers and employees who are
employed by both the Company and the Co-Administrator. The compensation of
such person or shall be paid by the Co-Administrator, and no obligation shall
be incurred on behalf of the Company in such respect.
d. If the expenses borne by any Fund in any fiscal year exceed the
applicable expense limitations imposed by the securities regulations of any
state in which the Fund's shares are registered or qualified for sale to the
public, the Co-Administrator agrees to reimburse such Fund for a portion of any
such excess expense in an amount equal to the portion that the fees otherwise
payable by the fund to the Co-Administrator hereunder bears to the total amount
of the investment advisory and administration fees otherwise payable by the
Fund. The expense reimbursement obligation of the Co-Administrator is limited
to the amount of its fees hereunder for such fiscal year, provided, however,
that notwithstanding the foregoing, the Co-Administrator shall reimburse such
Fund for a portion of any such excess expenses in an amount equal to the
proportion that the fees otherwise payable to the Co-Administrator bear to the
total amount of investment advisory and administration fees otherwise payable
by the fund regardless of the amount of fees paid to the Co-Administrator
during such fiscal year to the extent that the securities regulations of any
state having jurisdiction over the fund so require. Such expense
reimbursement, if any, will be estimated, reconciled and paid on a monthly
basis.
6. Proprietary and Influential Information. The Co-Administrator agrees
behalf of itself and its employees to treat confidentially and as proprietary
information of Company all records and other information relative to the
Company and its Funds and present or potential shareholders, and not to use
such records and information for any purpose other than performance of their
responsibilities and duties hereunder, except after or notification to and
approval in writing by the Company, which approval shall not be unreasonably
withheld and may not be withheld where the Co-Administrator may be exposed to
civil or criminal contempt proceedings for failure to comply, when requested to
divulge such information by duly constituted authorities, or when so requested
by the Company.
7. Limitations of Liability. The Co-Administrator shall not be liable
for error of judgment or mistake of law or for any loss suffered by the Company
in on with the matters to which this Agreement relates, except a loss resulting
from willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties from reckless disregard by it of its obligations and
duties under this Agreement. Any person, even though also an officer,
director, employee or agent of the Co-Administrator, who may be or become an
officer, employee or agent of the Company, shall be deemed when services to the
-4-
<PAGE> 5
Company or acting on any business of the Company (other than services or
business in connection with the Co-Administrator's duties hereunder) to be
rendering such services to or acting solely for the Company and not as an
officer, director, employee or agent or one under the control or direction of
the Co-Administrator even though paid by the Co-Administrator.
8. Duration and Termination. This Agreement shall become effective
upon execution as of the date first written above and, unless sooner terminated
as provided herein, shall continue until ____________, 199_. Thereafter, if
not terminated, this Agreement shall continue automatically for successive
terms of one year, provided that such continuance is specifically approved at
least annually (a) by a vote of a majority of those of the Company's Board of
Trustees who are not parties to this Agreement or "interested persons" of any
such party, cast in person at a meeting called for the purpose of voting on
such approval, and (b) by the Company's Board of Trustees or by vote of a
"majority of the outstanding voting securities" of the Company; provided,
however, that this Agreement may be terminated by the Company at any time,
without the payment of any penalty, by vote of a majority of the entire Board
of Trustees or a vote of a "majority of the outstanding voting securities" of
the Company, on 60-days' written notice to the Co-Administrator, or by the
Co-Administrator at any time, without the payment of any penalty, on 90-days'
written notice to the Company. (As used in this Agreement, the terms "majority
of the outstanding voting securities" and "interested person" shall have the
same meaning as such terms have in the 1940 Act.)
9. Amendment of this Agreement. No provision of this
Agreement may be changed, discharged or terminated orally, but only by an
instrument in writing signed by the party against which enforcement of the
change, discharge or termination is sought.
10. Notices. Notices of any kind to be given to the Company
hereunder by the Co-Administrator shall be in writing and shall be duly given
if mailed or delivered to the Company any at Bellevue Park Corporate Center,
Suite 152, 103 Bellevue Parkway, Wilmington, Delaware 19809, Attention: Mr.
Edward J. Roach, Treasurer, with a copy to Drinker Biddle & Reath,
Philadelphia National Bank Building, 1345 Chestnut Street, Philadelphia,
Pennsylvania 19107-3496, Attention: Morgan R. Jones, Secretary, or at such
other address or to such individual as shall be so specified by the Company to
the Co-Administrator. Notices of any kind to be given to the Co-Administrator
hereunder by the Company shall be in writing and shall be duly given if mailed
or delivered to PNC Mutual Fund Company, 345 Park Avenue, 30th Floor, New York,
New York 10154, Attention: Karen H. Sabath, or at such other address or to
such other individual as shall be so specified by the Co-Administrator to the
Company.
-5-
<PAGE> 6
11. Miscellaneous.
a. The captions in this Agreement are included for convenience
of reference only and in no way define or delimit any of the provisions hereof
or otherwise affect their construction or effect. If any provision of this
Agreement shall be held or made invalid by a court decision, statute, rule or
otherwise, the remainder of this Agreement shall not be affected thereby. This
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors.
b. The Names "The PNC(R) Fund" and "Trustees of The PNC(R)
Fund" refer specifically to the sent created and the Trustees, as trustees but
not individually or personally, acting from time to time under a Declaration of
Trust dated December 22, 1988, which is hereby referred to and a copy of which
is on file at the office of the State Secretary of the Commonwealth of
Massachusetts and at the principal office of the Company. The obligations of
"The PNC(R) Fund" entered into in the name or on behalf thereof by any of the
Trustees, officers, representatives or agents are not made individually, but in
such capacities, and are not binding upon any of the Trustees, shareholders,
representatives or agents of the Company personally, but bind only the Trust
property (as defined in the Declaration of Trust), and all persons dealing with
any Fund or class of shares of the Company must look solely to the Trust
property belonging to such Fund or class for the enforcement of any claims
against the Company.
12. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of ___________________.
13. Counterparts. This Agreement may be executed in counterparts,
all of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
THE PNC(R) FUND
By:_______________________________
PNC MUTUAL FUND COMPANY
By:_______________________________
-6-
<PAGE> 1
EXHIBIT (9)(k)
The PNC(R) Fund
Appendix C to the
Transfer Agency Agreement dated
as of October 4, 1989
The Fund desires to retain the Transfer Agent to serve as the
Fund's transfer agent, registrar and dividend disbursing agent with respect to
Shares, par value $.001 per Share, of the additional Portfolios listed below
("Additional Portfolios") and the Transfer Agent is willing to furnish such
services.
The Additional Portfolios are as follows:
- Government Income Portfolio
- International Emerging Markets Portfolio
- International Fixed Income Portfolio
- Virginia Municipal Money Market Portfolio
- New Jersey Municipal Money Market Portfolio
- New Jersey Tax-Free Income Portfolio
- Core Fixed Income Portfolio
- Multi-Sector Mortgage Securities Portfolio III
Agreed to and accepted as of
____________________________, 1996
The PNC(R) Fund
By:
----------------------------------
PFPC Inc.
By:
----------------------------------
<PAGE> 1
EXHIBIT (9)(n)
DRAFT - 10/05/95
THE PNC(R) FUND
AMENDED AND RESTATED
DISTRIBUTION AND SERVICE PLAN
____________, 1995
This Distribution and Service Plan (the "Plan") is adopted in
accordance with Rule 12b-1 (the "Rule") under the Investment Company Act of
1940, as amended (the "1940 Act"), by The PNC(R) Fund, a Massachusetts business
trust (the "Fund"), with respect to the various classes of shares (each, a
"Class") of the portfolios of the Fund (each, a "Portfolio") listed on Appendix
A hereto, as amended from time to time, subject to the terms and conditions set
forth herein. The Service Fees and Shareholder Processing Fees (each as
defined herein) payable pursuant to the Plan are intended to be fees payable
for the administration and servicing of shareholder accounts, as more fully
described in Section 2 below, and not costs which are primarily intended to
result in the sale of the Fund's shares and which would require approval
pursuant to the Rule.
Section 1. Distribution Fees
(a) Pursuant to the Plan, the Fund may pay to (i) the
Distributor of its shares, Provident Distributors, Inc., or any entity that may
in the future act as a distributor for its shares (collectively, the
"Distributor"), and/or (ii) PNC Mutual Fund Company or any other affiliate of
PNC Bank, National Association (collectively, "PMFCo"), with respect to and at
the expense of each Class of each Portfolio listed on Appendix A hereto, a fee
for distribution and sales support services, as applicable, and as more fully
described in Section 1(b) hereof (the "Distribution Fee"), such fee in the
aggregate to be at the annual rate specified with respect to such Class of such
Portfolio under the column "Distribution Fee" on Appendix A hereto.
(b) Payments of the Distribution Fee under the Plan shall be
used primarily to compensate the Distributor for distribution services and
sales support services provided, and/or to PMFCo for sales support services
provided, respectively, in connection with the offering and sale of shares of
the applicable Class of the applicable Portfolio, and to reimburse the
Distributor and/or PMFCo for related expenses incurred, including payments by
the Distributor and/or PMFCo to compensate or reimburse brokers, dealers, other
financial institutions or other industry professionals (collectively, "Selling
Agents"), for sales support services provided and related expenses incurred by
<PAGE> 2
such Selling Agents. The services and expenses described in this Section 1(b)
may include, but are not limited to, the following: (i) the development,
formulation and implementation of marketing and promotional activities,
including direct mail promotions and television, radio, magazine, newspaper,
electronic and other mass media advertising, (ii) the preparation, printing and
distribution of prospectuses and reports (other than prospectuses or reports
used for regulatory purposes or for distribution to existing shareholders);
(iii) the preparation, printing and distribution of sales literature; (iv)
expenditures for sales or distribution support services such as for telephone
facilities and in- house telemarketing; (v) preparation of information,
analyses and opinions with respect to marketing and promotional activities;
(vi) commissions, incentive compensation or other compensation to, and expenses
of, account executives or other employees of the Distributor, PMFCo or Selling
Agents, attributable to distribution or sales support activities, as
applicable, including interest expenses and other costs associated with
financing of such commissions, compensation and expenses; (vii) travel,
equipment, printing, delivery and mailing costs, overhead and other office
expenses of the Distributor, PMFCo or Selling Agents, attributable to
distribution or sales support activities, as applicable, (viii) the costs of
administering the Plan; (ix) expenses of organizing and conducting sales
seminars; and (x) any other costs and expenses relating to distribution or
sales support activities.
(c) Payments of the Distribution Fee on behalf of a particular
Portfolio must be in consideration of services rendered for or on behalf of
such Portfolio. However, joint distribution or sales support financing with
respect to the shares of the Portfolios (which financing may also involve other
investment portfolios or companies that are affiliated persons of such a
person, or affiliated persons of the Distributor or PMFCo, shall be permitted
in accordance with applicable law. Payments of the Distribution Fee under
Section 1 of the Plan may be made without regard to expenses actually incurred.
(d) The Distributor, PMFCo and other affiliates of PNC Bank,
National Association and other parties that receive fees from the Fund may each
make payments without limitation as to amount relating to distribution or sales
support activities, as applicable, in connection with each Class of each
Portfolio out of any portion of any fees other than the Distribution Fee paid
by the Fund to it or its affiliate, its past profits or any other sources
available to it.
Section 2. Service Fees and Shareholder Processing Fees
(a) Pursuant to the Plan, the Fund shall pay to PMFCo, with
respect to and at the expense of each Class of each
-2-
<PAGE> 3
Portfolio listed on Appendix A hereto, (i) a fee in respect of the provision of
personal services to shareholders of such Class of such Portfolio, as more
fully described in Section 2(b) hereof (the "Service Fee"), such fee to be at
the annual rate specified with respect to such Class of such Portfolio under
the column "Service Fee" on Appendix A hereto, and (ii) a fee in respect of the
provision of certain activities relating to the processing and administration
of shareholder accounts in such Class of such Portfolio, as more fully
described in Section 2(c) hereof (the "Shareholder Processing Fee"), such fee
to be at the annual rate specified with respect to such Class of such Portfolio
under the column "Shareholder Processing Fee" on Appendix A hereto. PMFCo
shall determine the amount of the Service Fee and the Shareholder Processing
Fee to be paid to one or more brokers, dealers, other financial institutions or
other industry professionals (collectively, "Service Agents") and the basis on
which such payments will be made. Payments to a Service Agent will be subject
to compliance by the Service Agent with the terms of any related Plan agreement
entered into by the Service Agent.
(b) Payments of the Service Fee shall be used to compensate
PMFCo and Service Agents for general shareholder liaison services provided with
respect to shareholders in the related Class of the related Portfolio,
including, but not limited to, (i) answering shareholder inquiries regarding
account status and history, the manner in which purchases, exchanges and
redemptions of shares may be effected and certain other matters pertaining to
the shareholders' investments; and (ii) assisting shareholders in designating
and changing dividend options, account designations and addresses.
(c) Payments of the Shareholder Processing Fee shall be used to
compensate PMFCo and Service Agents for certain services relating to the
processing and administration of shareholder accounts with respect to
shareholders in the related Class of the related Portfolio, which may include
some or all of the following: (i) providing necessary personnel and facilities
to establish and maintain shareholder accounts and records; (ii) assisting in
aggregating and processing purchase, exchange and redemption transactions;
(iii) placing net purchase and redemption orders with the Distributor; (iv)
arranging for wiring of funds; (v) transmitting and receiving funds in
connection with customer orders to purchase or redeem shares; (vi) processing
dividend payments; (vii) verifying and guaranteeing shareholder signatures in
connection with redemption orders and transfers and changes in
shareholder-designated accounts, as necessary; (viii) providing periodic
statements showing a customer's account balance and, to the extent practicable,
integrating such information with other customer transactions otherwise
effected through or with a Service Agent; (ix) furnishing (either separately or
on an integrated basis with other reports sent to a shareholder by a Service
Agent) monthly and year-end statements
-3-
<PAGE> 4
and confirmations of purchases, exchanges and redemptions; (x) transmitting on
behalf of the Fund, proxy statements, annual reports, updating prospectuses and
other communications from the Fund to the shareholders; (xi) receiving,
tabulating and transmitting to the Fund proxies executed by shareholders with
respect to shareholder meetings; (xii) providing subaccounting with respect to
shares beneficially owned by customers or the information to the Fund necessary
for subaccounting; (xiii) sub-transfer agency services; and (xiv) providing
such other similar services as the Fund or a shareholder may request. It is
intended that none of the services provided in consideration of the Shareholder
Processing Fee be of a nature so as to render the Shareholder Processing Fee a
"service fee" as defined in Article III, Section 26, of the Rules of Fair
Practice of the National Association of Securities Dealers, Inc.
(d) Payments of the Service Fee and the Shareholder Processing
Fee under Section 2 of the Plan may be made without regard to expenses actually
incurred.
Section 3. Calculation and Payment of Fees
The amount of the Distribution Fee, Service Fee and Shareholder
Processing Fee payable with respect to each Class of each Portfolio listed on
Appendix A hereto shall be calculated daily and paid monthly, at the applicable
annual rates indicated on Appendix A. The Distribution Fee, Service Fee and
Shareholder Processing Fee shall be calculated and paid separately for each
Class of each Portfolio.
Section 4. Approval of Plan
The Plan will become effective immediately, as to any Class of any
Portfolio, upon its approval by (a) a majority of the outstanding shares of
such Class of such Portfolio, and (b) a majority of the Board of Trustees,
including a majority of the trustees who are not "interested persons" (as
defined in the Act) of the Fund and who have no direct or indirect financial
interest in the operation of the Plan or in any agreements entered into in
connection with the Plan, pursuant to a vote cast in person at a meeting called
for the purpose of voting on the approval of the Plan.
Section 5. Continuance of the Plan
The Plan will continue in effect for so long as its continuance is
specifically approved at least annually by the Fund's Board of Trustees in the
manner described in Section 4 above.
-4-
<PAGE> 5
Section 6. Additional Classes and Portfolios
The Plan shall become effective with respect to Classes of Portfolios
not currently listed on Appendix A hereto upon obtaining the requisite
approvals with respect to such Classes of Portfolios in accordance with Section
4 above.
Section 7. Termination
The Plan may be terminated at any time with respect to any Class of
any Portfolio without penalty at any time by (a) a vote of a majority of the
Trustees who are not "interested persons" (as defined in the Act) of the Fund
and who have no direct or indirect financial interest in the operation of the
Plan or in any agreements entered into in connection with the Plan, or (b) a
vote of a majority of the outstanding shares of such Class of such Portfolio.
The termination of the Plan with respect to any Class of any Portfolio shall
not result in the termination of the Plan with respect to any other Class of
that Portfolio or any other Portfolio.
Section 8. Amendments
The Plan may not be amended with respect to any Class of any
Portfolio so as to increase materially the amount of the Distribution Fee
described in Section 1 above with respect to such Class of such Portfolio
unless the amendment is approved by a vote of at least a majority of the
outstanding shares of such Class of such Portfolio. In addition, no material
amendment to the Plan may be made unless approved by the Fund's Board of
Trustees in the manner described in Section 4 above.
Section 9. Selection of Certain Trustees
While the Plan is in effect, the selection and nomination of the
Fund's Trustees who are not "interested persons" of the Fund (as defined in the
Act) will be committed to the discretion of the Trustees then in office who are
not "interested persons" (as so defined) of the Fund.
Section 10. Written Reports
While the Plan is in effect, the Fund's Board of Trustees shall
receive, and the Trustees shall review, at least quarterly, written reports
complying with the requirements of the Rule, which set out the amounts expended
under the Plan and the purposes for which those expenditures were made.
Section 11. Preservation of Materials
The Fund will preserve copies of the Plan, any agreement relating to
the Plan and any report made pursuant to
-5-
<PAGE> 6
Section 10 above, for a period of not less than six years (the first two years
in an easily accessible place) from the date of the Plan, agreement or report.
Section 12. Limitation of Liability
The names "The PNC Fund" and "Trustees of The PNC Fund" refer
respectively to the trust created and the Trustees, as trustees but not
individually or personally, acting from time to time under a Declaration of
Trust dated December 22, 1988 which is hereby referred to and a copy of which
is on file at the office of the State Secretary of the Commonwealth of
Massachusetts and at the principal office of the Fund. The obligations of "The
PNC Fund" entered into in the name or on behalf thereof by any of the Trustees,
officers, representatives or agents are made not individually, but in such
capacities, and are not binding upon any of the Trustees, Shareholders,
officers, representatives or agents of the Fund personally, but bind only the
Trust Property (as defined in the Declaration of Trust), and all persons
dealing with any class of shares of the Fund must look solely to the Trust
Property belonging to such class for the enforcement of any claims against the
Fund.
Section 13. Miscellaneous
The captions in the Plan are included for convenience of reference
only and in no way define or delimit any of the provisions hereof or otherwise
affect their construction or effect.
IN WITNESS WHEREOF, the Fund has executed the Plan as of
____________, 1995 on behalf of each Class of each Portfolio listed on Appendix
A hereto.
THE PNC FUND
By:____________________________
Vice President and Treasurer
-6-
<PAGE> 7
APPENDIX A
<TABLE>
<CAPTION>
SHAREHOLDER
DISTRIBUTION FEE SERVICE FEE PROCESSING FEE
(EXPRESSED AS (EXPRESSED AS (EXPRESSED AS
A PERCENTAGE A PERCENTAGE A PERCENTAGE
OF AVERAGE DAILY OF AVERAGE DAILY OF AVERAGE DAILY
NET ASSETS OF NET ASSETS OF NET ASSETS OF
THE PORTFOLIO THE PORTFOLIO THE PORTFOLIO
ATTRIBUTABLE TO ATTRIBUTABLE TO ATTRIBUTABLE TO
NAME OF PORTFOLIO CLASS OF SHARES THE SPECIFIED CLASS) THE SPECIFIED CLASS) THE SPECIFIED CLASS)
- ----------------- --------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Small Cap Value Institutional 0% 0% 0%
Equity Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Small Cap Growth Institutional 0% 0% 0%
Equity Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Growth Equity Institutional 0% 0% 0%
Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Value Equity Institutional 0% 0% 0%
Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Core Equity Institutional 0% 0% 0%
Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Index Equity Institutional ___% ___% ___%
Portfolio Service ___% ___% ___%
Investor A ___% ___% ___%
Investor B ___% ___% ___%
Investor C ___% ___% ___%
International Institutional 0% 0% 0%
Equity Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
International Institutional 0% 0% 0%
Emerging Service 0% .15% .15%
Markets Portfolio Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
</TABLE>
A-1
<PAGE> 8
<TABLE>
<CAPTION>
SHAREHOLDER
DISTRIBUTION FEE SERVICE FEE PROCESSING FEE
(EXPRESSED AS (EXPRESSED AS (EXPRESSED AS
A PERCENTAGE A PERCENTAGE A PERCENTAGE
OF AVERAGE DAILY OF AVERAGE DAILY OF AVERAGE DAILY
NET ASSETS OF NET ASSETS OF NET ASSETS OF
THE PORTFOLIO THE PORTFOLIO THE PORTFOLIO
ATTRIBUTABLE TO ATTRIBUTABLE TO ATTRIBUTABLE TO
NAME OF PORTFOLIO CLASS OF SHARES THE SPECIFIED CLASS) THE SPECIFIED CLASS) THE SPECIFIED CLASS)
- ----------------- --------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Balanced Institutional 0% 0% 0%
Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Short-Term Bond Institutional 0% 0% 0%
Fund Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Intermediate-Term Institutional 0% 0% 0%
Bond Fund Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Intermediate Institutional 0% 0% 0%
Government Service 0% .15% .15%
Portfolio Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Government Income Institutional 0% 0% 0%
Fund Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Core Fixed-Income Institutional 0% 0% 0%
Fund Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Managed Income Institutional 0% 0% 0%
Fund Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
International Fixed- Institutional 0% 0% 0%
Income Fund Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
</TABLE>
A-2
<PAGE> 9
<TABLE>
<CAPTION>
SHAREHOLDER
DISTRIBUTION FEE SERVICE FEE PROCESSING FEE
(EXPRESSED AS (EXPRESSED AS (EXPRESSED AS
A PERCENTAGE A PERCENTAGE A PERCENTAGE
OF AVERAGE DAILY OF AVERAGE DAILY OF AVERAGE DAILY
NET ASSETS OF NET ASSETS OF NET ASSETS OF
THE PORTFOLIO THE PORTFOLIO THE PORTFOLIO
ATTRIBUTABLE TO ATTRIBUTABLE TO ATTRIBUTABLE TO
NAME OF PORTFOLIO CLASS OF SHARES THE SPECIFIED CLASS) THE SPECIFIED CLASS) THE SPECIFIED CLASS)
- ----------------- --------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Tax-Free Income Institutional 0% 0% 0%
Fund Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Pennsylvania Institutional 0% 0% 0%
Tax-Free Service 0% .15% .15%
Income Fund Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
New Jersey Tax- Institutional 0% 0% 0%
Free Income Fund Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Ohio Tax-Free Institutional 0% 0% 0%
Income Fund Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Money Market Institutional 0% 0% 0%
Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Municipal Money Institutional 0% 0% 0%
Market Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Government Institutional 0% 0% 0%
Money Market Service 0% .15% .15%
Portfolio Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Ohio Municipal Institutional 0% 0% 0%
Money Market Service 0% .15% .15%
Portfolio Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
</TABLE>
A-3
<PAGE> 10
<TABLE>
<CAPTION>
SHAREHOLDER
DISTRIBUTION FEE SERVICE FEE PROCESSING FEE
(EXPRESSED AS (EXPRESSED AS (EXPRESSED AS
A PERCENTAGE A PERCENTAGE A PERCENTAGE
OF AVERAGE DAILY OF AVERAGE DAILY OF AVERAGE DAILY
NET ASSETS OF NET ASSETS OF NET ASSETS OF
THE PORTFOLIO THE PORTFOLIO THE PORTFOLIO
ATTRIBUTABLE TO ATTRIBUTABLE TO ATTRIBUTABLE TO
NAME OF PORTFOLIO CLASS OF SHARES THE SPECIFIED CLASS) THE SPECIFIED CLASS) THE SPECIFIED CLASS)
- ----------------- --------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Pennsylvania Institutional 0% 0% 0%
Municipal Money Service 0% .15% .15%
Market Portfolio Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
North Carolina Institutional 0% 0% 0%
Municipal Service 0% .15% .15%
Money Market Investor A .10% .25% .15%
Portfolio Investor B .75% .25% .15%
Investor C .75% .25% .15%
New Jersey Institutional 0% 0% 0%
Municipal Service 0% .15% .15%
Money Market Investor A .10% .25% .15%
Portfolio Investor B .75% .25% .15%
Investor C .75% .25% .15%
Virginia Institutional 0% 0% 0%
Municipal Service 0% .15% .15%
Money Market Investor A .10% .25% .15%
Portfolio Investor B .75% .25% .15%
Investor C .75% .25% .15%
Multi-Sector Institutional 0% 0% 0%
Mortgage Service 0% .15% .15%
Securities Investor A .10% .25% .15%
Portfolio III Investor B .75% .25% .15%
Investor C .75% .25% .15%
</TABLE>
A-4
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference of our report dated April 14, 1995
relating to the financial highlights and financial statements of the New Jersey
Municipal Bond Fund, a series of shares of The Compass Capital Group of Funds,
into this Post-Effective Amendment No. 18 to the Registration Statement on Form
N-1A (File No. 33-26305) under the Securities Act of 1933, as amended, of The
PNC(R) Fund. We also consent to the reference to our Firm under the heading
"Financial Highlights" of the New Jersey Tax-Free Income Portfolio in the
applicable Prospectuses and the caption "Miscellaneous--Independent
Accountants" in the Statements of Additional Information.
/s/Coopers & Lybrand L.L.P.
- ----------------------------
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
October 11, 1995
<PAGE> 1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Statement of Additional
Information of The Core Fixed Income Portfolio included in this Post-Effective
Amendment No. 18 to Registration Statement No. 33-26305 of The PNC Fund on Form
N-1A of our report dated August 7, 1995 on the financial statements of The Core
Fixed Income Portfolio appearing in the Annual Report of the BFM Institutional
Trust Inc. for the year ended June 30, 1995 and to the incorporation by
reference in the Statement of Additional Information of The Multi-Sector
Mortgage Securities Portfolio III also included in the Registration Statement
of our report dated August 7, 1995 on the financial statements of The
Multi-Sector Mortgage Securities Portfolio III appearing in the Annual Report
of The BFM Institutional Trust Inc., The Multi-Sector Mortgage Securities
Portfolio III for the period ended June 30, 1995.
/s/Deloitte & Touche LLP
- -------------------------
DELOITTE & TOUCHE LLP
New York, New York
October 12, 1995
<PAGE> 1
EXHIBIT (11)(c)
CONSENT OF COUNSEL
We hereby consent to the use of our name and to the reference to our
firm under the Caption "Counsel" in the Statement of Additional Information
that is included in Post-Effective Amendment No. 18 to the Registration
Statement (File No. 33-26305) on Form N-1A of The PNC(R) Fund under the
Securities Act of 1933 and the Investment Company Act of 1940, respectively.
This consent does not constitute a consent under Section 7 of the Securities
Act of 1933, and in consenting to the use of our name and the reference to our
Firm under such caption we have not certified any part of the Registration
Statement and do not otherwise come within the categories of persons whose
consent is required under Section 7 or the rules and regulations of the
Securities and Exchange Commission thereunder.
/s/ DRINKER BIDDLE & REATH
--------------------------
DRINKER BIDDLE & REATH
Philadelphia, Pennsylvania
October 12, 1995
<PAGE> 1
EXHIBIT (13)(i)
PURCHASE AGREEMENT
The PNC(R) Fund (the "Fund"), a Massachusetts business trust, and
Provident Distributors, Inc. ("PDI"), a Delaware corporation, hereby agree as
follows:
1. The Fund hereby offers PDI and PDI hereby purchases ten
Service, Series A Investor, Series B Investor and
Institutional Shares (collectively, the "New Portfolio
Shares") of the Fund's New Jersey Tax-Free Income and Core
Fixed Income Portfolios and of the Fund's Multi-Sector
Mortgage Securities Portfolio III for $10 per share. The Fund
hereby acknowledges receipt from PDI of funds in the total
amount of $120 in full payment for the New Portfolio Shares.
2. PDI represents and warrants to the Fund that the New Portfolio
Shares are being acquired for investment purposes and not with
a view to the distribution thereof.
IN AGREEMENT WHEREOF, and intending to be legally bound hereby, the
parties hereto have executed this Agreement as of September 29, 1995.
THE PNC(R) FUND
By:
----------------------------
Vice President and Treasurer
PROVIDENT DISTRIBUTORS, INC.
By:
----------------------------
