<PAGE> 1
As filed with the Securities and Exchange Commission on October 6, 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. 17 /X/
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 19 /X/
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THE PNC(R) FUND
(Formerly, NCP Funds)
(Exact Name of Registrant as Specified in Charter)
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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
</TABLE>
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)
/x/ on (December 4, 1995) pursuant to paragraph (a)(i)
/ / 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.
It is proposed that the Securities and Exchange Commission accelerate
the effectiveness of this filing in order to make it effective on December 4,
1995 pursuant to Rule 461 and paragraph (a) of Rule 485 under the Securities
Act of 1933.
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
initial 24f-2 Notice for its fiscal year ended September 30, 1994 was filed on
October 7, 1994.
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THE PNC(R) FUND
(SERVICE SHARES OF THE INDEX EQUITY PORTFOLIO)
CROSS REFERENCE SHEET
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FORM N-1A ITEM LOCATION
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PART A PROSPECTUS
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
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 and Net
Asset Value
8. Redemption or Repurchase. . . . . . . . . . . Purchase and Redemption
of Shares -
Redemption of
Shares
9. Legal Proceedings . . . . . . . . . . . . . . Inapplicable
</TABLE>
<PAGE> 3
THE INDEX EQUITY PORTFOLIO
SERVICE CLASS
The PNC(R) Fund (the "Fund") consists of twenty-six investment portfolios.
This Prospectus relates to shares (the "Service Shares" or "Shares")
representing interests in the Index Equity Portfolio (the "Portfolio") with an
investment objective which seeks to duplicate the capital performance and
dividend income of the Standard & Poor's 500(R) Composite Stock Price Index (the
"S&P 500 Index").
The Portfolio, unlike many other investment companies which directly
acquire and manage their own portfolio of securities, seeks to achieve its
investment objective by investing all of its investable assets in a series of
shares (the "Master Portfolio") of an open-end management investment company,
The DFA Investment Trust Company. The Master Portfolio has substantially the
same investment objective, policies and limitations as the Portfolio. The
Portfolio will purchase shares of the Master Portfolio at net asset value, The
net asset value of the Portfolio will respond to increases and decreases in the
value of the Master Portfolio's securities and to the expenses of the Master
Portfolio allocable to and the expenses of the Portfolio. Investors should
carefully consider this investment approach. For additional information, see
"Investment Policies--Master/Feeder Structure."
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 December , 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.
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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 ARE NOT
FEDERALLY INSURED BY, GUARANTEED BY, OBLIGATIONS OF OR OTHERWISE SUPPORTED BY
THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENTS IN SHARES OF THE
FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL AMOUNT
INVESTED.
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PROSPECTUS December , 1995
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INTRODUCTION
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The Fund is an open-end management investment company which has registered
shares in 26 investment portfolios, one of which is included in this Prospectus.
THE ADVISER
Dimensional Fund Advisers Inc. (the "Adviser") serves as investment adviser
to the Master Portfolio.
THE ADMINISTRATORS
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
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EXPENSE TABLE
ANNUAL FUND OPERATING EXPENSES INCLUDE THE EXPENSES OF THE PORTFOLIO AND
THE EXPENSES OF THE MASTER PORTFOLIO WHICH ARE ALLOCABLE TO THE PORTFOLIO. BELOW
IS A SUMMARY OF THE ESTIMATED OPERATING EXPENSES OF THE PORTFOLIO (INCLUDING THE
OPERATING EXPENSES OF THE MASTER PORTFOLIO WHICH ARE ALLOCABLE TO THE PORTFOLIO)
FOR THE CURRENT FISCAL YEAR.
ANNUAL FUND OPERATING EXPENSES FOR SERVICE SHARES AFTER FEE WAIVERS
AS A PERCENTAGE OF DAILY NET ASSETS
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INDEX
EQUITY
PORTFOLIO
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Advisory fees of the Master Portfolio................................................. .025%
Operating expenses of the Master Portfolio............................................ --
Other operating expenses of the Master Portfolio...................................... --
---
Administration fees(1).............................................................. --
Service Fees(1)..................................................................... .15
Other expenses...................................................................... .26
---
Total fund operating expenses......................................................... .48%
===
</TABLE>
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(1) Administration fees are net of waivers of % for the Portfolio. The
Administrators are under no obligation to waive or continue waiving such
fees, but have informed the Fund that they expect to waive or continue
waiving such fees as necessary to maintain the Portfolio's total operating
expenses during the current fiscal year 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 Fund's most recent 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:
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ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
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<S> <C> <C> <C> <C>
Index Equity Portfolio....................... $5 $15 $ 27 $60
</TABLE>
The foregoing Expense Table and Example are intended to assist investors in
understanding the Portfolio's estimated operating expenses and the Portfolio's
pro rata share of the Master Portfolio's advisory fees and operating expenses.
Investors bear these expenses either directly or indirectly. The information in
the table for the Index Equity Portfolio is based on the advisory fees,
administration fees and other expenses payable after fee waivers with respect to
the Portfolio for the fiscal year ended September 30, 1994, as restated to
include fees relating to the Service Plan and fees for other shareholder support
activities borne by Service Shares and to reflect the elimination of direct
advisory fees, revised administration fee waivers and the addition of the
Portfolio's pro rata share of the Master Portfolio's advisory fees and other
operating expenses. Total operating expenses would have been: %, for
Service Shares of the Index Equity Portfolio, without such fee waivers and with
fees relating to the Service Plan and fees for other shareholder support
activities. See Footnote 1 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, the Fund's operating expenses and the
operating expenses of the Master Portfolio.
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.
3
<PAGE> 6
The Board of Trustees of the Fund believes that the aggregate per share
expenses of the Portfolio and the Master Portfolio in which the Portfolio's
assets are invested will be approximately equal to the expenses which the
Portfolio would incur if the Fund retained the services of an investment adviser
for the Portfolio and the assets of the Portfolio were invested directly in the
type of securities held by the Master Portfolio.
CERTAIN RISK FACTORS TO CONSIDER
An investment in the Portfolio is subject to certain investment
considerations. As with other mutual funds, there can be no assurance that the
Portfolio will achieve its investment objective. The Master Portfolio may:
acquire and hold equity securities; enter into repurchase agreements; lend
portfolio securities to third parties; and enter into futures contracts and
options thereon. 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
Except for the financial data relating to the six month period ended March
31, 1995, the financial data included in the tables below has been derived from
the financial statements incorporated by reference in the Statement of
Additional Information and has been audited by Coopers & Lybrand, L.L.P., the
Fund's independent accountants. This financial data should be read in
conjunction with such financial statements. The financial data reflects the
financial experiences of the Portfolio prior to its transformation, on December
, 1995 into a feeder portfolio of the Master Portfolio. Further information
about the performance of the Portfolio is available in the annual report to
shareholders. Both the Statement of Additional Information and the annual report
to shareholders may be obtained from the Fund free of charge by calling the
number on the front cover of this Prospectus.
4
<PAGE> 7
THE PNC(R) FUND
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
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INDEX EQUITY PORTFOLIO
---------------------------
SERVICE CLASS
---------------------------
FOR THE
SIX FOR THE
MONTHS PERIOD
ENDED YEAR 7/29/93(1)
3/31/95 ENDED THROUGH
(UNAUDITED) 9/30/94 9/30/93
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Net asset value at beginning of period.............................................. $ 10.93 $ 11.02 $ 10.76
-------- -------- --------
Income from investment operations
Net investment income............................................................ 0.16 0.29 0.05
Net gain (loss) on investments (both realized and unrealized).................... 0.85 0.02 0.29
-------- -------- --------
Total from investment operations............................................. 1.01 0.31 0.34
-------- -------- --------
Less distributions
Distributions from net investment income......................................... (0.16) (0.29) (0.08)
Distributions from net realized capital gains.................................... (0.12) (0.11) --
-------- -------- --------
Total distributions.......................................................... (0.28) (0.40) (0.08)
-------- -------- --------
Net asset value at end of period.................................................... $ 11.66 $ 10.93 $ 11.02
========= ========= =========
Total return........................................................................ 9.46% 2.78% 3.16%
Ratios/Supplemental data
Net assets at end of period (in thousands)....................................... $ 49,834 $ 27,376 $ 12,441
Ratios of expenses to average net assets
After advisory/administration fee waivers...................................... 0.40% (2) 0.40% 0.41% (2)
Before advisory/administration fee waivers..................................... 0.76% (2) 0.77% 0.53% (2)
Ratios of net investment income to average net assets
After advisory/administration fee waivers...................................... 2.73% (2) 2.49% 3.04% (2)
Before advisory/administration fee waivers..................................... 2.37% (2) 2.12% 2.92% (2)
Portfolio turnover rate............................................................. 3% 17% 8%
</TABLE>
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(1) Commencement of operations.
(2) Annualized.
(3) Sales load not reflected in total return.
5
<PAGE> 8
INVESTMENT POLICIES
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INDEX EQUITY PORTFOLIO
The Portfolio's investment objective and policies may be changed by the
Fund's Board of Trustees without shareholder approval.
The Portfolio pursues its investment objective by investing all of its
assets in the U.S. Large Company Series (the "Master Portfolio") of The DFA
Investment Trust Company (the "Trust"), which in turn invests in the stocks
which comprise the S&P 500 Index in approximately the same proportions as they
are represented in such Index. The S&P 500 Index is composed of 500 common
stocks chosen on the basis of market value and industry diversification. While
most issuers are among the 500 largest U.S. companies in terms of aggregate
market value, some other stocks are included for purposes of diversification.
Since the investment characteristics of the Portfolio will correspond to those
of the Master Portfolio, the following is a discussion of the various
investments of and techniques employed by the Master Portfolio.
The Master Portfolio will operate as an "index" portfolio and, therefore,
will not be managed traditionally (through the use of economic, financial or
market analysis). Adverse performance will ordinarily not result in the
elimination of a stock from the Master Portfolio. The investment performance of
the Master Portfolio and the Portfolio is expected to approximate the investment
performance of the S&P 500 Index, which tends to be cycical in nature,
reflecting periods when stock prices generally rise or fall. The Master
Portfolio will remain invested in common stocks even when stock prices are
generally falling. During normal market conditions, the Master Portfolio will
normally invest at least 95% of the value of its total assets in stocks that
comprise the S&P 500 Index. A portion of its assets, however, (generally not
more than 5% of its net assets) may be invested in U.S. Government obligations,
dollar denominated obligations of foreign issuers issued in the U.S., bank
obligations (including obligations of U.S. subsidiaries and branches of foreign
banks), corporate obligations, commercial paper, repurchase agreements and
obligations of supranational organizations. Generally such interest-bearing
obligations will mature within one year from the date of settlement, but may
mature within two years from the date of settlement.
The Master Portfolio may acquire index futures contracts and options
thereon in order to commit funds awaiting investment in stocks or maintain
liquidity. To enter into a futures contract, the Master 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. The Master Portfolio will not purchase index
futures contracts or options if as a result more than 5% of its total assets
would then consist of initial and variation margin deposits on such contracts or
options.
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
Master Portfolio is subject to its adviser's ability to correctly predict
movements in the direction of the market. For example, if the Master 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, it 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 future
pricing. As a result, a relatively small price movement in a futures contract
may result in
6
<PAGE> 9
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.
The Master Portfolio may lend securities to qualified brokers, dealers,
bankers and other financial institutions for the purpose of earning additional
income. The value of securities loaned may not exceed 33 1/3% of the value of
the Master Portfolio's total assets. In the event of bankruptcy of the borrower,
the Trust could experience delay in recovering the loaned securities. Management
of the Trust believes that the risk can be controlled through careful monitoring
procedures.
The Master Portfolio may also invest in repurchase agreements. In the event
of the bankruptcy of the other party to the repurchase agreement, the Trust
could experience delay in recovering the securities underlying such agreement as
a loss. Management of the Trust believes that the risk can be controlled through
stringent security selection criteria and careful monitoring procedures.
The Master Portfolio has reserved the right to borrow amounts not exceeding
33% of its net assets for the purposes of making redemption payments. When
advantageous opportunities to do so exist, the Master Portfolio may also
purchase securities when borrowings exceed 5% of the value of its net assets.
Such purchases can be considered to be "leveraging" and, in such circumstances,
the net asset value of the Master Portfolio may increase or decrease at a
greater rate than would be the case if the Master Portfolio had not leveraged.
The interest payable on the amount borrowed would increase the Master
Portfolio's expenses and, if the appreciation and income produced by the
investments purchased when the Master Portfolio has borrowed are less than the
cost of borrowing, the investment performance of the Master Portfolio will be
reduced as a result of leveraging.
PORTFOLIO TURNOVER RATES. Ordinarily, portfolio securities will not be sold
by the Master Portfolio except to reflect additions or deletions of stocks that
comprise the S&P 500 Index, including mergers, reorganizations and similar
transactions and, to the extent necessary, to provide cash to pay redemptions of
the Master Portfolio's shares. Although it may vary from year to year, it is
currently estimated that under normal market conditions the annual portfolio
turnover rate for the Master Portfolio may be as high as %. High portfolio
turnover rates (i.e., over 100%) will generally result in higher transaction
costs to the Master Portfolio and, indirectly, to the Portfolio.
INVESTMENT LIMITATIONS
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The Portfolio is subject to the following fundamental investment
limitations, which may not be changed except upon the affirmative vote of the
holders of a majority of the Portfolio's outstanding Shares.
1. Purchase securities of any one issuer (other than securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities or
certificates of deposit for any such securities) if more than 5% of the
value of the Portfolio's total assets would (taken at current value) be
invested in the securities of such issuer, or more than 10% of the issuer's
outstanding voting securities would be owned by the Portfolio or the Fund,
except that up to 25% of the value of the Portfolio's total assets may
(taken at current value) be invested without regard to these limitations.
For purposes of this limitation, a security is considered to be issued by
the entity (or entities) whose assets and revenues back the security. A
guarantee of a security shall not be deemed to be a security issued by the
guarantor when the value of all securities issued and guaranteed by the
guarantor, and owned by the Portfolio, does not exceed 10% of the value of
the Portfolio's total assets.
2. 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 (as defined in Investment Limitation
No. 1 above) 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
7
<PAGE> 10
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.
3. Borrow money or issue senior securities, except that each 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. No Portfolio will 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 a
Portfolio's investment practices are not deemed to be pledged for purposes
of this limitation.
4. Notwithstanding the investment limitations of the Index Equity
Portfolio, the Index Equity Portfolio may invest all of its assets in
shares of an open-end management investment company with substantially the
same investment objective, policies and limitations as the Portfolio.
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
the Portfolio's securities will not constitute a violation of such limitation,
except that any borrowing by the Portfolio that exceeds the fundamental
investment restrictions stated above must be reduced to meet such restrictions
within the period required by the 1940 Act (currently three days).
For information on additional limitations relating to the Portfolios, see
the Fund's Statement of Additional Information.
MASTER-FEEDER STRUCTURE
The Portfolio, unlike many other investment companies which directly
acquire and manage their own portfolio of securities, seeks to achieve its
investment objective by investing all of its investable assets in the Master
Portfolio. The Portfolio may withdraw its investment in the Master Portfolio at
any time upon days notice to the Master Portfolio if the Board of
Trustees of the Fund determines that it is in the best interest of the Portfolio
to do so. Upon any such withdrawal, the Board of Trustees would consider what
action might be taken, including the investment of all of the assets of the
Portfolio in another pooled investment entity having the same investment
objective as the Portfolio or the hiring of an investment adviser to manage the
Portfolio's assets in accordance with the investment policies described above
with respect to the Master Portfolio.
The Master Portfolio is a separate series of the Trust, which is a business
trust created under the laws of the State of Delaware. The Portfolio and other
institutional investors that may invest in the Master Portfolio from time to
time (e.g., other investment companies) will each bear a share of all
liabilities of the Master Portfolio. Under the Delaware Business Trust Act,
shareholders of the Master Portfolio have the same limitation of personal
liability as shareholders of a Delaware corporation. Accordingly, Fund
management believes that neither the Portfolio nor its shareholders will be
adversely affected by reason of the Portfolio's investing in the Master
Portfolio.
The shares of the Master Portfolio will be offered to institutional
investors in private placements for the purpose of increasing the funds
available for investment and to achieve economies of scale that might be
available at higher asset levels. The expenses of such other institutional
investors and their returns may differ from those of the Portfolio. While
investment in the Master Portfolio by other institutional investors offers
potential benefits to the Master Portfolio (and, indirectly, to the Portfolio),
economies of scale and related expense reductions might not be achieved. Also,
if an institutional investor were to redeem its interest in the Master
Portfolio, the remaining investors in the Master Portfolio could experience
higher pro rata operating expenses and correspondingly lower returns. In
addition, institutional
8
<PAGE> 11
investors that have a greater pro rata ownership interest in the Master
Portfolio than the Portfolio could have effective voting control over the
operation of the Master Portfolio.
Shares in the Master Portfolio have equal, non-cumulative voting rights,
except as set forth below, and with no preferences as to conversion, exchange,
dividends, redemption or any other feature. Shareholders of the Trust have the
right to vote only (i) for removal of its trustees, (ii) with respect to such
additional matters relating to the Trust as may be required by the applicable
provisions of the 1940 Act, including the approval of the investment advisory
agreement and the selection of trustees and accountants, and (iii) on such other
matters as the trustees of the Trust may consider necessary or desirable. In
addition, approval of the shareholders of the Trust is required to adopt any
amendments to the Agreement and Declaration of Trust of the Trust which would
adversely affect to a material degree the rights and preferences of the shares
of the Master Portfolio or to increase or decrease their par value. The Master
Portfolio's shareholders will also be asked to vote on any proposal to change a
fundamental investment policy (i.e. a policy that may be changed only with the
approval of shareholders) of the Master Portfolio.
If the Portfolio, as a shareholder of the Master Portfolio, is requested to
vote on matters pertaining to the Master Portfolio, the Fund's trustees intend
to vote all of the shares that the Master Portfolio held in the Portfolio
without submitting any such questions to the shareholders of the Portfolio. If
the Fund's trustees decide to adopt "pass-through" voting, the Portfolio, if
required under the 1940 Act or other applicable law, would hold a meeting of its
shareholders and would cast its votes proportionately as instructed by Portfolio
shareholders. In such cases, shareholders of the Portfolio, in effect, would
have the same voting rights they would have as direct shareholders of the Master
Portfolio.
The investment objective of the Master Portfolio may not be changed without
approval of its shareholders. Shareholders of the Portfolio will receive written
notice thirty days prior to the effective date of any change in the investment
objective of the Master Portfolio. If the Master Portfolio changes its
investment objective in a manner which is inconsistent with the investment
objective of the Portfolio and the Fund's Board of Trustees fails to approve a
similar change in the investment objective of the Portfolio, the Portfolio would
be forced to withdraw its investment in the Master Portfolio and either seek to
invest its assets in another registered investment company with the same
investment objective as the Portfolio, which might not be possible, or retain an
investment adviser to manage the Portfolio's assets in accordance with its own
investment objective, possibly at increased cost. A withdrawal by the Portfolio
of its investment in the Master Portfolio could result in a distribution in kind
of portfolio securities (as opposed to a cash distribution) to the Portfolio.
Should such a distribution occur, the Portfolio could incur brokerage fees or
other transaction costs in converting such securities to cash in order to pay
redemptions. In addition, a distribution in kind to the Portfolio could result
in a less diversified portfolio of investments and could adversely affect the
liquidity of the Portfolio.
The policy of the Portfolio, and other similar investment companies, to
invest their investable assets in funds such as the Master Portfolio is a
relatively recent development in the mutual fund industry and, consequently,
there is a lack of substantial experience with the operation of this policy.
There may also be other investment companies through which you can invest
in the Master Portfolio which may have higher or lower fees and expenses than
those of the Portfolio and which may therefore have different performance
results than the Portfolio. Information concerning whether an investment in the
Master Portfolio may be available through another entity investing in the Master
Portfolio may be obtained by calling [ ].
* * *
9
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MANAGEMENT
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BOARD OF TRUSTEES
The business and affairs of the Fund and the Trust are managed under the
direction of the Fund's Board of Trustees and the Trust's Board of Trustees,
respectively. The Statement of Additional Information contains the name of each
trustee of the Fund and of the Trust and certain background information.
------------------------------------
ADVISER
Dimensional Fund Advisors Inc. (the "Adviser"), located at 1299 Ocean
Avenue, 11th Floor, Santa Monica, CA 90401, serves as investment adviser to the
Master Portfolio and is responsible for the management of its assets.
The Adviser was organized in May 1981 and is engaged in the business of
providing investment management services to institutional investors. The
Adviser's assets under management totalled approximately $11 billion at
, 1995. David G. Booth and Rex A. Sinquefield, both of whom are
trustees and officers of the Trust and directors and officers of the Adviser,
together own approximately 55% of the Adviser's outstanding stock and may be
deemed controlling persons of the Adviser.
For the services provided to the Master Portfolio and expenses assumed
under the advisory agreement between the Adviser and the Trust, the Adviser is
entitled to receive a fee at the annual rate of .025% of the Master Portfolio's
average daily net assets. For the Master Portfolio's fiscal year ended November
30, 1994, the Adviser received a fee for its investment advisory services which,
on an annual basis, equaled .025% of the Master Portfolio's average daily net
assets.
------------------------------------
ADMINISTRATORS
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. PFPC is an indirect wholly-owned subsidiary 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, the
Administrators 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. The Fund paid the Administrators an
administration fee at the annual rate of .01% of the average daily net assets of
the Index Equity Portfolio for the year ended September 30, 1994, and the
Administrators waived combined administration fees at annual rates of .19% of
the average daily net assets of the Index Equity Portfolio, for that year. From
time to time the Administrators may waive all or any portion of the
administration fees for the Portfolio. See "Expense Table" above for information
on the administrative fees waived by the Administrators for the current fiscal
year.
10
<PAGE> 13
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND CUSTODIAN
PNC Bank serves as the Fund's custodian for the Fund and the Trust and PFPC
serves as the transfer agent and dividend disbursing agent for the Fund.
------------------------------------
EXPENSES
The Fund and the Trust each bears all of its own costs and expenses,
although the Portfolio bears its pro rata portion of any costs and expenses of
the Master Portfolio which consist of advisory fees and other operating expenses
such as custody, legal and accounting fees. Other costs and expenses borne by
the Portfolio include: services of its independent accountants, legal counsel,
taxes, insurance premiums, costs incidental to meetings of its shareholders and
trustees, the cost of filing its registration statements under federal and state
securities laws, reports to shareholders, and transfer and dividend disbursing
agency, administrative services and custodian fees. Expenses of the Master
Portfolio, which are determined by the Trust's Board of Trustees to be
extraordinary, would be borne by it. Expenses which are not allocable to a
particular Trust portfolio or Fund portfolio are borne by each Trust portfolio
or Fund portfolio on the basis of the fees paid by the Fund or Trust to PFPC.
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 Fund's 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. Expenses are deducted from the total income of the Portfolio before
dividends and distributions are paid.
If the total expenses borne by the Portfolio in any fiscal year exceed the
expense limitations imposed by applicable state securities regulations, 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" and "Management--Administrators" for
discussions of fee waivers.
------------------------------------
PORTFOLIO TRANSACTIONS
The Adviser place portfolio securities transactions with a view to
obtaining best price and execution. Subject to that goal, transactions may be
placed with securities firms that are an affiliate of the Adviser.
------------------------------------
BANKING LAWS
Banking laws and regulations currently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered open-end investment company continuously
engaged in the issuance of its shares, and prohibit banks generally from
underwriting securities, but such banking laws and regulations do not prohibit
such a holding company or affiliate or banks generally from acting as investment
adviser, administrator, transfer agent or custodian to such an investment
company, or from purchasing shares of such a company as agent for and upon the
order of customers. PNC Bank, 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.
11
<PAGE> 14
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.
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.
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 Portfolio's 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 may 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
12
<PAGE> 15
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.
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 each Service Share of the Portfolio is calculated
as of the close of regular trading hours on the NYSE (currently 4:00 p.m.
Eastern Time) on each Business Day by adding the value of all its shares in the
Master Portfolio and other assets allocable to the Shares, subtracting the
liabilities allocable to the 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.
The net asset value per share of the Master Portfolio is calculated as of
the close of the NYSE by dividing the total market value of its investments and
other assets, less any liabilities, by the total outstanding shares of the
Master Portfolio. Securities held by the Master Portfolio which are listed on
the securities exchange and for which market quotations are available are valued
at the last quoted sale price of the day or, if there is no such reported sale,
at the mean between the most recent quoted bid and asked prices. Price
information on listed securities is taken from the
13
<PAGE> 16
exchange where the security is primarily traded. Unlisted securities for which
market quotations are readily available are valued at the mean between the most
recent bid and asked prices. The value of other assets and securities for which
no quotations are readily available (including restricted securities) are
determined in good faith at fair market value in accordance with procedures
adopted by the Trust's Board of Trustees.
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
it 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 that 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 quarterly as a dividend to
investors who are Shareholders of the Portfolio at the close of business on the
day of declaration. All such dividends are paid within ten days after the end of
each quarter. Net realized capital gains (including net short-term capital
gains), if any, will be distributed by the Portfolio at least annually.
The Portfolio seeks its investment objective by investing all of its
investable assets in Master Portfolio. The Portfolio is allocated its pro rata
share of the ordinary income and deductions of the Master Portfolio. This net
income, less the Portfolio's expenses incurred in operations, is the Portfolio's
net investment income from which dividends are distributed as described above.
The Master Portfolio also allocates to Portfolio its pro rata share of capital
gains, if any, realized by Master Portfolio. Any realized net capital gains of
the Portfolio will be distributed as described above.
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 has elected 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 and excise 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.
The Master Portfolio intends to qualify for taxation as a partnership for
Federal income tax purposes. As such, the Master Portfolio is not subject to tax
and the Portfolio will be treated for Federal income tax purposes as recognizing
its pro rata portion of the Master Portfolio's income and deductions, and owning
its pro rata share of the Master Portfolio's assets. The Portfolio's status as a
regulated investment company is dependent on, among other things, the Master
Portfolio's continued classification as a partnership for Federal income tax
purposes.
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.
14
<PAGE> 17
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 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 134 classes (29 classes of Institutional
Shares, 21 classes of Series B Investor Shares and 28 classes each of Service
Shares, Series A Investor Shares and Series C Investor Shares), representing
interests in the Fund's investment portfolios. Institutional Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares in the
Portfolio have different expenses than the Service Shares offered under this
Prospectus, which may affect performance. Call the Distributor at (800) 998-7633
for information on those other classes of shares in the Portfolio which are
offered under separate Prospectuses. This Prospectus describes Index Equity
Portfolio, which is classified as a diversified company under the 1940 Act. The
Index Equity Portfolio was established with only one class of shares. The
original class of shares was available to all investors until the subsequent
establishment of multiple classes in the Portfolio. In addition, the Board of
Trustees has also authorized the issuance of additional classes of shares
representing interests in other investment portfolios of the Fund. For
information regarding these other portfolios, 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 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.
15
<PAGE> 18
On , 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.
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 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 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.
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 S&P 500 Index, EAFE, the Dow Jones
Industrial Average, the Dimensional Fund Advisor's Small Cap Index, 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, the Lipper International Fund Index, the Shearson Lehman
Hutton Government Corporate Bond Index and the Financial Times World Stock
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 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 the Master 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.
* * *
16
<PAGE> 19
=====================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
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 AND, IF GIVEN OR MADE, SUCH REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS
DISTRIBUTOR. THE INDEX EQUITY PORTFOLIO IS NOT SPONSORED, ENDORSED, SOLD OR
PROMOTED BY STANDARD & POOR'S CORPORATION. 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 OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Introduction..................................... 2
Financial Highlights............................. 4
Investment Policies.............................. 6
Investment Limitations........................... 7
Management....................................... 10
Purchase and Redemption of Shares................ 12
Net Asset Value.................................. 13
Dividends and Distributions...................... 14
Taxes............................................ 14
Description of Shares............................ 15
Other Information................................ 16
</TABLE>
CO-ADMINISTRATOR AND TRANSFER AGENT
PFPC Inc.
Wilmington, Delaware
CO-ADMINISTRATOR
Provident Distributors, Inc.
Radnor, Pennsylvania
DISTRIBUTOR
Provident Distributors, Inc.
Radnor, Pennsylvania
COUNSEL
Drinker Biddle & Reath
Philadelphia, Pennsylvania
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand, L.L.P.
Philadelphia, Pennsylvania
PNCS-P-003M
=====================================================
=====================================================
THE INDEX EQUITY
PORTFOLIO
SERVICE CLASS
PROSPECTUS
INDEX
EQUITY PORTFOLIO
- -----------------------------------------------------
DECEMBER , 1995
=====================================================
<PAGE> 20
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 21
THE PNC(R) FUND
(SERIES A AND SERIES B INVESTOR SHARES
OF THE INDEX EQUITY PORTFOLIO)
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A ITEM LOCATION
- -------------- --------
<S> <C>
PART A PROSPECTUS
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
6. Capital Stock and Other Securities . . . . . . Cover Page; Dividends
and Distributions;
Description of
Shares
7. Purchase of Securities Being Offered. . . . . How to Purchase Shares
and Net Asset
Value
8. Redemption or Repurchase. . . . . . . . . . . How to Redeem Shares
9. Legal Proceedings . . . . . . . . . . . . . . Inapplicable
</TABLE>
<PAGE> 22
THE INDEX EQUITY PORTFOLIO
INVESTOR CLASS
The PNC(R) Fund (the "Fund") consists of twenty-six investment portfolios.
This Prospectus relates to the Index Equity Portfolio (the "Portfolio") with an
investment objective which seeks to duplicate the capital performance and
dividend income of the Standard & Poor's 500(R) Composite Stock Price Index (the
"S&P 500 Index").
THE PORTFOLIO, UNLIKE MANY OTHER INVESTMENT COMPANIES WHICH DIRECTLY
ACQUIRE AND MANAGE THEIR OWN PORTFOLIO OF SECURITIES, SEEKS TO ACHIEVE ITS
INVESTMENT OBJECTIVE BY INVESTING ALL OF ITS INVESTABLE ASSETS IN A SERIES OF
SHARES (THE "MASTER PORTFOLIO") OF AN OPEN-END MANAGEMENT INVESTMENT COMPANY,
THE DFA INVESTMENT TRUST COMPANY. THE MASTER PORTFOLIO HAS SUBSTANTIALLY THE
SAME INVESTMENT OBJECTIVE, POLICIES AND LIMITATIONS AS THE PORTFOLIO. THE
PORTFOLIO WILL PURCHASE SHARES OF THE MASTER PORTFOLIO AT NET ASSET VALUE. THE
NET ASSET VALUE OF THE PORTFOLIO WILL RESPOND TO INCREASES AND DECREASES IN THE
VALUE OF THE MASTER PORTFOLIO'S SECURITIES AND TO THE EXPENSES OF THE MASTER
PORTFOLIO ALLOCABLE TO AND THE EXPENSES OF THE PORTFOLIO. INVESTORS SHOULD
CAREFULLY CONSIDER THIS INVESTMENT APPROACH. FOR ADDITIONAL INFORMATION, SEE
"INVESTMENT POLICIES--MASTER/FEEDER STRUCTURE."
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 December ,
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
FEDERALLY INSURED BY, GUARANTEED BY, OBLIGATIONS OF OR OTHERWISE SUPPORTED BY
THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENTS IN SHARES OF THE
FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL AMOUNT
INVESTED.
- --------------------------------------------------------------------------------
PROSPECTUS December , 1995
<PAGE> 23
INTRODUCTION
- --------------------------------------------------------------------------------
The Fund is an open-end management investment company which has registered
shares in 26 investment portfolios, one of which is included in this Prospectus.
Shares are offered by the Fund's distributor to investors generally.
THE ADVISOR
Dimensional Fund Advisors Inc. (the "Adviser") serves as investment adviser
to the Master Portfolio.
THE ADMINISTRATORS
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> 24
EXPENSE TABLE
Annual Fund operating expenses include the expenses of the Portfolio and
the expenses of the Master Portfolio which are allocable to the Portfolio. Below
is a summary of the estimated operating expenses of the Portfolio (including the
operating expenses of the Master Portfolio which are allocable to the Portfolio)
for the current fiscal year.
<TABLE>
<CAPTION>
INDEX EQUITY
PORTFOLIO
--------------------
SERIES A SERIES B
-------- --------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Front-End Sales Charge(1)
(as a percentage of offering price)......................................... 4.5% 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 5.0%
ANNUAL FUND OPERATING EXPENSES FOR INVESTOR SHARES AFTER FEE WAIVERS
AS A PERCENTAGE OF DAILY NET ASSETS
Advisory fees of the Master Portfolio......................................... .025% .025%
12b-1 fees(4)................................................................. .40 .75
Operating expenses of the Master Portfolio.................................... % %
Other operating expenses of the Master Portfolio.............................. -- --
------ ------
Administration fees(3)...................................................... .02 .02
Service fees................................................................ None .25
Other expenses(3)........................................................... -- --
------ ------
Total fund operating expenses................................................. .65% 1.25%
====== ======
</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--Purchases of Series B Shares."
(3) Administration fees are net of waivers of % for the Portfolio. The
Administrators are under no obligation to waive or continue waiving such
fees, but have informed the Fund that they expect to waive or continue
waiving such fees as necessary to maintain the Portfolio's total operating
expenses during the current fiscal year 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 Fund's most recent 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").
3
<PAGE> 25
EXAMPLE
An investor in Investor Shares would pay the following expenses on a $1,000
investment in Shares of each of the Portfolios, assuming (1) 5% annual return,
and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Index Equity Portfolio
Series A Shares*....................................... $51 $65 $80 $122
Series B Shares**...................................... 63 72 92 119***
</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 the Series B Shares to Series A Shares after six
years.
The foregoing Expense Table and Example are intended to assist investors in
understanding the Portfolios' shareholder transaction and estimated operating
expenses and the Portfolio's pro rata share of the Master Portfolios advisory
fees and operating expenses. Investors bear these expenses either directly or
indirectly. The information in the table for the Portfolio is based on the
advisory fees, administration fees and other expenses payable after fee waivers
with respect to the particular Portfolios for the fiscal year ended September
30, 1994, as restated to include 12b-1 fees borne by Investor Shares and service
fees borne by Series B Shares and to reflect the eliminations of direct advisory
fees, revised administration fee waivers and the addition of the Portfolio's pro
rata share of the Master Portfolio's advisory fees and other operating expenses.
Total operating expenses would have been: i) .98% for Series A Investor Shares
of the Portfolio and ii) 1.58% for Series B Investor Shares of the Portfolios
without such fee waivers and with 12b-1 fees. See Footnote 3 to the Expense
Table, "Management," "Distribution of Shares," "How to Purchase Shares" and
"Description of Shares" for a further description of shareholder transaction
expenses, the Fund's operating expenses and the operating expenses of the Master
Portfolio.
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-advisers, 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 one 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
4
<PAGE> 26
Shares of one 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 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."
The Board of Trustees of the Fund believes that the aggregate per share
expenses of the Portfolio and the Master Portfolio in which the Portfolio's
assets are invested will be approximately equal to the expenses which the
Portfolio would incur if the Fund retained the services of an investment adviser
for the Portfolio and the assets of the Portfolio were invested directly in the
type of securities held by the Master Portfolio.
CERTAIN RISK FACTORS TO CONSIDER
An investment in the Portfolio is subject to certain investment
considerations. As with other mutual funds, there can be no assurance that the
Portfolio will achieve its investment objective. The Master Portfolios may:
acquire and hold equity securities, enter into repurchase agreements; lend
portfolio securities to third parties; and enter into futures contracts and
options thereon. 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
Except for the financial data relating to the six month period ended March
31, 1995, the financial data included in the tables below has been derived from
the financial statements incorporated by reference in the Statement of
Additional Information and has been audited by Coopers & Lybrand, L.L.P., the
Fund's independent accountants. This financial data should be read in
conjunction with such financial statements. The financial data reflects the
financial experiences of the Portfolio prior to its transformation on
December , 1995 into a Feeder portfolio of the Master Portfolio. Further
information about the performance of the Portfolio is available in the annual
report to shareholders. Both the Statement of Additional Information and the
annual report to shareholders may be obtained from the Fund free of charge by
calling the number on the front cover of this Prospectus.
5
<PAGE> 27
THE PNC(R) FUND
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
INDEX EQUITY PORTFOLIO
------------------------------------------------
SERIES A INVESTOR CLASS
------------------------------------------------
FOR THE FOR THE
SIX MONTHS PERIOD
ENDED YEAR YEAR 6/02/92(1)
3/31/95 ENDED ENDED THROUGH
(UNAUDITED) 9/30/94 9/30/93 9/30/92
----------- ------- ------- --------
<S> <C> <C> <C> <C>
Net asset value at beginning of period................................. $10.93 $11.02 $10.06 $10.07
------ ------ ------ ------
Income from investment operations
Net investment income.............................................. 0.14 0.25 0.27 0.10
Net gain (loss) on investments (both realized and unrealized)...... 0.85 0.96 (0.01)
------ ------ ------ ------
Total from investment operations............................... 0.99 0.29 1.23 0.09
------ ------ ------ ------
Less distributions
Distributions from net investment income........................... (0.16) (0.27) (0.10)
Distributions from net realized capital gains...................... (0.12) (0.11) -- --
------ ------ ------ ------
Total distributions............................................ (0.28) (0.38) (0.27) (0.10)
------ ------ ------ ------
Net asset value at end of period....................................... $11.64 $10.93 $11.02 $10.06
====== ====== ====== ======
Total return........................................................... 9.23%(3) 12.33%(3) 0.91%(3)
Ratios/Supplemental data
Net assets at end of period (in thousands)......................... $3,736 $2,632 $1,263 $56
Ratios of expenses to average net assets
After advisory/administration fee waivers........................ 0.55%(2) 0.55% 0.49% 0.45%(2)
Before advisory/administration fee waivers....................... 0.91%(2) 0.92% 0.61% 0.64%(2)
Ratios of net investment income to average net assets
After advisory/administration fee waivers........................ 2.56%(2) 2.72% 2.48% 2.85%(2)
Before advisory/administration fee waivers....................... 2.20%(2) 1.98% 2.36% 2.66%(2)
Portfolio turnover rate................................................ 3% 17% 8% 23%
</TABLE>
- -------------
(1) Commencement of operations.
(2) Annualized.
(3) Sales load not reflected in total return.
6
<PAGE> 28
INVESTMENT POLICIES
- --------------------------------------------------------------------------------
INDEX EQUITY PORTFOLIO
The Portfolio investment objective and policies may be changed by the
Fund's Board of Trustees without shareholder approval.
The Portfolio pursues its investment objective by investing all of its
assets in the U.S. Large Company Series (the "Master Portfolio") of The DFA
Investment Trust Company (the "Trust"), which in turn intends to invest in all
of the stocks which comprise the S&P 500 Index in approximately the same
proportions as they are represented in such Index. The amount of each stock
purchased for the Master Portfolio therefore, will be based on its respective
market capitalization. The S&P 500 Index is composed of 500 common stocks chosen
on the basis of market value and industry diversification. While most issuers
are among the 500 largest U.S. companies in terms of aggregate market value,
some other stocks are included for purposes of diversification. Since the
investment characteristics of the Portfolio will correspond to those of the
Master Portfolio, the following is a discussion of the various investments of
and techniques employed by the Master Portfolio.
The Master Portfolio will operate as an "index" portfolio and, therefore,
will not be managed traditionally (through the use of economic, financial or
market analysis). Adverse performance will ordinarily not result in the
elimination of a stock from the Master Portfolio. The investment performance of
the Master Portfolio and the Portfolio is expected to approximate the investment
performance of the S&P 500 Index, which tends to be cyclical in nature,
reflecting periods when stock prices generally rise or fall. The Master
Portfolio will remain invested in common stocks even when stock prices are
generally falling. During normal market conditions, the Master Portfolio will
normally invest at least 95% of the value of its total assets in stocks that
comprise the S&P 500 Index. A portion of its assets, however, (generally not
more than 5% of its net assets) may be invested in U.S. Government obligations,
dollar denominated obligations of foreign issuers issued in the U.S., bank
obligations (including obligations of U.S. subsidiaries and branches of foreign
banks), corporate obligations, commercial paper, repurchase agreements and
obligations of supranational organizations. Generally such interest-bearing
obligations will mature within one year from the date of settlement, but may
mature within two years from the date of settlement.
The Master Portfolio may acquire index futures contracts and options
therein in order to commit funds awaiting investment in stocks or maintain
liquidity. To enter into a futures contract, the Master 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.The Master Portfolio will not purchase index
futures contracts or options if as a result more than 5% of its total assets
would then consist of initial and variation margin deposits on such contracts or
options.
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
Master Portfolio is subject to its adviser's ability to correctly predict
movements in the direction of the market. For example, if the Master 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, it 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
7
<PAGE> 29
some strategies can be substantial, due both to the low margin deposits
required, and the extremely high degree of leverage involved in future 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.
The Master Portfolio may lend securities to qualified brokers, dealers,
banks and other financial institutions for the purpose of earning additional
income. The value of securities loaned may not exceed 33 1/3% of the value of
the Master Portfolio's total assets. In the event of bankruptcy of the borrower,
the Trust could experience delay in recovering the loaned securities. Management
of the Trust believe that this risk can be controlled through careful monitoring
procedures.
The Master Portfolio may also invest in repurchase agreements. In the event
of the bankruptcy of the other party to the repurchase agreement, the Trust
could experience delay in recovering the securities underlying such agreement or
a loss. Management of the Trust believes that this risk can be controlled
through stringent security selection criteria and careful monitoring procedures.
The Master Portfolio has reserved the right to borrow amounts not exceeding
33% of its net assets for the purposes of making redemption payments. When
advantageous opportunities to do so exist, the Master Portfolio may also
purchase securities when borrowing exceed 5% of the value of its net assets.
Such purchases can be considered to be "leveraging" and, in such circumstances,
the net asset value of the Master Portfolio may increase or decrease at a
greater rate than would be the case if the Master Portfolio had not leveraged.
The interest payable on the amount borrowed would increase the Master
Portfolio's expenses and, if the appreciation and income produced by the
investments purchased when the Master Portfolio has borrowed are less than the
cost of borrowing, the investment performance of the Master Portfolio will be
reduced as a result of leveraging.
PORTFOLIO TURNOVER RATES. Ordinarily, portfolio securities will not be sold
by the Master Portfolio except to reflect additions or deletions of stocks that
comprise the S&P 500 Index, including mergers, reorganizations and similar
transactions and, to the extent necessary, to provide cash to pay redemptions of
the Master Portfolio's shares. Although it may vary from year to year, it is
currently estimated that under normal market conditions the annual portfolio
turnover rate for the Master Portfolio may be as high as %. High portfolio
turnover rates (i.e., over 100%) will generally result in higher transaction
costs to the Master Portfolio and, indirectly, to the Portfolio.
INVESTMENT LIMITATIONS
- --------------------------------------------------------------------------------
The Portfolio is subject to the following fundamental investment
limitations, which may not be changed except upon the affirmative vote of the
holders of a majority of the Portfolio's outstanding Shares.
1. Purchase securities of any one issuer (other than securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities or
certificates of deposit for any such securities) if more than 5% of the
value of the Portfolio's total assets would (taken at current value) be
invested in the securities of such issuer, or more than 10% of the issuer's
outstanding voting securities would be owned by the Portfolio or the Fund,
except that up to 25% of the value of the Portfolio's total assets may
(taken at current value) be invested without regard to these limitations.
For purposes of this limitation, a security is considered to be issued by
the entity (or entities) whose assets and revenues back the security. A
guarantee of a security shall not be deemed to be a security issued by the
guarantor when the value of all securities issued and guaranteed by the
guarantor, and owned by the Portfolio, does not exceed 10% of the value of
the Portfolio's total assets.
8
<PAGE> 30
2. 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 (as defined in Investment Limitation
No. 1 above) 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.
3. Borrow money or issue senior securities, except that each 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. No Portfolio will 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 a
Portfolio's investment practices are not deemed to be pledged for purposes
of this limitation.
4. Notwithstanding the investment limitations of the Index Equity
Portfolio, the Index Equity Portfolio may invest all of its assets in
shares of an open-end management investment company with substantially the
same investment objective, policies and limitations as the Portfolio.
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
the Portfolio's securities will not constitute a violation of such limitation,
except that any borrowing by the Portfolio that exceeds the fundamental
investment restrictions stated above must be reduced to meet such restrictions
within the period required by the 1940 Act (currently three days).
For information on additional limitations relating to the Portfolio and the
Master Portfolio, see the Fund's Statement of Additional Information.
MASTER-FEEDER STRUCTURE
The Portfolio, unlike many other investment companies which directly
acquire and manage their own portfolio of securities, seeks to achieve its
investment objective by investing all of its investable assets in the Master
Portfolio. The Portfolio may withdraw its investment in the Master Portfolio at
any time upon days notice to the Master Portfolio if the Board of
Trustees of the Fund determines that it is in the best interest of the Portfolio
to do so. Upon any such withdrawal, the Board of Trustees would consider what
action might be taken, including the investment of all of the assets of the
Portfolio in another pooled investment entity having the same investment
objective as the Portfolio or the hiring of an investment adviser to manage the
Portfolio's assets in accordance with the investment policies described above
with respect to the Master Portfolio.
The Master Portfolio is a separate series of the Trust, which is a business
trust created under the laws of the State of Delaware. The Portfolio and other
institutional investors that may invest in the Master Portfolio from time to
time (e.g., other investment companies) will each bear a share of all
liabilities of the Master Portfolio. Under the Delaware Business Trust Act,
shareholders of the Master Portfolio have the same limitation of personal
liability as shareholders of a Delaware corporation. Accordingly, Fund
management believes that neither the Portfolio nor its shareholders will be
adversely affected by reason of the Portfolio's investing in the Master
Portfolio.
9
<PAGE> 31
The shares of the Master Portfolio will be offered to institutional
investors in private placements for the purpose of increasing the funds
available for investment and to achieve economies of scale that might be
available at higher asset levels. The expenses of such other institutional
investors and their returns may differ from those of the Portfolio. While
investment in the Master Portfolio by other institutional investors offers
potential benefits to the Master Portfolio (and, indirectly, to the Portfolio),
economies of scale and related expense reductions might not be achieved. Also,
if an institutional investor were to redeem its interest in the Master
Portfolio, the remaining investors in the Master Portfolio could experience
higher pro rata operating expenses and correspondingly lower returns. In
addition, institutional investors that have a greater pro rata ownership
interest in the Master Portfolio than the Portfolio could have effective voting
control over the operation of the Master Portfolio.
Shares in the Master Portfolio have equal, non-cumulative voting rights,
except as set forth below, and with no preferences as to conversion, exchange,
dividends, redemption or any other feature. Shareholders of the Trust have the
right to vote only (i) for removal of its trustees, (ii) with respect to such
additional matters relating to the Trust as may be required by the applicable
provisions of the 1940 Act, including the approval of the investment advisory
agreement and the selection of trustees and accountants, and (iii) on such other
matters as the trustees of the Trust may consider necessary or desirable. In
addition, approval of the shareholders of the Trust is required to adopt any
amendments to the Agreement and Declaration of Trust of the Trust which would
adversely affect to a material degree the rights and preferences of the shares
of the Master Portfolio or to increase or decrease their par value. The Master
Portfolio's shareholders will also be asked to vote on any proposal to change a
fundamental investment policy (i.e. a policy that may be changed only with the
approval of shareholders) of the Master Portfolio.
If the Portfolio, as a shareholder of the Master Portfolio, is requested to
vote on matters pertaining to the Master Portfolio, the Fund's trustees intend
to vote all of the shares that the Master Portfolio held in the Portfolio
without submitting any such questions to the shareholders of the Portfolio. If
the Fund's trustees decide to adopt "pass-through" voting, the Portfolio, if
required under the 1940 Act or other applicable law, would hold a meeting of its
shareholders and would cast its votes proportionately as instructed by Portfolio
shareholders. In such cases, shareholders of the Portfolio, in effect, would
have the same voting rights they would have as direct shareholders of the Master
Portfolio.
The investment objective of the Master Portfolio may not be changed without
approval of its shareholders. Shareholders of the Portfolio will receive written
notice thirty days prior to the effective date of any change in the investment
objective of the Master Portfolio. If the Master Portfolio changes its
investment objective in a manner which is inconsistent with the investment
objective of the Portfolio and the Fund's Board of Trustees fails to approve a
similar change in the investment objective of the Portfolio, the Portfolio would
be forced to withdraw its investment in the Master Portfolio and either seek to
invest its assets in another registered investment company with the same
investment objective as the Portfolio, which might not be possible, or retain an
investment adviser to manage the Portfolio's assets in accordance with its own
investment objective, possibly at increased cost. A withdrawal by the Portfolio
of its investment in the Master Portfolio could result in a distribution in kind
of portfolio securities (as opposed to a cash distribution) to the Portfolio.
Should such a distribution occur, the Portfolio could incur brokerage fees or
other transaction costs in converting such securities to cash in order to pay
redemptions. In addition, a distribution in kind to the Portfolio could result
in a less diversified portfolio of investments and could adversely affect the
liquidity of the Portfolio.
The policy of the Portfolio, and other similar investment companies, to
invest their investable assets in funds such as the Master Portfolio is a
relatively recent development in the mutual fund industry and, consequently,
there is a lack of substantial experience with the operation of this policy.
10
<PAGE> 32
There may also be other investment companies through which you can invest
in the Master Portfolio which may have higher or lower fees and expenses than
those of the Portfolio and which may therefore have different performance
results than the Portfolio. Information concerning whether an investment in the
Master Portfolio may be available through another entity investing in the Master
Portfolio may be obtained by calling [ ].
* * *
MANAGEMENT
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES
The business and affairs of the Fund and the Trust are managed under the
direction of the Fund's Board of Trustees and the Trust's Board of Trustees,
respectively. The Statement of Additional Information contains the name of each
trustee of the Fund and of the Trust and certain background information.
------------------------------------
ADVISER
Dimensional Fund Advisors Inc. (the "Adviser"), located at 1299 Ocean
Avenue, 11th Floor, Santa Monica, CA 90401, serves as investment adviser to the
Master Portfolio and is responsible for the management of its assets.
The Adviser was organized in May 1981 and is engaged in the business of
providing investment management services to institutional investors. The
Adviser's assets under management totalled approximately $11 billion at
, 1995. David G. Booth and Rex A. Sinquefield, both of whom are
trustees and officers of the Trust and directors and officers of the Adviser,
together own approximately 55% of the Adviser's outstanding stock and may be
deemed controlling persons of the Adviser.
For the services provided to the Master Portfolio and expenses assumed
under the advisory agreement, the Adviser is entitled to receive a fee at the
annual rate of .025% of the Master Portfolio's average daily net assets. For the
Master Portfolio's fiscal year ended November 30, 1994, the Adviser received a
fee for its investment advisory services which, on an annual basis, equaled
.025% of the Master Portfolio's average daily net assets.
------------------------------------
ADMINISTRATORS
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. PFPC is an indirect wholly-owned subsidiary 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, the
Administrators 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
11
<PAGE> 33
average daily net assets in excess of $2 billion. The Fund paid the
Administrators an administration fee at the annual rate of .01% of the average
daily net assets of the Index Equity Portfolio for the year ended September 30,
1994, and the Administrators waived combined administration fees at annual rates
of .19% of the average daily net assets of the Index Equity Portfolio for that
year. From time to time the Administrators may waive all or any portion of the
administration fees for the Portfolio. See "Expense Table" above for information
on the administration fees waived by the Administrators for the current fiscal
year.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND CUSTODIAN
PNC Bank serves as the Fund's custodian for the Fund and the Trust and PFPC
serves as the transfer agent and dividend disbursing agent for the Fund.
------------------------------------
EXPENSES
The Fund and the Trust each bears all of its own costs and expenses,
although the Portfolio bears its pro rata portion of any costs and expenses of
the Master Portfolio which consist of advisory fees and other operating expenses
such as custody, legal and accounting fees. Other costs and expenses borne by
the Portfolio include: services of its independent accountants, legal counsel,
taxes, insurance premiums, costs incidental to meetings of its shareholders and
trustees, the cost of filing its registration statements under federal and state
securities laws, reports to shareholders, and transfer and dividend disbursing
agency, administrative services and custodian fees. Expenses of the Master
Portfolio, which are determined by the Trust's Board of Trustees to be
extraordinary, would be borne by it. Expenses which are not allocable to a
particular Trust portfolio or Fund portfolio are borne by each Trust portfolio
or Fund portfolio on the basis of the fees paid by the Fund or Trust to PFPC.
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 Fund's 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. Expenses are deducted from the total income of the Portfolio before
dividends and distributions are paid.
If the total expenses borne by the Portfolio in any fiscal year exceed the
expense limitations imposed by applicable state securities regulations, 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" and "Management -- Administrators"
for discussion of fee waivers.
------------------------------------
PORTFOLIO TRANSACTIONS
The Adviser places portfolio securities transactions with a view to
obtaining best price and execution. Subject to that goal, transactions may be
placed with securities firms that are affiliated with an affiliate of the
Adviser.
12
<PAGE> 34
------------------------------------
BANKING LAWS
Banking laws and regulations currently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered open-end investment company continuously
engaged in the issuance of its shares, and prohibit banks generally from
underwriting securities, but such banking laws and regulations do not prohibit
such a holding company or affiliate or banks generally from acting as investment
adviser, administrator, transfer agent or custodian to such an investment
company, or from purchasing shares of such a company as agent for and upon the
order of customers. PNC Bank 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.
DISTRIBUTION OF SHARES
- --------------------------------------------------------------------------------
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 a Distribution and Service Plan
("Series A Plan") for Series A Shares and a Series B Distribution Plan ("Series
B Plan" and, collectively with the Series A Plan, the "Plans") for Series B
Shares.
Under each Plan the Distributor is entitled to payments by the Portfolio
for: (i) direct out-of-pocket promotional expenses incurred 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,
payments under the Series B 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. "Direct out-of-pocket promotional expenses"
include amounts spent by the Distributor in connection with 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 out-of-pocket expenses incurred in connection with the promotion of
Shares.
Upon proper authorization by the Fund's trustees, expenses covered by the
Plans may also include other expenses the Distributor (or any other person) may
incur in connection with the distribution of the Fund's Shares including,
without limitation, expenditures for telephone facilities and in-house
telemarketing, or, in the case of the Series A Plan, in connection with
shareholder servicing.
Payments under the Series A Plan will not exceed .55% (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
13
<PAGE> 35
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 Series A Plan with respect to the
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 Series A Plan 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 Series B Plan will not exceed .75% (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 Series B Plan 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 Series B 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 Plans 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.
If in any month the Distributor expends more monies than are immediately
payable under the Plans because of the percentage limitations described above
(or, due to any expense limitation imposed on the Portfolio, monies otherwise
payable by the Portfolio to the Distributor under the Plans are rendered
uncollectible), the unpaid expenditure may be "carried forward" from month to
month until such time, if ever, as it may be paid. In addition, payments to
Service Organizations (which may include the adviser and sub-advisers and their
affiliates) are not tied directly to the Service Organizations' own
out-of-pocket expenses and therefore may be used as they 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 Series B Shares. Such
services will be provided to customers who are the beneficial owners of Series B
Shares and are intended to supplement the services provided by the Fund's
Administrators and transfer agent. In consideration for payment of up to .25%
(on an annualized basis) of the average daily net asset value of Series B Shares
owned beneficially by their customers, 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 Series B Shares; processing dividend and distribution payments from
the Fund on behalf of customers; arranging for bank wires; providing
sub-accounting with respect to Series B 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 Series B Shares pursuant to specific or pre-
14
<PAGE> 36
authorized instructions; providing information periodically to customers showing
their positions in Series B 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 Series B Shares; and providing other
similar shareholder liaison services. Fees relating to the Series B Service Plan
are not paid to Service Organizations or the Distributor with respect to other
classes of shares of the Portfolios ("Service Shares," "Series A Investor
Shares" and "Institutional Shares"). See "Description of Shares." 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.
HOW TO PURCHASE SHARES
- --------------------------------------------------------------------------------
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") is 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
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
15
<PAGE> 37
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; and (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 a 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 Distribution and Service Plan at an annual rate not to exceed
.55% 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 Series B Distribution Plan at an annual rate not to exceed
.75% of the average daily net asset value of the Portfolio's outstanding Series
B Investor Shares. See "Distribution of Shares." Series B Shares also bear the
expense of the Series B Service Plan at an annual rate not to exceed .25% of the
Portfolio's outstanding Series B Shares. See "Shareholder Servicing." If
payments under the Distribution and Service Plan for Series A Shares and
payments under the Series B Distribution and Series B Service Plans 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 same
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.
16
<PAGE> 38
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 same 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 same 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.
17
<PAGE> 39
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.
<TABLE>
<CAPTION>
REALLOWANCE OR
PLACEMENT FEES
TO DEALERS
SALES CHARGE SALES CHARGE (AS % OF
AMOUNT OF TRANSACTION AS PERCENTAGE OF AS PERCENTAGE OF OFFERING
AT OFFERING PRICE OFFERING PRICE NET 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 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
18
<PAGE> 40
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.
REDUCING THE FRONT-END SALES CHARGE
The foregoing schedule applies to single purchases, concurrent purchases of
shares of two or more of the Fund's portfolios offered with a front-end sales
charge, and to purchases made pursuant to the Right of Accumulation or under a
Letter of Intent, which are described below.
RIGHT OF ACCUMULATION. Under the Right of Accumulation, the current value
of an investor's existing Series A Shares in any of the Fund's portfolios
subject to a front-end sales charge may be combined with the amount of the
investor's current purchase in determining the front-end sales charge. IN ORDER
TO RECEIVE THE CUMULATIVE QUANTITY REDUCTION, PREVIOUS PURCHASES OF SERIES A
SHARES MUST BE CALLED TO THE ATTENTION OF THE FUND'S TRANSFER AGENT BY THE
INVESTOR AT THE TIME OF THE CURRENT PURCHASE.
REINVESTMENT PRIVILEGE. An investor may also purchase Series A Shares of a
Portfolio at net asset value, without a sales charge, if the investor has
redeemed his Series A Shares in that Portfolio within the previous 45 days. The
amount which may be so reinvested is limited to the amount of the redemption
proceeds. If the investor has realized a gain on the redemption, the transaction
is taxable and reinvestment will not alter any taxes payable. If there has been
a loss on the redemption and a subsequent reinvestment pursuant to this
privilege, some or all of the loss may not be allowed as a tax deduction
depending upon the amount reinvested, although amounts disallowed are, for tax
purposes, added to the cost of the Series A Shares acquired upon the
reinvestment. The reinvestment privilege may be exercised only once.
INVESTMENTS OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES.
Investors may purchase Series A Shares 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. (This does not
include shares of an affiliated mutual fund which were or would be subject to a
contingent deferred sales charge upon redemption.) Such purchases must be made
within 60 days of the redemption, and the Fund must be notified by the investor
in writing, or by his financial institution, at the time the purchase of Series
A Shares is made. The Distributor will offer to pay dealers a placement fee of
.25% of the net asset value of Series A Shares purchased by their clients or
customers in this manner, provided the aggregate of such fees (including
placement fees described above payable to dealers in connection with purchases
of Series A Shares aggregating $1 million or more) does not exceed the aggregate
amount of sales charges, net of dealer reallowances, on Series A Shares subject
to a sales charge. Dealers must refund a pro-rata portion of such fee if the
Series A Shares are redeemed within six months.
LETTER OF INTENT. An investor may qualify for a reduced sales charge
immediately by signing a nonbinding Letter of Intent stating the investor's
intention to invest during the next 13 months a specified amount in Series A
Shares which, if made at one time, would qualify for a reduced sales charge. The
Letter of Intent may be signed at any time within 90 days after the first
investment to be included in the Letter of Intent. The initial investment must
meet the minimum initial investment requirement and represent at least 5% of the
total intended investment. THE INVESTOR MUST INSTRUCT THE TRANSFER AGENT UPON
MAKING SUBSEQUENT PURCHASES THAT SUCH PURCHASES ARE SUBJECT TO A LETTER OF
INTENT. All dividends and capital gains of a Portfolio that are invested in
additional Series A Shares of the same Portfolio are applied to the Letter of
Intent.
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<PAGE> 41
During the term of a Letter of Intent, the Fund's transfer agent will hold
Series A Shares representing 5% of the indicated amount in escrow for payment of
a higher sales load if the full amount indicated in the Letter of Intent is not
purchased. These Series A Shares held in escrow will be registered in the
shareholder's name and will continue to earn any dividends and capital gains
paid by a Portfolio. The escrowed Series A Shares will be released when the full
amount indicated has been purchased. Any redemptions made during the 13-month
period will be subtracted from the amount of purchases in determining whether
the Letter of Intent has been completed.
If the full amount indicated is not purchased within the 13-month period,
the investor will be required to pay an amount equal to the difference between
the sales charge actually paid and the sales charge the investor would have had
to pay on his or her aggregate purchases if the total of such purchases had been
made at a single time. If remittance is not received within 20 days of the
expiration of the 13-month period, PFPC, as attorney-in-fact, pursuant to the
terms of the Letter of Intent, will redeem an appropriate number of Series A
Shares held in escrow to realize the difference.
PURCHASES OF SERIES B SHARES
Series B Investor Shares are sold at their net asset value next computed
after a purchase order is received by the Fund's transfer agent. Although
investors pay no front-end sales charge on purchases of Series B Shares, Series
B Shares are subject to a deferred sales charge at the rates set forth in the
chart below if they are redeemed within six years of purchase. Service
Organizations and other broker/dealers will receive commissions from the
Distributor in connection with sales of Series B Shares. These commissions may
be different than the reallowances or placement fees paid to dealers in
connection with sales of Series A Shares. The deferred sales charge on Series B
Shares is based on the lesser of the net asset value of the Series B Shares on
the redemption date or the original cost of the Series B Shares being redeemed.
As a result, no sales charge is charged on any increase in the principal value
of an investor's Series B Shares.
The amount of any contingent deferred sales charge an investor must pay on
Series B Shares depends on the number of years that elapse between the purchase
date and the date such Series B Shares are redeemed.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE (AS A
NUMBER OF YEARS PERCENTAGE OF DOLLAR AMOUNT
ELAPSED SINCE PURCHASE SUBJECT TO THE CHARGE)
- ------------------------------------------------------------------------- ---------------------------
<S> <C>
Less than one............................................................ 5.0%
More than one, but less than two......................................... 4.0%
More than two, but less than three....................................... 3.0%
More than three, but less than four...................................... 3.0%
More than four, but less than five....................................... 2.0%
More than five, but less than six........................................ 1.0%
After six years.......................................................... None
</TABLE>
When an investor redeems his Series B Shares, the redemption order is
processed to minimize the amount of the contingent deferred sales charge that
will be charged. Series B Shares are redeemed first from those Series B Shares
that are not subject to the deferred sales load (i.e., Series B Shares that were
acquired through reinvestment of dividends or distributions) and after that from
the Series B Shares that have been held the longest.
EXEMPTIONS FROM THE CONTINGENT DEFERRED SALES CHARGE. The contingent
deferred sales charge on Series B Shares is not charged in connection with: (1)
exchanges described in "Investor Programs--Exchange Privilege;" (2) redemptions
made in connection with minimum required distributions from IRA, 403(b)(7) and
Qualified Plan accounts due to the shareholder reaching age 70 1/2; (3)
redemptions in connection with a shareholder's death or disability (as defined
in
20
<PAGE> 42
the Internal Revenue Code) subsequent to the purchase of Series B Shares; and
(4) involuntary redemptions of Series B Shares in accounts with low balances as
described in "How to Redeem Shares--Accounts With Low Balances." In addition, no
contingent deferred sales charge is charged on Series B Shares acquired through
the reinvestment of dividends or distributions.
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 same 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 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.
21
<PAGE> 43
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 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 any
Portfolio at any time the net asset value of the account in such 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 a 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
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
22
<PAGE> 44
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).
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.
23
<PAGE> 45
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
involved 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 applicable 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 each Series B Share for the
Portfolio is calculated as of the close of regular trading hours on the NYSE
(currently 4:00 p.m. Eastern Time) on each Business Day by adding the value of
all its shares in the Master Portfolio 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 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 same Portfolio.
The net asset value per share of the Master Portfolio is calculated as of
the close of the NYSE by dividing the total market value of its investments and
other assets, less any liabilities, by the total outstanding shares of the
Master
24
<PAGE> 46
Portfolio. Securities held by the Master Portfolio which are listed on the
securities exchange and for which market quotations are available are valued at
the last quoted sale price of the day or, if there is no such reported sale, at
the mean between the most recent quoted bid and asked prices. Price information
on listed securities is taken from the exchange where the security is primarily
traded. Unlisted securities for which market quotations are readily available
are valued at the mean between the most recent bid and asked prices. The value
of other assets and securities for which no quotations are readily available
(including restricted securities) are determined in good faith at fair market
value in accordance with procedures adopted by the Trust's Board of Trustees.
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 it 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 that Portfolio's Investor Shares, including: i) fees payable under the
Fund's Distribution and Service Plan in the case of the Series A Shares; and ii)
fees payable under the Series B Distribution Plan and the Series B Service Plan
in the case of the Series B Shares. All distributions are reinvested at net
asset value in the form of additional full and fractional Investor Shares of the
same series 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 quarterly as a dividend to
investors who are Shareholders of the Portfolio at the close of business on the
day of declaration. All such dividends are paid within ten days after the end of
each quarter. Net realized capital gains (including net short-term capital
gains), if any, will be distributed by the Portfolio at least annually.
The Portfolio seeks its investment objective by investing all of its
investable assets in Master Portfolio. The Portfolio is allocated its pro rata
share of the ordinary income and deductions of the Master Portfolio. This net
income, less the Portfolio's expenses incurred in operations, is the Portfolio's
net investment income from which dividends are distributed as described above.
The Master Portfolio also allocates to Portfolio its pro rata share of capital
gains, if any, realized by Master Portfolio. Any realized net capital gains of
the Portfolio will be distributed as described above.
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 Portfolios should consult their tax advisers with specific reference to
their own tax situation.
The Portfolio has elected 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 or excise 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.
The Master Portfolio intends to qualify for taxation as a partnership for
Federal income tax purposes. As such, the Master Portfolio is not subject to tax
and the Portfolio will be treated for Federal income tax purposes as recognizing
its pro rata portion of the Master Portfolio's income and deductions, and owning
its pro rata share of the Master Portfolio's
25
<PAGE> 47
assets. The Portfolio's status as a regulated investment company is dependent
on, among other things, the Master Portfolio's continued classification as a
partnership for Federal income tax purposes.
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 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.
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 134 classes (29 classes of Institutional
Shares, 21 classes of Series B Investor Shares and 28 classes each of Service
Shares, Series A Investor Shares and Series C Investor Shares) representing
interests in the Fund's investment portfolios. Service Shares, Institutional
Shares and Series C Investor Shares in the Portfolio have different expenses
than the Series A Investor Shares and Series B Investor Shares offered under
this Prospectus, which may affect performance. Call the Distributor at (800)
998-7633 for information on those other classes of shares in the Portfolio which
are offered under separate Prospectuses. This Prospectus describes the Index
Equity Portfolio, which is classified as a diversified company under the 1940
Act. The Index Equity Portfolio was established with only one class of shares.
The original class of shares was available to all investors until the subsequent
establishment of multiple classes in the Portfolio. In addition, the Board of
Trustees has authorized the issuance of additional classes of shares
representing interests in other investment
26
<PAGE> 48
portfolios of the Fund. 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.
On , 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 financial statements and
annual financial statements audited by independent accountants. 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 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, a
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.
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 S&P 500 Index, EAFE, the Dow Jones
Industrial Average, the Dimensional Fund Advisor's Small Cap Index, the Shearson
Lehman GMNA Index, the Shearson
27
<PAGE> 49
Lehman Index of Baa-rated Corporate Bonds, the T-Bill Index, the "stocks, bonds
and inflation Index" published annually by Ibbotson Associates, the Lipper
International Fund Index, the Shearson Lehman Hutton Government Corporate Bond
Index and the Financial Times World Stock 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 Series A 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 the Master 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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=====================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
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 AND, IF GIVEN OR MADE, SUCH REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS
DISTRIBUTOR. THE INDEX EQUITY PORTFOLIO IS NOT SPONSORED, ENDORSED, SOLD OR
PROMOTED BY STANDARD & POOR'S CORPORATION. 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.
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<S> <C>
Introduction..................................... 2
Financial Highlights............................. 5
Investment Policies.............................. 7
Investment Limitations........................... 8
Management....................................... 11
Distribution of Shares........................... 13
Shareholder Servicing............................ 14
How to Purchase Shares........................... 15
How to Redeem Shares............................. 21
Investor Programs................................ 22
Net Asset Value.................................. 24
Dividends and Distributions...................... 25
Taxes............................................ 25
Description of Shares............................ 26
Other Information................................ 27
</TABLE>
CO-ADMINISTRATOR AND TRANSFER AGENT
PFPC Inc.
Wilmington, Delaware
CO-ADMINISTRATOR
Provident Distributors, Inc.
Radnor, Pennsylvania
DISTRIBUTOR
Provident Distributors, Inc.
Radnor, Pennsylvania
COUNSEL
Drinker Biddle & Reath
Philadelphia, Pennsylvania
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand, L.L.P.
Philadelphia, Pennsylvania
PNCR-P-003
=====================================================
=====================================================
[A R T]
THE PNC(R) FUND
THE INDEX EQUITY
PORTFOLIO
INVESTOR CLASS
PROSPECTUS
INDEX
EQUITY PORTFOLIO
- -----------------------------------------------------
DECEMBER , 1995
=====================================================
<PAGE> 51
THE PNC(R) FUND
(Institutional Shares of the Index Equity Portfolio)
Cross Reference Sheet
<TABLE>
<CAPTION>
FORM N-1A ITEM LOCATION
- -------------- --------
<S> <C>
PART A PROSPECTUS
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
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 and Net
Asset Value
8. Redemption or Repurchase. . . . . . . . . . . Purchase and Redemption
of Shares -
Redemption of
Shares
9. Legal Proceedings . . . . . . . . . . . . . . Inapplicable
</TABLE>
<PAGE> 52
THE INDEX EQUITY PORTFOLIO
INSTITUTIONAL CLASS
The PNC(R) Fund (the "Fund") consists of twenty-six investment portfolios.
This Prospectus relates to shares ("Institutional Shares" or "Shares")
representing interests in the Index Equity Portfolio (the "Portfolio") with an
investment objective which seeks to duplicate the capital performance and
dividend income of the Standard & Poor's 500(R) Composite Stock Price Index (the
"S&P 500 Index").
THE PORTFOLIO, UNLIKE MANY OTHER INVESTMENT COMPANIES WHICH DIRECTLY
ACQUIRE AND MANAGE THEIR OWN PORTFOLIO OF SECURITIES, SEEKS TO ACHIEVE ITS
INVESTMENT OBJECTIVE BY INVESTING ALL OF ITS INVESTABLE ASSETS IN A SERIES OF
SHARES (THE "MASTER PORTFOLIO") OF AN OPEN-END MANAGEMENT INVESTMENT COMPANY,
THE DFA INVESTMENT TRUST COMPANY. THE MASTER PORTFOLIO HAS SUBSTANTIALLY THE
SAME INVESTMENT OBJECTIVE, POLICIES AND LIMITATIONS AS THE PORTFOLIO. THE
PORTFOLIO WILL PURCHASE SHARES OF THE MASTER PORTFOLIO AT NET ASSET VALUE. THE
NET ASSET VALUE OF THE PORTFOLIO WILL RESPOND TO INCREASES AND DECREASES IN THE
VALUE OF THE MASTER PORTFOLIO'S SECURITIES AND TO THE EXPENSES OF THE MASTER
PORTFOLIO ALLOCABLE TO AND THE EXPENSES OF THE PORTFOLIO. INVESTORS SHOULD
CAREFULLY CONSIDER THIS INVESTMENT APPROACH. FOR ADDITIONAL INFORMATION, SEE
"INVESTMENT POLICIES--MASTER/FEEDER STRUCTURE."
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 December , 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
FEDERALLY INSURED BY, GUARANTEED BY, OBLIGATIONS OF OR OTHERWISE SUPPORTED BY
THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENTS IN SHARES OF THE
FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL AMOUNT
INVESTED.
- --------------------------------------------------------------------------------
PROSPECTUS December , 1995
<PAGE> 53
INTRODUCTION
- --------------------------------------------------------------------------------
The Fund is an open-end management investment company which has registered
shares in 26 investment portfolios, one of which is included in this Prospectus.
THE ADVISER
Dimensional Fund Advisors Inc. (the "Adviser") serves as investment adviser
to the Master Portfolio.
THE ADMINISTRATORS
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> 54
EXPENSE TABLE
Annual Fund operating expenses include the expenses of the Portfolio and
the expenses of the Master Portfolio which are allocable to the Portfolio. Below
is a summary of the estimated operating expenses of the Portfolio (including the
operating expenses of the Master Portfolio which are allocable to the Portfolio)
for the current fiscal year.
ANNUAL FUND OPERATING EXPENSES FOR INSTITUTIONAL SHARES OF THE INDEX EQUITY
PORTFOLIO AFTER FEE WAIVERS AS A PERCENTAGE OF DAILY NET ASSETS
<TABLE>
<CAPTION>
<S> <C>
Advisory fees of the Master Portfolio.................................................. .025%
Operating expenses of the Master Portfolio............................................. %
Other operating expenses of the Portfolio.............................................. --
----
Administration fees(1)............................................................... --
Other expenses(1).................................................................... .11
---
Total fund operating expenses.......................................................... .18%
====
</TABLE>
- ------------------
(1) Administration fees are net of waivers of --% for the Portfolio. The
Administrators are under no obligation to waive or continue waiving such
fees, but have informed the Fund that they expect to waive or continue
waiving such fees as necessary to maintain the Portfolio's total operating
expenses during the current fiscal year 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 Fund's most recent 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>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Index Equity Portfolio............................ $2 $6 $10 $23
</TABLE>
The foregoing Expense Table and Example are intended to assist investors in
understanding the Portfolio's estimated operating expenses and the Portfolio's
pro rata share of the Master Portfolio's advisory fees and operating expenses.
Investors bear these expenses either directly or indirectly. The information in
the table for the Index Equity Portfolio is based on the advisory fees,
administration fees and other expenses payable after fee waivers with respect to
the Portfolio for the fiscal year ended September 30, 1994, as restated to
reflect the elimination of direct advisory fees, revised administration fee
waivers and the addition of the Portfolio's pro rata share of the Master
Portfolio's advisory fees and other operating expenses. [Total operating
expenses would have been --% for Institutional Shares in the Index Equity
Portfolio, without such fee waivers.] See Footnote 1 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, the Fund's operating expenses and the
operating expenses of the Master Portfolio.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
INVESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND OPERATING
EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
The Board of Trustees of the Fund believes that the aggregate per share
expenses of the Portfolio and the Master Portfolio in which the Portfolio's
assets are invested will be approximately equal to the expenses which the
Portfolio would incur if the Fund retained the services of an investment adviser
for the Portfolio and the assets of the Portfolio were invested directly in the
type of securities held by the Master Portfolio.
3
<PAGE> 55
CERTAIN RISK FACTORS TO CONSIDER
An investment in the Portfolio is subject to certain investment
considerations. As with other mutual funds, there can be no assurance that the
Portfolio will achieve its investment objective. The Master Portfolio may:
acquire and hold equity securities; enter into repurchase agreements; lend
portfolio securities to third parties; and enter into futures contracts and
options thereon. These and the other investment practices set forth below and
their associated risks deserve careful consideration by investors. See
"Investment Policies."
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Except for the financial data relating to the six month period ended March
31, 1995, the financial data included in the table below has been derived from
financial statements incorporated by reference in the Statement of Additional
Information and has been audited by Coopers & Lybrand, L.L.P., the Fund's
independent accountants. This financial data should be read in conjunction with
such financial statements. The financial data reflects the financial experiences
of the Portfolio prior to its transformation on December , 1995 into a feeder
portfolio of the Master Portfolio. Further information about the performance of
the Portfolio is available in the annual report to shareholders. Both the
Statement of Additional Information and the annual report to shareholders may be
obtained from the Fund free of charge by calling the number on the front cover
of this Prospectus.
4
<PAGE> 56
THE PNC(R) FUND
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
INDEX EQUITY PORTFOLIO
-----------------------------------------------------
INSTITUTIONAL CLASS
-----------------------------------------------------
FOR THE
SIX MONTHS PERIOD
ENDED YEAR YEAR 4/20/92(1)
MARCH 31, 1995 ENDED ENDED THROUGH
(UNAUDITED) 9/30/94 9/30/93 9/30/92
-------------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value at beginning of period......... $ 10.93 $ 11.02 $ 10.06 $ 10.00
-------- -------- -------- --------
Income from investment operations
Net investment income..................... 0.16 0.31 0.27 0.13
Net gain (loss) on investments (both
realized and unrealized)................. 0.86 0.03 0.97 0.03
-------- -------- -------- --------
Total from investment operations..... 1.02 0.34 1.24 0.16
-------- -------- -------- --------
Less distributions
Distributions from net investment
income.................................. (0.17) (0.32) (0.28) (0.10)
Distributions from net realized capital
gains................................... (0.12) (0.11) -- --
-------- -------- -------- --------
Total distributions.................. (0.29) (0.43) (0.28) (0.10)
-------- -------- -------- --------
Net asset value at end of period............... $ 11.66 $ 10.93 $ 11.02 $ 10.06
======== ======== ======== ========
Total return................................... 9.58% 3.07% 12.40% 1.62%
Ratios/Supplemental data
Net assets at end of period (in
thousands).............................. $158,645 $147,746 $186,163 $175,888
Ratios of expenses to average net assets
After advisory/administration fee
waivers.............................. 0.15%(2) 0.15% 0.40% 0.45%(2)
Before advisory/administration fee
waivers.............................. 0.51%(2) 0.52% 0.52% 0.64%(2)
Ratios of net investment income to average
net assets
After advisory/administration fee
waivers.............................. 2.98%(2) 2.72% 2.46% 2.85%(2)
Before advisory/administration fee
waivers.............................. 2.62%(2) 2.35% 2.34% 2.66%(2)
Portfolio turnover rate........................ 3% 17% 8% 23%
</TABLE>
- -------------
(1) Commencement of operations.
(2) Annualized.
(3) Sales load not reflected in total return.
5
<PAGE> 57
INVESTMENT POLICIES
- --------------------------------------------------------------------------------
INDEX EQUITY PORTFOLIO
The Portfolio's investment objective and policies may be changed by the
Fund's Board of Trustees without shareholder approval.
The Portfolio pursues its investment objective by investing all of its
assets in the U.S. Large Company Series (the "Master Portfolio") of The DFA
Investment Trust Company (the "Trust"), which in turn intends to invest in all
of the stocks which comprise the S&P 500 Index in approximately the same
proportions as they are represented in such Index. The amount of each stock
purchased for the Master Portfolio, therefore, will be based on its respective
market capitalization. The S&P 500 Index is composed of 500 common stocks chosen
on the basis of market value and industry diversification. While most issuers
are among the 500 largest U.S. companies in terms of aggregate market value,
some other stocks are included for purposes of diversification. Since the
investment characteristics of the Portfolio will correspond to those of the
Master Portfolio, the following is a discussion of the various investments of
and techniques employed by the Master Portfolio.
The Master Portfolio will operate as an "index" portfolio and, therefore,
will not be managed traditionally (through the use of economic, financial or
market analysis). Adverse performance will ordinarily not result in the
elimination of a stock from the Master Portfolio. The investment performance of
the Master Portfolio and the Portfolio is expected to approximate the investment
performance of the S&P 500 Index, which tends to be cyclical in nature,
reflecting periods when stock prices generally rise or fall. The Master
Portfolio will remain invested in common stocks even when stock prices are
generally falling. During normal market conditions, the Master Portfolio will
normally invest at least 95% of the value of its total assets in stocks that
comprise the S&P 500 Index. A portion of its assets, however, (generally not
more than 5% of its net assets) may be invested in U.S. Government obligations,
dollar denominated obligations of foreign issuers issued in the U.S., bank
obligations (including obligations of U.S. subsidiaries and branches of foreign
banks), corporate obligations, commercial paper, repurchase agreements and
obligations of supranational organizations. Generally such interest-bearing
obligations will mature within one year from the date of settlement, but may
mature within two years from the date of settlement.
The Master Portfolio may acquire index futures contracts and options
thereon in order to commit funds awaiting investment in stocks or maintain
liquidity. To enter into a futures contract, the Master 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. The Master Portfolio will not purchase index
futures contracts or options if as a result more than 5% of its total assets
would then consist of initial and variation margin deposits on such contracts or
options.
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
Master Portfolio is subject to its adviser's ability to correctly predict
movements in the direction of the market. For example, if the Master 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, it 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
6
<PAGE> 58
leverage involved in future 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.
The Master Portfolio may lend securities to qualified brokers, dealers,
banks and other financial institutions for the purpose of earning additional
income. The value of securities loaned may not exceed 33 1/3% of the value of
the Master Portfolio's total assets. In the event of bankruptcy of the borrower,
the Trust could experience delay in recovering the loaned securities. Management
of the Trust believes that this risk can be controlled through careful
monitoring procedures.
The Master Portfolio may also invest in repurchase agreements. In the event
of the bankruptcy of the other party to the repurchase agreement, the Trust
could experience delay in recovering the securities underlying such agreements
or a loss. Management of the Trust believes that this risk can be controlled
through stringent security selection criteria and careful monitoring procedures.
The Master Portfolio has reserved the right to borrow amounts not exceeding
33% of its net assets for the purposes of making redemption payments. When
advantageous opportunities to do so exist, the Master Portfolio may also
purchase securities when borrowings exceed 5% of the value of its net assets.
Such purchases can be considered to be "leveraging" and, in such circumstances,
the net asset value of the Master Portfolio may increase or decrease at a
greater rate than would be the case if the Master Portfolio had not leveraged.
The interest payable on the amount borrowed would increase the Master
Portfolio's expenses and, if the appreciation and income produced by the
investments purchased when the Master Portfolio has borrowed are less than the
cost of borrowing, the investment performance of the Master Portfolio will be
reduced as a result of leveraging.
PORTFOLIO TURNOVER RATES. Ordinarily, portfolio securities will not be sold
by the Master Portfolio except to reflect additions or deletions of stocks that
comprise the S&P 500 Index, including mergers, reorganizations and similar
transactions and, to the extent necessary, to provide cash to pay redemptions of
the Master Portfolio's shares. Although it may vary from year to year, it is
currently estimated that under normal market conditions the annual portfolio
turnover rate for the Master Portfolio may be as high as %. High portfolio
turnover rates (i.e., over 100%) will generally result in higher transaction
costs to the Master Portfolio and, indirectly, to the Portfolio.
INVESTMENT LIMITATIONS
- --------------------------------------------------------------------------------
The Portfolio is subject to the following fundamental investment
limitations, which may not be changed except upon the affirmative vote of the
holders of a majority of the Portfolio's outstanding Shares.
1. Purchase securities of any one issuer (other than securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities or
certificates of deposit for any such securities) if more than 5% of the
value of the Portfolio's total assets would (taken at current value) be
invested in the securities of such issuer, or more than 10% of the issuer's
outstanding voting securities would be owned by the Portfolio or the Fund,
except that up to 25% of the value of the Portfolio's total assets may
(taken at current value) be invested without regard to these limitations.
For purposes of this limitation, a security is considered to be issued by
the entity (or entities) whose assets and revenues back the security. A
guarantee of a security shall not be deemed to be a security issued by the
guarantor when the value of all securities issued and guaranteed by the
guarantor, and owned by the Portfolio, does not exceed 10% of the value of
the Portfolio's total assets.
2. 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 (as defined in Investment Limitation
No. 1 above) or guaranteed by the United States, any state, territory or
7
<PAGE> 59
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.
3. Borrow money or issue senior securities, except that each 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. No Portfolio will 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 a
Portfolio's investment practices are not deemed to be pledged for purposes
of this limitation.
4. Notwithstanding the investment limitations of the Index Equity
Portfolio, the Index Equity Portfolio may invest all of its assets in
shares of an open-end management investment company with substantially the
same investment objective, policies and limitations as the Portfolio.
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
the Portfolio's securities will not constitute a violation of such limitation,
except that any borrowing by the Portfolio that exceeds the fundamental
investment restrictions stated above must be reduced to meet such restrictions
within the period required by the 1940 Act (currently three days).
For information on additional limitations relating to the Portfolio and the
Master Portfolio, see the Fund's Statement of Additional Information.
MASTER-FEEDER STRUCTURE
The Portfolio, unlike many other investment companies which directly
acquire and manage their own portfolio of securities, seeks to achieve its
investment objective by investing all of its investable assets in the Master
Portfolio. The Portfolio may withdraw its investment in the Master Portfolio at
any time upon days notice to the Master Portfolio if the Board of Trustees
of the Fund determines that it is in the best interest of the Portfolio to do
so. Upon any such withdrawal, the Board of Trustees would consider what action
might be taken, including the investment of all of the assets of the Portfolio
in another pooled investment entity having the same investment objective as the
Portfolio or the hiring of an investment adviser to manage the Portfolio's
assets in accordance with the investment policies described above with respect
to the Master Portfolio.
The Master Portfolio is a separate series of the Trust, which is a business
trust created under the laws of the State of Delaware. The Portfolio and other
institutional investors that may invest in the Master Portfolio from time to
time (e.g., other investment companies) will each bear a share of all
liabilities of the Master Portfolio. Under the Delaware Business Trust Act,
shareholders of the Master Portfolio have the same limitation of personal
liability as shareholders of a Delaware corporation. Accordingly, Fund
management believes that neither the Portfolio nor its shareholders will be
adversely affected by reason of the Portfolio's investing in the Master
Portfolio.
The shares of the Master Portfolio will be offered to institutional
investors in private placements for the purpose of increasing the funds
available for investment and to achieve economies of scale that might be
available at higher asset levels. The expenses of such other institutional
investors and their returns may differ from those of the Portfolio. While
investment in the Master Portfolio by other institutional investors offers
potential benefits to the Master Portfolio (and, indirectly, to the Portfolio),
economies of scale and related expense reductions might not be achieved. Also,
if an
8
<PAGE> 60
institutional investor were to redeem its interest in the Master Portfolio, the
remaining investors in the Master Portfolio could experience higher pro rata
operating expenses and correspondingly lower returns. In addition, institutional
investors that have a greater pro rata ownership interest in the Master
Portfolio than the Portfolio could have effective voting control over the
operation of the Master Portfolio.
Shares in the Master Portfolio have equal, non-cumulative voting rights,
except as set forth below, and with no preferences as to conversion, exchange,
dividends, redemption or any other feature. Shareholders of the Trust have the
right to vote only (i) for removal of its trustees, (ii) with respect to such
additional matters relating to the Trust as may be required by the applicable
provisions of the 1940 Act, including the approval of the investment advisory
agreement and the selection of trustees and accountants, and (iii) on such other
matters as the trustees of the Trust may consider necessary or desirable. In
addition, approval of the shareholders of the Trust is required to adopt any
amendments to the Agreement and Declaration of Trust of the Trust which would
adversely affect to a material degree the rights and preferences of the shares
of the Master Portfolio or to increase or decrease their par value. The Master
Portfolio's shareholders will also be asked to vote on any proposal to change a
fundamental investment policy (i.e. a policy that may be changed only with the
approval of shareholders) of the Master Portfolio.
If the Portfolio, as a shareholder of the Master Portfolio, is requested to
vote on matters pertaining to the Master Portfolio, the Fund's trustees intend
to vote all of the shares that the Master Portfolio held in the Portfolio
without submitting any such questions to the shareholders of the Portfolio. If
the Fund's trustees decide to adopt "pass-through" voting, the Portfolio, if
required under the 1940 Act or other applicable law, would hold a meeting of its
shareholders and would cast its votes proportionately as instructed by Portfolio
shareholders. In such cases, shareholders of the Portfolio, in effect, would
have the same voting rights they would have as direct shareholders of the Master
Portfolio.
The investment objective of the Master Portfolio may not be changed without
approval of its shareholders. Shareholders of the Portfolio will receive written
notice thirty days prior to the effective date of any change in the investment
objective of the Master Portfolio. If the Master Portfolio changes its
investment objective in a manner which is inconsistent with the investment
objective of the Portfolio and the Fund's Board of Trustees fails to approve a
similar change in the investment objective of the Portfolio, the Portfolio would
be forced to withdraw its investment in the Master Portfolio and either seek to
invest its assets in another registered investment company with the same
investment objective as the Portfolio, which might not be possible, or retain an
investment adviser to manage the Portfolio's assets in accordance with its own
investment objective, possibly at increased cost. A withdrawal by the Portfolio
of its investment in the Master Portfolio could result in a distribution in kind
of portfolio securities (as opposed to a cash distribution) to the Portfolio.
Should such a distribution occur, the Portfolio could incur brokerage fees or
other transaction costs in converting such securities to cash in order to pay
redemptions. In addition, a distribution in kind to the Portfolio could result
in a less diversified portfolio of investments and could adversely affect the
liquidity of the Portfolio.
The policy of the Portfolio, and other similar investment companies, to
invest their investable assets in funds such as the Master Portfolio is a
relatively recent development in the mutual fund industry and, consequently,
there is a lack of substantial experience with the operation of this policy.
There may also be other investment companies through which you can invest
in the Master Portfolio which may have higher or lower fees and expenses than
those of the Portfolio and which may therefore have different performance
results than the Portfolio. Information concerning whether an investment in the
Master Portfolio may be available through another entity investing in the Master
Portfolio may be obtained by calling [ ].
* * *
9
<PAGE> 61
MANAGEMENT
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES
The business and affairs of the Fund and the Trust are managed under the
direction of the Fund's Board of Trustees and the Trust's Board of Trustees,
respectively. The Statement of Additional Information contains the name of each
trustee of the Fund and of the Trust and certain background information.
------------------------------------
ADVISER
Dimensional Fund Advisors Inc. (the "Adviser"), located at 1299 Ocean
Avenue, 11th Floor, Santa Monica, CA 90401, serves as investment adviser to the
Master Portfolio and is responsible for the management of its assets.
The Adviser was organized in May 1981 and is engaged in the business of
providing investment management services to institutional investors. The
Adviser's assets under management totalled approximately $11 billion at
, 1995. David G. Booth and Rex A. Sinquefield, both of whom are
trustees and officers of the Trust and directors and officers of the Adviser,
together own approximately 55% of the Adviser's outstanding stock and may be
deemed controlling persons of the Adviser.
For the services provided to the Master Portfolio and expenses assumed
under the advisory agreement between the Adviser and the Trust, the Adviser is
entitled to receive a fee at the annual rate of .025% of the Master Portfolio's
average daily net assets. For the Master Portfolio's fiscal year ended November
30, 1994, the Adviser received a fee for its investment advisory services which,
on an annual basis, equaled .025% of the Master Portfolio's average daily net
assets.
ADMINISTRATORS
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. PFPC is an indirect wholly-owned subsidiary 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, the
Administrators 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. The Fund paid the Administrators an
administration fee at the annual rate of .01% of the average daily net assets of
the Index Equity Portfolio for the year ended September 30, 1994, and the
Administrators waived combined administration fees at the annual rate of .19% of
the average daily net assets of the Index Equity Portfolio for that year. From
time to time the Administrators may waive all or any portion of the
administration fees for the Portfolio. See "Expense Table" above for information
on the administration fees waived by the Administrators for the current fiscal
year.
PFPC also serves as the administrative services agent for the Trust.
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<PAGE> 62
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND CUSTODIAN
PNC Bank serves as the custodian for the Fund and the Trust and PFPC serves
as the transfer agent and dividend disbursing agent for the Fund and the Trust.
------------------------------------
EXPENSES
The Fund and the Trust each bears all of its own costs and expenses,
although the Portfolio bears its pro rata portion of any costs and expenses of
the Master Portfolio which consist of advisory fees and other operating expenses
such as custody, legal and accounting fees. Other costs and expenses borne by
the Portfolio include: services of its independent accountants, legal counsel,
taxes, insurance premiums, costs incidental to meetings of its shareholders and
trustees, the cost of filing its registration statements under federal and state
securities laws, reports to shareholders, and transfer and dividend disbursing
agency, administrative services and custodian fees. Expenses of the Master
Portfolio, which are determined by the Trust's Board of Trustees to be
extraordinary, would be borne by it. Expenses which are not allocable to a
particular Trust portfolio or Fund portfolio are borne by each Trust portfolio
or Fund portfolio on the basis of the fees paid by the Fund or Trust to PFPC.
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 Fund's 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. Expenses are deducted from the total income of the Portfolio before
dividends and distributions are paid.
If the total expenses borne by the Portfolio in any fiscal year exceed the
expense limitations imposed by applicable state securities regulations, 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" and "Management--Administrators" for
discussions of fee waivers.
------------------------------------
PORTFOLIO TRANSACTIONS
The Adviser places portfolio securities transactions with a view to
obtaining best price and execution. Subject to that goal, transactions may be
placed with securities firms that are affiliated with an affiliate of the
Adviser.
------------------------------------
BANKING LAWS
Banking laws and regulations currently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from underwriting securities, but such banking laws and regulations do not
prohibit such a holding company or affiliate or banks generally from acting as
investment adviser, administrator, transfer agent or custodian to such an
investment company, or from purchasing shares of such a company as agent for and
upon the order of customers. PNC Bank, 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.
11
<PAGE> 63
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.
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's 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.
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.
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<PAGE> 64
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 each Institutional Share of the Portfolio is
calculated as of the close of regular trading hours on the NYSE (currently 4:00
p.m. Eastern Time) on each Business Day by adding the value of all its shares in
the Master Portfolio and other assets allocable to the Shares, subtracting the
liabilities allocable to the 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.
The net asset value per share of the Master Portfolio is calculated as of
the close of the NYSE by dividing the total market value of its investments and
other assets, less any liabilities, by the total outstanding shares of the
Master Portfolio. Securities held by the Master Portfolio which are listed on
the securities exchange and for which market quotations are available are valued
at the last quoted sale price of the day or, if there is no such reported sale,
at the mean between the most recent quoted bid and asked prices. Price
information on listed securities is taken from the exchange where the security
is primarily traded. Unlisted securities for which market quotations are readily
available are valued at the mean between the most recent bid and asked prices.
The value of other assets and securities for which no quotations are readily
available (including restricted securities) are determined in good faith at fair
market value in accordance with procedures adopted by the Trust's Board of
Trustees.
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 it 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 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 quarterly as a dividend to
investors who are Shareholders of the Portfolio at the close of business on the
day of declaration. All such dividends are paid within ten days after the end of
each quarter. Net realized capital gains (including net short-term capital
gains), if any, will be distributed by the Portfolio at least annually.
The Portfolio seeks its investment objective by investing all of its
investable assets in Master Portfolio. The Portfolio is allocated its pro rata
share of the ordinary income and deductions of the Master Portfolio. This net
income, less the Portfolio's expenses incurred in operations, is the Portfolio's
net investment income from which dividends are distributed as described above.
The Master Portfolio also allocates to Portfolio its pro rata share of capital
gains, if any, realized by Master Portfolio. Any realized net capital gains of
the Portfolio will be distributed as described above.
13
<PAGE> 65
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 has elected 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 or excise 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.
The Master Portfolio intends to qualify for taxation as a partnership for
Federal income tax purposes. As such, the Master Portfolio is not subject to tax
and the Portfolio will be treated for Federal income tax purposes as recognizing
its pro rata portion of the Master Portfolio's income and deductions, and owning
its pro rata share of the Master Portfolio's assets. The Portfolio's status as a
regulated investment company is dependent on, among other things, the Master
Portfolio's continued classification as a partnership for Federal income tax
purposes.
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 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 134 classes (29 classes of Institutional
Shares, 21 classes of Series B Investor Shares and 28 classes each of Service
Shares, Series A Investor Shares and Series C Investor Shares) representing
interests in the Fund's investment portfolios. Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares in the Portfolio
have different expenses
14
<PAGE> 66
than the Institutional Shares offered under this Prospectus, which may affect
performance. Call the Distributor at (800) 998-7633 for information on those
other classes of shares in the Portfolio which are offered under separate
Prospectuses. This Prospectus describes the Index Equity Portfolio, which is
classified as a diversified company under the 1940 Act. The Index Equity
Portfolio was established with only one class of shares. The original class of
shares was available to all investors until the subsequent establishment of
multiple classes in the Portfolio. In addition, the Board of Trustees has
authorized the issuance of additional classes of shares representing interests
in other investment portfolios of the Fund. For information regarding these
other portfolios, 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 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.
On , 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.
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 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 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.
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 S&P 500 Index, EAFE, the Dow Jones
Industrial Average, the Dimensional Fund Advisor's Small Cap Index, 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, the Lipper International Fund Index, the Shearson Lehman
Hutton Government
15
<PAGE> 67
Corporate Bond Index and the Financial Times World Stock 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 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 the Master 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
calculations of yield and total return.
16
<PAGE> 68
=====================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
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 AND, IF GIVEN OR MADE, SUCH REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS
DISTRIBUTOR. THE INDEX EQUITY PORTFOLIO IS NOT SPONSORED, ENDORSED, SOLD OR
PROMOTED BY STANDARD & POOR'S CORPORATION. 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 OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Introduction..................................... 2
Financial Highlights............................. 4
Investment Policies.............................. 6
Investment Limitations........................... 7
Management....................................... 10
Purchase and Redemption of Shares................ 12
Net Asset Value.................................. 13
Dividends and Distributions...................... 13
Taxes............................................ 14
Description of Shares............................ 14
Other Information................................ 15
</TABLE>
CO-ADMINISTRATOR AND TRANSFER AGENT
PFPC Inc.
Wilmington, Delaware
CO-ADMINISTRATOR
Provident Distributors, Inc.
Radnor, Pennsylvania
DISTRIBUTOR
Provident Distributors, Inc.
Radnor, Pennsylvania
COUNSEL
Drinker Biddle & Reath
Philadelphia, Pennsylvania
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand, L.L.P.
Philadelphia, Pennsylvania
PNCI-P-003M
=====================================================
=====================================================
THE INDEX EQUITY
PORTFOLIO
INSTITUTIONAL
CLASS
PROSPECTUS
INDEX
EQUITY PORTFOLIO
DECEMBER , 1995
=====================================================
=====================================================
<PAGE> 69
This filing includes the prospectuses for Service Shares, Investor
Shares and Institutional Shares of 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, New Jersey Municipal Money Market, Managed Income, Tax-Free Income,
Intermediate Government, Ohio Tax-Free Income, Pennsylvania Tax-Free Income,
Short-Term Bond, Intermediate-Term Bond, International Fixed Income, Government
Income, Value Equity, Growth Equity, Small Cap Growth Equity, Core Equity,
Index Equity, Small Cap Value Equity, International Equity, International
Emerging Markets and Balanced Portfolios of The PNC(R) Fund (the "Fund"). The
above-referenced prospectuses are incorporated herein by reference to
Post-Effective Amendment No. 16 to the Fund's Registration Statement on Form
N-1A filed with the Securities and Exchange Commission on October 5, 1995.
<PAGE> 70
THE PNC(R) FUND
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information provides supplementary
information pertaining to shares ("Shares") representing interests in 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, New Jersey Municipal Money Market,
Value Equity, Growth Equity, Index Equity, Small Cap Value Equity,
International Equity, International Emerging Markets, Balanced, Small Cap
Growth Equity, Core Equity, Managed Income, Tax-Free Income, Intermediate
Government, Ohio Tax-Free Income, Pennsylvania Tax-Free Income, Short-Term
Bond, Intermediate-Term Bond, Government Income and International Fixed Income
Portfolios of The PNC Fund (the "Fund"). 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 are
hereinafter collectively called "Money Market Portfolios," and the other
Portfolios are hereinafter collectively called "Non-Money Market Portfolios."
This Statement of Additional Information is not a prospectus, and should be
read only in conjunction with the Prospectuses of the Fund relating to the
Non-Money Market Portfolios dated January 30, 1995, (and ____________, 1995
with respect to the Index Equity Portfolio) and the Prospectuses relating to
the Money Market Portfolios dated July 24, 1995, as amended from time to time
(the "Prospectuses"). Prospectuses may be obtained from the Fund's distributor
by calling toll-free (800) 441-7379. This Statement of Additional Information
is dated ____________, 1995. Capitalized terms used herein and not otherwise
defined have the same meanings as are given to them in the Prospectuses.
CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Investment Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Trustees and Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Investment Advisory, Administration,
Distribution and Servicing Arrangements . . . . . . . . . . . . . . . . . . . . . . 50
Portfolio Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Purchase and Redemption Information . . . . . . . . . . . . . . . . . . . . . . . . . 67
Valuation of Portfolio Securities . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Performance Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Additional Information Concerning Shares . . . . . . . . . . . . . . . . . . . . . . 101
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
</TABLE>
<PAGE> 71
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS STATEMENT OF ADDITIONAL INFORMATION OR
THE PROSPECTUSES IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUSES 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 PROSPECTUSES DO
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> 72
INVESTMENT POLICIES
The following supplements information contained in the Prospectus
concerning the Portfolios' investment policies. A description of applicable
credit ratings is set forth in Appendix A hereto. Except as indicated, the
information below relates only to those Portfolios that are authorized to
invest in the instruments or securities described below.
The Index Equity Portfolio invests all of its investable assets in The
U.S. Large Company Series (the "Master Portfolio") of The DFA Investment Trust
Company (the "Trust"). Accordingly, the following discussion relates to: (i)
the investment policies of all the Portfolios except the Index Equity
Portfolio; and (ii) where indicated the investment policies of the Master
Portfolio.
ADDITIONAL INFORMATION ON PORTFOLIO INVESTMENTS.
REVERSE REPURCHASE AGREEMENTS. Each Portfolio other than the
Municipal 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 (the "Municipal
Portfolios") and the Master Portfolio may invest in reverse repurchase
agreements. Reverse repurchase agreements involve the sale of securities held
by a Portfolio pursuant to a 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, a 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 particular variable and floating rate instruments could make it
difficult for a Portfolio to dispose of a variable or floating
-3-
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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
involved can recover payment of principal as specified in the instrument.
Variable rate U.S. Government obligations held by the Portfolios, 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. Each Non-Money Market 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 each 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.
The Master Portfolio may purchase obligations of U.S. banks
and savings and loan associations and dollar-denominated obligations of U.S.
subsidiaries and branches of foreign banks, such as certificates of deposit
(including marketable variable rate certificates of deposit) and bankers'
acceptances. Bank certificates of deposit will only be acquired by the Master
Portfolio if the bank has assets in excess of $1 billion.
MORTGAGE-RELATED SECURITIES. There are a number of important
differences among the agencies and instrumentalities of the U.S. Government
that issue mortgage-related securities and among the securities that they
issue. Mortgage-related securities guaranteed by the Government National
Mortgage Association ("GNMA") include GNMA Mortgage Pass-Through Certificates
(also known as "Ginnie Maes") which are guaranteed as to the timely payment of
principal and interest by GNMA and such guarantee is backed by the full faith
and credit of the United States. GNMA is a wholly-owned U.S. Government
corporation within the Department of Housing and Urban Development. GNMA
certificates also are supported by the authority of GNMA to borrow funds from
the U.S. Treasury to make payments under its guarantee. Mortgage-related
securities issued by the Federal National Mortgage Association ("FNMA") include
FNMA guaranteed Mortgage Pass-Through Certificates (also known as "Fannie
Maes") which are solely the obligations of the FNMA, are
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not backed by or entitled to the full faith and credit of the United States and
are supported by the right of the issuer to borrow from the Treasury. FNMA is
a government-sponsored organization owned entirely by private stockholders.
Fannie Maes are guaranteed as to timely payment of principal and interest by
FNMA. Mortgage-related securities issued by the Federal Home Loan Mortgage
Corporation ("FHLMC") include FHLMC Mortgage Participation Certificates (also
known as "Freddie Macs" or "Pcs"). FHLMC is a corporate instrumentality of the
United States, created pursuant to an Act of Congress, which is owned entirely
by Federal Home Loan Banks. Freddie Macs are not guaranteed by the United
States or by any Federal Home Loan Banks and do not constitute a debt or
obligation of the United States or of any Federal Home Loan Bank. Freddie Macs
entitle the holder to timely payment of interest, which is guaranteed by the
FHLMC. FHLMC guarantees either ultimate collection or timely payment of all
principal payments on the underlying mortgage loans. When FHLMC does not
guarantee timely payment of principal, FHLMC may remit the amount due on
account of its guarantee of ultimate payment of principal at any time after
default on an underlying mortgage, but in no event later than one year after it
becomes payable.
The Managed Income, Intermediate Government, Short-Term Bond,
Intermediate-Term Bond, Government Income and International Fixed Income
Portfolios may invest in multiple class pass-through securities, including
collateralized mortgage obligations ("CMOs") and real estate mortgage
investment conduit ("REMIC") pass-through or participation certificates ("REMIC
Certificates"). These multiple class securities may be issued by U.S.
Government agencies or instrumentalities, including FNMA and FHLMC, or by
trusts formed by private originators of, or investors in, mortgage loans. In
general, CMOs and REMICs are debt obligations of a legal entity that are
collateralized by, and multiple class pass-through securities represent direct
ownership interests in, a pool of residential mortgage loans or mortgage
pass-through securities (the "Mortgage Assets"), the payments on which are used
to make payments on the CMOs or multiple pass-through securities. Investors
may purchase beneficial interests in REMICs, which are known as "regular"
interests or "residual" interests. The Portfolios do not intend to purchase
residual interests.
Each class of CMOs or REMIC Certificates, often referred to as a
"tranche," is issued at a specific adjustable or fixed interest rate and must
be fully retired no later than its final distribution date. Principal
prepayments on the Mortgage Assets underlying the CMOs or REMIC Certificates
may cause some or all of the classes of CMOs or REMIC Certificates to be
retired substantially earlier than their final distribution dates.
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Generally, interest is paid or accrues on all classes of CMOs or REMIC
Certificates on a monthly basis.
The principal of and interest on the Mortgage Assets may be allocated
among the several classes of CMOs or REMIC Certificates in various ways. In
certain structures (known as "sequential pay" CMOs or REMIC Certificates),
payments of principal, including any principal prepayments, on the Mortgage
Assets generally are applied to the classes of CMOs or REMIC Certificates in
the order of their respective final distribution dates. Thus no payment of
principal will be made on any class of sequential pay CMOs or REMIC
Certificates until all other classes having an earlier final distribution date
have been paid in full.
Additional structures of CMOs or REMIC Certificates include, among
others, "parallel pay" CMOs and REMIC Certificates. Parallel pay CMOs or REMIC
Certificates are those which are structured to apply principal payments and
prepayments of the Mortgage Assets to two or more classes concurrently on a
proportionate or disproportionate basis. These simultaneous payments are taken
into account in calculating the final distribution date of each class.
A wide variety of REMIC Certificates may be issued in the parallel pay
or sequential pay structures. These securities include accrual certificates
(also known as "Z-Bonds"), which only accrue interest at a specified rate until
all other certificates having an earlier final distribution date have been
retired and are converted thereafter to an interest-paying security, and
planned amortization class ("PAC") certificates, which are parallel pay REMIC
Certificates which generally require that specified amounts of principal be
applied on each payment date to one or more classes of REMIC Certificates (the
"PAC Certificates"), even though all other principal payments and prepayments
of the Mortgage Assets are then required to be applied to one or more other
classes of the Certificates. The scheduled principal payments for the PAC
Certificates generally have the highest priority on each payment date after
interest due has been paid to all classes entitled to receive interest
currently. Shortfalls, if any, are added to the amount payable on the next
payment date. The PAC Certificate payment schedule is taken into account in
calculating the final distribution date of each class of PAC. In order to
create PAC tranches, one or more tranches generally must be created that absorb
most of the volatility in the underlying Mortgage Assets. These tranches tend
to have market prices and yields that are much more volatile than the PAC
classes.
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FNMA REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by FNMA. In addition, FNMA will be
obligated to distribute on a timely basis to holders of FNMA REMIC Certificates
required installments of principal and interest and to distribute the principal
balance of each class of REMIC Certificates in full, whether or not sufficient
funds are otherwise available.
For FHLMC REMIC Certificates, FHLMC guarantees the timely payment of
interest, and also guarantees the ultimate payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("Pcs"). Pcs represent undivided interests in specified level payment,
residential mortgages or participations therein purchased by FHLMC and placed
in a PC pool. With respect to principal payments on Pcs, FHLMC generally
guarantees ultimate collection of all principal of the related mortgage loans
without offset or deduction. FHLMC also guarantees timely payment of principal
on certain Pcs, referred to as "Gold Pcs."
ASSET-BACKED SECURITIES. Asset-backed securities are generally issued
as pass-through certificates, which represent undivided fractional ownership
interests in an underlying pool of assets, or as debt instruments, which are
also known as collateralized obligations, and are generally issued as the debt
of a special purpose entity organized solely for the purpose of owning such
assets and issuing such debt. Asset-backed securities are often backed by a
pool of assets representing the obligations of a number of different parties.
The yield characteristics of asset-backed securities differ from
traditional debt securities. A major difference is that the principal amount
of the obligations may be prepaid at any time because the underlying assets
(i.e., loans) generally may be prepaid at any time. As a result, if an
asset-backed security is purchased at a premium, a prepayment rate that is
faster than expected may reduce yield to maturity, while a prepayment rate that
is slower than expected may have the opposite effect of increasing yield to
maturity. Conversely, if an asset-backed security is purchased at a discount,
faster than expected prepayments may increase, while slower than expected
prepayments may decrease, yield to maturity.
In general, the collateral supporting asset-backed securities is of
shorter maturity than mortgage-related securities. Like other fixed-income
securities, when interest rates rise the value of an asset-backed security
generally will decline; however, when interest rates decline, the value of an
asset-backed security with prepayment features may not increase as much as that
of other fixed-income securities.
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U.S. GOVERNMENT OBLIGATIONS. Examples of the types of U.S. Government
obligations which the Portfolios 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.
The Master Portfolio may purchase (i) debt securities issued
by the U.S. Treasury which are direct obligations of the U.S. Government,
including bills, notes and bonds, and (ii) obligations issued or guaranteed by
U.S. Government-sponsored instrumentalities and federal agencies, including the
Federal National Mortgage Association, Federal Home Loan Bank and the Federal
Housing Administration.
SUPRANATIONAL ORGANIZATION OBLIGATIONS. The Master Portfolio may
purchase debt securities of supranational organizations such as the European
Coal and Steel Community, the European Economic Community and the World Bank,
which are charted to promote economic development.
LEASE OBLIGATIONS. The Municipal Money Market, Pennsylvania
Municipal Money Market, Ohio Municipal Money Market, North Carolina Municipal
Money Market, Virginia Municipal Money Market, New Jersey Municipal Money
Market, Managed Income, Tax-Free Income, Pennsylvania Tax-Free Income, Ohio
Tax-Free Income, Short-Term Bond, Intermediate-Term Bond and International
Fixed Income Portfolios may hold participation certificates in a lease, an
installment purchase contract, or a conditional sales contract ("lease
obligations").
The Adviser will monitor the credit standing of each municipal
borrower and each entity providing credit support and/or a put option. In
determining whether a lease obligation is liquid, the 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
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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.
The Municipal Money Market, Pennsylvania Municipal Money Market, Ohio
Municipal Money Market, North Carolina Municipal Money Market, Virginia
Municipal Money Market and New Jersey Municipal Money Market Portfolios will
only invest in lease obligations with puts that (i) may be exercised at par on
not more than seven days notice, and (ii) are issued by institutions deemed by
the adviser to present minimal credit risks. Such obligations will be
considered liquid. However, a number of puts are not exercisable at the time
the put would otherwise be exercised if the municipal borrower is not
contractually obligated to make payments (e.g., an event of nonappropriation
with a "nonappropriation" lease obligation). Under such circumstances, the
lease obligation while previously considered liquid would become illiquid, and
a Portfolio might lose its entire investment in such 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 Fund, 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 Fund. Issuers of municipal securities might seek
protection under the bankruptcy laws. In the event of bankruptcy of such an
issuer, the Fund could experience delays and limitations with respect to the
collection of principal and interest on such municipal leases and the Fund 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 Fund may take possession of and manage the assets securing the
issuer's obligations on such securities, which may increase the Fund's
operating expenses and adversely affect the net asset value of the Fund. When
the lease contains a non-appropriation clause, however, the failure to pay
would not be a default and the Fund would not have the right to take possession
of the assets. Any income derived from the Fund's ownership or operation of
such assets may not be tax-exempt. In addition, the Fund'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 Fund may
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exercise its rights by taking possession of such assets, because as a regulated
investment company the Fund is subject to certain limitations on its
investments and on the nature of its income.
COMMERCIAL PAPER. The Money Market Portfolios may purchase commercial
paper rated in one of the two highest rating categories of a nationally
recognized statistical rating organization ("NRSRO"). The Non-Money Market
Portfolios, except the Master Portfolio, may purchase commercial paper rated
(at the time of purchase) "A-1" by S&P or "Prime-1" by Moody's or, when deemed
advisable by a Portfolio's adviser or sub-adviser, "high quality" issues rated
"A-2" or "Prime-2" by S&P or Moody's, respectively. The Master Portfolio may
purchase commercial paper rated (at the time of purchase) A-1 or better by S&P
or Prime-1 by Moody's, or, if not rated, issued by a corporation having an
outstanding unsecured issue rated Aaa by Moody's or AAA by S&P, and having a
maximum maturity of nine months. These ratings symbols are described in
Appendix A.
Commercial paper purchasable by each 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. Each Portfolio (including the Master
Portfolio) other than the Municipal Portfolios may invest in repurchase
agreements. The repurchase price under the repurchase agreements described in
the Prospectuses generally equals the price paid by a 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 a 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. A 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
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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 Portfolios under the 1940 Act.
The Master Portfolio will not enter into a repurchase agreement with a
duration of more than seven days if, as a result, more than 10% of the value of
its total assets would be so invested. The Master Portfolio will also only
invest in repurchase agreements with a bank if the bank has at least $1 billion
in assets and has a credit rating of not less than A as determined by Moody's
or S&P. The Adviser to the Master Portfolio will monitor the market value of
transferred securities plus any accrued interest thereon so that the value of
such securities will at least equal the repurchase price. The instruments
through which the Master Portfolio purchases securities ("underlying
securities") from a bank, or a registered U.S. Government securities dealer,
with an agreement by the seller to repurchase the security at an agreed price,
plus interest at a specified rate. The underlying securities will be limited
to U. S. Government and agency obligations described under "Government
Obligations" above.
INVESTMENT GRADE DEBT OBLIGATIONS. Each of the Money Market
Portfolios may invest in securities in the two highest rating categories of
NRSROs. The Non-Money Market Portfolios, except the Master Portfolio, 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 to have some speculative characteristics and
are more sensitive to economic change than higher rated securities.
The Master Portfolio may invest in non-convertible corporate debt
securities which are issued by companies whose commercial paper is rated
Prime-1 by Moody's or A-1 by S&P and dollar-denominated obligations of foreign
issuers issued in the U.S. If the issuer's commercial paper is unrated, then
the debt security would have to be rated at least AA by S&P or Aa2 by Moody's.
If there is neither a commercial paper rating nor a rating of the debt
security, then the Master Portfolio's investment adviser must determine that
the debt security is of comparable quality to equivalent issues of the same
issuer rated at least AA or Aa2.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. When a Portfolio
agrees to purchase securities on a when-issued or
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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 commitments. It may be expected that the market value of the
Portfolios' 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 a 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, each 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.
A 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, a 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 a 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 a 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.
RIGHTS OFFERINGS AND WARRANTS TO PURCHASE. As stated in their
Prospectus, the Value Equity, Growth Equity, Small Cap Growth Equity, Core
Equity, Small Cap Value Equity, International Equity, International Emerging
Markets and Balanced Portfolios may participate in rights offerings and may
purchase warrants, which are privileges issued by corporations enabling the
owners to subscribe to and purchase a specified number of shares of the
corporation at a specified price during a specified period of
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time. Subscription rights normally have a short life span to expiration. The
purchase of rights or warrants involves the risk that the Portfolios could lose
the purchase value of a right or warrant if the right to subscribe to
additional shares is not exercised prior to the rights' and warrants'
expiration. Also, the purchase of rights and/or warrants involves the risk
that the effective price paid for the right and/or warrant added to the
subscription price of the related security may exceed the value of the
subscribed security's market price such as when there is no movement in the
level of the underlying security. A Portfolio will not invest more than 5% of
its net assets, taken at market value, in warrants, or more than 2% of its net
assets, taken at market value, in warrants not listed on the New York or
American Stock Exchanges. Warrants acquired by a Portfolio in units or
attached to other securities are not subject to this restriction.
FOREIGN CURRENCY TRANSACTIONS. Forward foreign currency exchange
contracts involve an obligation to purchase or sell a specified currency at a
future date at a price set at the time of the contract. Forward currency
contracts do not eliminate fluctuations in the values of portfolio securities
but rather allow a Portfolio to establish a rate of exchange for a future point
in time. A Portfolio may enter into forward foreign currency exchange
contracts when deemed advisable by its adviser or sub-adviser under two
circumstances. First, when entering into a contract for the purchase or sale
of a security, the Portfolio may enter into a forward foreign currency exchange
contract for the amount of the purchase or sale price to protect against
variations, between the date the security is purchased or sold and the date on
which payment is made or received, in the value of the foreign currency
relative to the U.S. dollar or other foreign currency.
Second, when a Portfolio's adviser or sub-adviser anticipates that a
particular foreign currency may decline substantially relative to the U.S.
dollar or other leading currencies, in order to reduce risk, the Portfolio may
enter into a forward contract to sell, for a fixed amount, the amount of
foreign currency approximating the value of some or all of the Portfolio's
securities denominated in such foreign currency. No Portfolio intends to enter
into forward contracts under this second circumstance on a regular or
continuing basis and will not do so if, as a result, it will have more than 15%
of the value of its total assets committed to such contracts. With respect to
any forward foreign currency contract, it will not generally be possible to
match precisely the amount covered by that contract and the value of the
securities involved due to the changes in the values of such securities
resulting from market movements between the date the forward contract is
entered into and the date it matures. In addition, while forward contracts may
offer protection from losses resulting from declines in the value of a
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particular foreign currency, they also limit potential gains which might result
from increases in the value of such currency. A Portfolio will also incur
costs in connection with forward foreign currency exchange contracts and
conversions of foreign currencies and U.S. dollars.
A separate account of a Portfolio consisting of cash or liquid
securities equal to the amount of the Portfolio's assets that could be required
to consummate forward contracts entered into under the second circumstance, as
set forth above, will be established with the Fund's custodian. For the
purpose of determining the adequacy of the securities in the account, the
deposited securities will be valued at market or fair value. If the market or
fair value of such securities declines, additional cash or securities will be
placed in the account daily so that the value of the account will equal the
amount of such commitments by the Portfolio.
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 securities, and therefore,
on a percentage basis, an investment in the underlying securities themselves.
A 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 a 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
a Portfolio maintains with its custodian cash or cash equivalents equal to the
contract value. A call option is also covered if a 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 a Portfolio purchases a put option, the premium paid by it is
recorded as an asset of the Portfolio. When a 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
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prices. If an option purchased by a 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 a 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 a
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 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. Each Non-Money Market
Portfolio (including the Master 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
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adverse price movements, a Portfolio would continue to be required to make
daily cash payments to maintain its required margin. In such situations, if a
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, a 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 a
Portfolio's ability to effectively hedge.
Successful use of futures by a Portfolio is also subject to the
adviser's ability to correctly predict movements in the direction of the
market. For example, if a 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 a Portfolio has insufficient cash, it may have to sell
securities to meet daily variation margin requirements. Such sales of
securities may be, but will not necessarily be, at increased prices which
reflect the rising market. A 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 a Portfolio involves the risk
of loss by a 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
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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.
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 a 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, a 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 a
Portfolio will not exceed 1/2 of 1% of the value of such 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. A 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 a 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 such Portfolio and will be
reflected in realized gain or loss when the commitment is exercised or expires.
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TAX-EXEMPT DERIVATIVES. The Municipal Portfolios and the Tax-Free
Income, Ohio Tax-Free Income and Pennsylvania Tax-Free Income Portfolios
(collectively, the "Money and Non-Money Market Municipal Portfolios") 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 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 Money
and Non-Money Market Municipal Portfolios 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 Fund nor its
investment adviser will review the proceedings related to the creation of any
tax-exempt derivatives or the basis for such opinions.
SECURITIES LENDING. A 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 a Portfolio in connection with such
loans would be invested in short-term U.S. Government obligations.
While the Master Portfolio may earn additional income from
lending securities, such activity is incidental to the investment objective of
the Master Portfolio. The value of securities loaned may not exceed 33 1/3% of
the value of the Master Portfolio's total assets. In connection with such
loans, the Master Portfolio will receive collateral consisting of cash or U.S.
Government securities, which will be maintained at all times in an amount equal
to at least 100% of the current market
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value of the loaned securities. In addition, the Master Portfolio will be able
to terminate the loan at any time, will receive reasonable interest on the
loan, as well as amounts equal to any dividends, interest or other
distributions on the loaned securities. In the event of the bankruptcy of the
borrower, the Trust could experience delay in recovering the loaned securities.
Management of the Trust believes that this risk can be controlled through
careful monitoring procedures.
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 a 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.
SECURITIES OF SMALL CAP ISSUERS. Securities of small cap issues
purchased by the Small Cap Value Equity and Small Cap Growth Equity Portfolios
may be exchange-listed or purchased "over-the-counter."
SPECIAL CONSIDERATIONS REGARDING INVESTMENT IN OHIO MUNICIPAL
OBLIGATIONS. As described above, the Ohio Tax-Free Money Market and Ohio
Tax-Free Income Portfolios (the "Ohio Portfolios") will each invest most of its
net assets in securities issued by or on behalf of (or in certificates of
participation in lease-purchase obligations of) the State of Ohio, political
subdivisions of the State, or agencies or instrumentalities of the State or its
political subdivisions (Ohio Obligations). The Ohio Portfolios are therefore
susceptible to general or particular political, economic or regulatory factors
that may affect issuers of Ohio Obligations. The following information
constitutes only a brief summary of some of the many complex factors that may
have an effect. The information does not apply to "conduit" obligations on
which the public issuer itself has no financial responsibility. This
information is derived from official statements of certain Ohio issuers
published in connection with their issuance of securities and from other
publicly available information, and is believed to be accurate. No independent
verification has been made of any of the following information.
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Generally, the creditworthiness of Ohio Obligations of local issuers
is unrelated to that of obligations of the State itself, and the State has no
responsibility to make payments on those local obligations. There may be
specific factors that at particular times apply in connection with investment
in particular Ohio Obligations or in those obligations of particular Ohio
issuers. It is possible that the investment may be in particular Ohio
Obligations, or in those of particular issuers, as to which those factors
apply. However, the information below is intended only as a general summary,
and is not intended as a discussion of any specific factors that may affect any
particular obligation or issuer.
Ohio is the seventh most populous state; the 1990 Census count of
10,847,000 indicated a 0.5% population increase from 1980. The Census estimate
for 1993 is 11,091,000.
While diversifying more into the service and other non-manufacturing
areas, the Ohio economy continues to rely in part on durable goods
manufacturing largely concentrated in motor vehicles and equipment, steel,
rubber products and household appliances. As a result, general economic
activity, as in many other industrially-developed states, tends to be more
cyclical than in some other states and in the nation as a whole. Agriculture
is an important segment of the economy, with over half the State's area devoted
to farming and approximately 15% of total employment in agribusiness.
In prior years, the State's overall unemployment rate was commonly
somewhat higher than the national figure. For example, the reported 1990
average monthly State rate was 5.7%, compared to the 5.5% national figure.
However, for the last four years the State rates were below the national rates
(5.5% versus 6.1% in 1994). The unemployment rate and its effects vary among
geographic areas of the State.
There can be no assurance that future national, regional or state-wide
economic difficulties, and the resulting impact on State or local government
finances generally, will not adversely affect the market value of Ohio
Obligations held in the Ohio Portfolios or the ability of particular obligors
to make timely payments of debt service on (or lease payments relating to)
those Obligations.
The State operates on the basis of a fiscal biennium for its
appropriations and expenditures, and is precluded by law from ending its July 1
to June 30 fiscal year (FY) or fiscal biennium in a deficit position. Most
State operations are financed through the General Revenue Fund (GRF), for which
the personal income and sales-use taxes are the major sources. Growth and
depletion of GRF ending fund balances show a consistent pattern
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related to national economic conditions, with the ending FY balance reduced
during less favorable and increased during more favorable economic periods.
The State has well-established procedures for, and has timely taken, necessary
actions to ensure resource/expenditure balances during less favorable economic
periods. Those procedures included general and selected reductions in
appropriations spending.
Key biennium-ending fund balances at June 30, 1989 were $475.1 million
in the GRF and $353 million in the Budget Stabilization Fund (BSF, a cash and
budgetary management fund). In the next two fiscal years necessary corrective
steps were taken (including selected reductions in appropriations spending and
the transfer of $64 million from the BSF to the GRF) to respond to certain
lower receipts and higher expenditures than earlier estimated. June 30, 1991
ending fund balances were $135.3 million (GRF) and $300 million (BSF).
The next biennium, 1992-93, presented significant challenges to State
finances, successfully addressed. To allow time to resolve certain budget
differences, an interim appropriations act was enacted effective July 1, 1991;
it included GRF debt service and lease rental appropriations for the entire
1992-93 biennium, while continuing most other appropriations for a month. The
general appropriations act for the entire biennium was passed on July 11, 1991.
Pursuant to it, $200 million was transferred from the BSF to the GRF in FY
1992.
Based on updated results and forecasts in the course of FY 1992, both
in light of a continuing uncertain nationwide economic situation, there was
projected, and then timely addressed, an FY 1992 imbalance in GRF resources and
expenditures. GRF receipts significantly below original forecasts resulted
primarily from lower collections of certain taxes, particularly sales-use and
personal income taxes. Higher expenditure levels were in certain areas,
particularly human services including Medicaid. In response, the Governor
ordered most State agencies to reduce GRF spending in the last six months of FY
1992 by a total of approximately $184 million; the $100.4 million BSF balance
and additional amounts from certain other funds were transferred late in the FY
to the GRF; and adjustments were made in the timing of certain tax payments.
A significant GRF shortfall (approximately $520 million) was then
projected for FY 1993. It was addressed by appropriate legislative and
administrative actions, including the Governor's ordering $300 million in
selected GRF spending reductions and subsequent executive and legislative
action (a combination of tax revisions and additional spending reductions).
The June 30, 1993 ending GRF fund balance was approximately $111 million, of
which,
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as a first step to BSF replenishment, $21 million was deposited in the BSF.
No spending reductions were applied to appropriations needed for debt
service on or lease rentals relating to any State obligations.
The 1994-95 biennium presented a more affirmative financial picture
for the State. Based on June 30, 1994 balances, an additional $260 million was
deposited in the BSF. The biennium ended June 30, 1995 with a GRF ending fund
balance of $928 million, of which $535.2 million has been transferred into the
BSF (which has a current balance of over $828 million).
The GRF appropriations act for the current 1994-95 biennium was on
June 28, 1995 passed and promptly signed (after selective vetoes) by the
Governor. All necessary GRF appropriations for State debt service and lease
rental payments then projected for the biennium were included in that act. In
accordance with the appropriations act, the significant June 30, 1995 GRF fund
balance, after leaving in the GRF an unreserved and undesignated balance of $70
million has been transferred to a variety of funds, including $535.2 million to
the BSF. $322.8 million was transferred to other funds, including school
assistance funds and, in anticipation of possible federal program changes, a
human services stabilization fund.
The State's incurrence or assumption of debt without a vote of the
people is, with limited exceptions, prohibited by current State constitutional
provisions. The State may incur debt, limited in amount to $750,000, to cover
casual deficits or failures in revenues or to meet expenses not otherwise
provided for. The Constitution expressly precludes the State from assuming the
debts of any local government or corporation. (An exception is made in both
cases for any debt incurred to repel invasion, suppress insurrection or defend
the State in war.)
By 13 constitutional amendments, the last adopted in 1993, Ohio voters
have authorized the incurrence of State debt and the pledge of taxes or excises
to its payment. At June 9, 1995, $820.1 million (excluding certain highway
bonds payable primarily from highway use charges) of this debt was outstanding
or awaiting delivery. The only such State debt then still authorized to be
incurred are portions of the highway bonds, and the following: (a) up to $100
million of obligations for coal research and development may be outstanding at
any one time ($34.7 million outstanding); (b) $360 million of obligations
authorized for local infrastructure improvements, no more than $120 million of
which may be issued in any calendar year ($728.2 million outstanding); and (c)
up to $200 million in general obligation bonds for parks, recreation and
natural resources
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purposes which may be outstanding at any one time ($50 million outstanding,
with no more than $50 million to be issued in any one year).
The General Assembly has placed on the November 1995 ballot a proposed
constitutional amendment that would extend the local infrastructure bond
program (authorizing an additional $1.2 billion of State full faith and credit
obligations to be issued over 10 years for the purpose) and authorize
additional highway bonds. The latter would supersede the current $500 million
highway obligation authorization, and would authorize not more than $1.2
billion to be outstanding at any time and not more than $220 million to be
issued in a fiscal year.
Common resolutions are pending in both houses of the General Assembly
that would submit a constitutional amendment relating to certain other aspects
of State debt. The proposal would authorize, among other things, the issuance
of general obligation debt for a variety of purposes without debt service on
all State general obligation debt and GRF-supported obligations not to exceed
5% of the preceding Fiscal Year's GRF expenditures.
The Constitution also authorizes the issuance of State obligations for
certain purposes, the owners of which do not have the right to have excises or
taxes levied to pay debt service. Those special obligations include
obligations issued by the Ohio Public Facilities Commission and the Ohio
Building Authority, and certain obligations issued by the State Treasurer, over
$4.5 billion of which were outstanding at June 9, 1995.
A 1990 constitutional amendment authorizes greater State and political
subdivision participation (including financing) in the provision of housing.
The General Assembly may for that purpose authorize the issuance of State
obligations secured by a pledge of all or such portion as it authorizes of
State revenues or receipts (but not by a pledge of the State's full faith and
credit).
A 1994 constitutional amendment pledges the full faith and credit and
taxing power of the State to meeting certain guarantees under the State's
tuition credit program which provides for purchase of tuition credits, for the
benefit of State residents, guaranteed to cover a specified amount when applied
to the cost of higher education tuition. (A 1965 constitutional provision that
authorized student loan guarantees payable from available State moneys has
never been implemented, apart from a "guarantee fund" approach funded
essentially from program revenues.)
The House has adopted a resolution that would submit to the electors a
constitutional amendment prohibiting the General
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Assembly from imposing a new tax or increasing an existing tax unless approved
by a three-fifths vote of each house or by a majority vote of the electors. It
cannot be predicted whether required Senate concurrence will be received.
State and local agencies issue obligations that are payable from
revenues from or relating to certain facilities (but not from taxes). By
judicial interpretation, these obligations are not "debt" within constitutional
provisions. In general, payment obligations under lease-purchase agreements of
Ohio public agencies (in which certificates of participation may be issued) are
limited in duration to the agency's fiscal period, and are renewable only upon
appropriations being made available for the subsequent fiscal period.
Local school districts in Ohio receive a major portion (state-wide
aggregate in the range of 44% in recent years) of their operating moneys from
State subsidies, but are dependent on local property taxes, and in 120
districts from voter-authorized income taxes, for significant portions of their
budgets. Litigation, similar to that in other states, is pending questioning
the constitutionality of Ohio's system of school funding. In one case, the
trial court concluded that aspects of the system (including basic operating
assistance) are unconstitutional, and ordered the State to provide for and fund
a system complying with the Ohio Constitution. The State has appealed. A
small number of the State's 612 local school districts have in any year
required special assistance to avoid year-end deficits. A current program
provides for school district cash need borrowing directly from commercial
lenders, with diversion of State subsidy distributions to repayment if needed.
Recent borrowings under this program totalled $94.5 million for 27 districts
(including $75 million for one)in FY 1993, $41.1 million for 28 districts in FY
1994, and $20.1 million for eight districts in FY 1995.
Ohio's 943 incorporated cities and villages rely primarily on property
and municipal income taxes for their operations. With other subdivisions, they
also receive local government support and property tax relief moneys
distributed by the State. For those few municipalities that on occasion have
faced significant financial problems, there are statutory procedures for a
joint State/local commission to monitor the municipality's fiscal affairs and
for development of a financial plan to eliminate deficits and cure any
defaults. Since inception in 1979, these procedures have been applied to 23
cities and villages; for 18 of them the fiscal situation was resolved and the
procedures terminated.
At present the State itself does not levy ad valorem taxes on real or
tangible personal property. Those taxes are levied by
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political subdivisions and other local taxing districts. The Constitution has
since 1934 limited to 1% of true value in money the amount of the aggregate
levy (including a levy for unvoted general obligations) of property taxes by
all overlapping subdivisions, without a vote of the electors or a municipal
charter provision, and statutes limit the amount of that aggregate levy to 10
mills per $1 of assessed valuation (commonly referred to as the "ten-mill
limitation"). Voted general obligations of subdivisions are payable from
property taxes that are unlimited as to amount or rate.
SPECIAL CONSIDERATIONS REGARDING INVESTMENT IN PENNSYLVANIA MUNICIPAL
OBLIGATIONS. The concentration of investments in Pennsylvania Municipal
Obligations by the Pennsylvania Municipal Money Market and Pennsylvania
Tax-Free Income Portfolios raises special investment considerations. In
particular, changes in the economic condition and governmental policies of the
Commonwealth of Pennsylvania and its municipalities could adversely affect the
value of those Portfolios and their portfolio securities. This section briefly
describes current economic trends in Pennsylvania.
Pennsylvania has historically been dependent on heavy industry
although recent declines in the coal, steel and railroad industries have led to
diversification of the Commonwealth's economy. Recent sources of economic
growth in Pennsylvania are in the service sector, including trade, medical and
health services, education and financial institutions. Agriculture continues
to be an important component of the Commonwealth's economic structure, with
nearly one-third of the Commonwealth's total land area devoted to cropland,
pasture and farm woodlands.
The population of Pennsylvania experienced a slight increase in the
period 1980 through 1990 and has a high proportion of persons 65 or older. The
Commonwealth is highly urbanized, with almost 85% of the 1980 census population
residing in metropolitan statistical areas. The two largest metropolitan
statistical areas, those containing the Cities of Philadelphia and Pittsburgh,
together comprise approximately 50% of the Commonwealth's total population.
The Commonwealth utilizes the fund method of accounting and over 120
funds have been established for purposes of recording receipts and
disbursements of the Commonwealth, of which the General Fund is the largest.
Most of the Commonwealth's operating and administrative expenses are payable
from the General Fund. The major tax sources for the General Fund are the
sales tax, the personal income tax and the corporate net income tax. Major
expenditures of the Commonwealth include funding for education, public health
and welfare, transportation, and economic development.
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The constitution of the Commonwealth provides that operating budget
appropriations of the Commonwealth may not exceed the estimated revenues and
available surplus in the fiscal year for which funds are appropriated. Annual
budgets are enacted for the General Fund (the principal operating fund of the
Commonwealth) and for certain special revenue funds which together represent
the majority of expenditures of the Commonwealth. Although a negative balance
was experienced applying generally accepted accounting principles ("GAAP") in
the General Fund for fiscal 1990 and 1991, tax increases and spending decreases
helped return the General Fund balance to a surplus at June 30, 1992 of $87.5
million and at June 30, 1993 of $698.9 million. The deficit in the
Commonwealth's unreserved/undesignated funds of prior years also was reversed
to a surplus of $64.4 million as of June 30, 1993.
Current constitutional provisions permit the Commonwealth to issue the
following types of debt: (i) electorate approved debt, (ii) debt for capital
projects subject to an aggregate debt limit of 1.75 times the annual average
tax revenues of the preceding five fiscal years, (iii) tax anticipation notes
payable in the fiscal year of issuance and (iv) debt to suppress insurrection
or rehabilitate areas affected by disaster. Certain state-created agencies
issue debt supported by assets of, or revenues derived from, the various
projects financed and the debt of such agencies is not an obligation of the
Commonwealth, although some of the agencies are indirectly dependent on
Commonwealth appropriations.
Certain litigation is pending against the Commonwealth that could
adversely affect the ability of the Commonwealth to pay debt service on its
obligations including suits relating to the following matters: (a) the ACLU
has filed suit in Federal court demanding additional funding for child welfare
services; the Commonwealth settled a similar suit in the Commonwealth Court of
Pennsylvania and is seeking the dismissal of the federal suit, inter alia,
because of that settlement. The district court has denied class certification
to the ACLU, and the parties have stipulated to a judgment against the
plaintiffs to allow plaintiffs to appeal the denial of class certification (no
available estimates of potential liability); (b) in 1987, the Supreme Court of
Pennsylvania held the statutory scheme for county funding of the judicial
system to be in conflict with the constitution of the Commonwealth, but stayed
judgment pending enactment by the legislature of funding consistent with the
opinion, and the legislature has yet to consider legislation implementing the
judgment. In 1992, a new action in mandamus was filed seeking to compel the
Commonwealth to comply with the original decision; (c) several banks have filed
suit against the Commonwealth contesting the constitutionality of a law enacted
in 1989 imposing a bank shares tax; in July 1994, the Commonwealth Court en
banc upheld the constitutionality of the 1989 bank
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shares tax law, but struck down a companion law to provide credits against the
bank shares tax for new banks; cross-appeals from that decision to the
Pennsylvania Supreme Court have been filed; (d) litigation has been filed in
both state and Federal court by an association of rural and small schools and
several individual school districts and parents challenging the
constitutionality of the Commonwealth's system for funding local school
districts -- the Federal case has been stayed pending resolution of the state
case and the state case is in the pre-trial stage (no available estimate of
potential liability); (e) the ACLU has brought a class action on behalf of
inmates challenging the conditions of confinement in thirteen of the
Commonwealth correctional institutions; a proposed settlement agreement has
been submitted to the court and members of the class for their review (no
available estimate of potential cost of complying with the injunction sought,
but capital and personnel costs might cost millions of dollars); (f) a
consortium of public interest law firms has filed a class action suit alleging
that the Commonwealth has not complied with a Federal mandate to provide
screening, diagnostic and treatment services for all Medicaid-eligible children
under 21; the district court denied class certification and the parties have
submitted a tentative settlement agreement to the court for approval; and (g)
litigation has been filed in federal court by the Pennsylvania Medical Society
seeking payment of the full co-pay and deductible in excess of the maximum fees
set under the Commonwealth's medical assistance program for outpatient services
provided to medical assistance patients who also were eligible for Medicare;
the Commonwealth received a favorable decision in the federal district court,
but the Pennsylvania Medical Society won a reversal in the federal circuit
court (potential liability estimated at $50 million per year).
Local government units in the Commonwealth of Pennsylvania (which
include, among other things, counties, cities, boroughs, towns, townships,
school districts and other municipally created units such as industrial
development authorities and municipality authorities, including water and sewer
authorities) are permitted to issue debt for capital projects: (i) in any
amount so long as the debt has been approved by the voters of the local
government unit; or (ii) without electoral approval if the aggregate
outstanding principal amount of debt of the local government unit is not in
excess of 100% of its borrowing base (in the case of a school district of the
first class), 300% of its borrowing base (in the case of a county) or 250% of
its borrowing base (in the case of all other local government units); or (iii)
without electoral approval and without regard to the limit described in (ii) in
any amount in the case of certain subsidized debt and qualifying
self-liquidating debt. Lease rental debt may also be issued, in which case the
total debt limits described in section (ii) (taking into account all existing
lease rental debt in
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addition to all other debt) are increased. The borrowing base for a local
government unit is the average of total revenues for the three fiscal years
preceding the borrowing. The risk of investing in debt issued by any
particular local government unit depends, in the case of general obligation
bonds secured by tax revenues, on the credit-worthiness of that issuer or, in
the case of revenue bonds, on the revenue producing ability of the project
being financed, and not directly on the credit-worthiness of the Commonwealth
of Pennsylvania as a whole.
The City of Philadelphia (the "City") has been experiencing severe
financial difficulties which has impaired its access to public credit markets
and a long-term solution to the City's financial crisis is still being sought.
The City experienced a series of General Fund deficits for fiscal years 1988
through 1992. The City has no legal authority to issue deficit reduction bonds
on its own behalf, but state legislation has been enacted to create an
Intergovernmental Cooperation Authority (the "Authority") to provide fiscal
oversight for Pennsylvania cities (primarily Philadelphia) suffering recurring
financial difficulties. The Authority is broadly empowered to assist cities in
avoiding defaults and eliminating deficits by encouraging the adoption of sound
budgetary practices and issuing bonds. In order for the Authority to issue
bonds on behalf of the City, the City and the Authority entered into an
intergovernmental cooperative agreement providing the Authority with certain
oversight powers with respect to the fiscal affairs of the City, and the
Authority originally approved a five-year financial plan prepared by the City
on April 6, 1992. The Authority approved the latest update of the five year
financial plan on May 2, 1994. The City has reported a surplus of
approximately $15 million for the fiscal year ending June 30, 1994. In June
1992, the Authority issued $474,555,000 in bonds to liquidate the City's
deficit balance in its general fund. The Authority issued $643,430,000 of
bonds in July 1993 and $178,675,000 of bonds in August 1993 to refund certain
general obligation bonds of the City and to fund additional capital projects.
SPECIAL CONSIDERATIONS REGARDING INVESTMENT IN NORTH CAROLINA
MUNICIPAL OBLIGATIONS. The concentration of investments in North Carolina
Municipal Obligations by the North Carolina Municipal Money Market Portfolio
raises special investment considerations. In particular, changes in the
economic condition and governmental policies of North Carolina and its
political subdivisions, agencies, instrumentalities, and authorities could
adversely affect the value of the Portfolio and its portfolio securities. This
section briefly describes current economic trends in North Carolina.
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The State of North Carolina has two major operating funds: the
General Fund and the Highway Fund. In addition, the 1989 General Assembly
created the Highway Trust Fund to provide funding for a major highway
construction program. North Carolina derives most of its revenue from taxes,
including individual income tax, corporation income tax, sales and use taxes,
corporation franchise tax, alcoholic beverage tax, insurance tax, inheritance
tax, tobacco products tax, and soft drink tax. North Carolina receives other
non-tax revenues which are also deposited in the General Fund. The most
important are Federal funds collected by North Carolina agencies, university
fees and tuition, interest earned by the North Carolina Treasurer on
investments of General Fund moneys and revenues from the judicial branch. The
proceeds from the motor fuel tax, highway use tax and motor vehicle license tax
are deposited in the Highway Fund and the Highway Trust Fund.
During the 1989-92 budget years, growth of North Carolina tax revenues
slowed considerably, requiring tax increases and budget adjustments, including
hiring freezes and restrictions, spending constraints, changes in timing and
certain collections and payments, and other short-term budget adjustments
necessary to comply with North Carolina's constitutional mandate for a balanced
budget. Many areas of North Carolina government were affected. Reductions in
capital spending, local government aid, and the use of the budget stabilization
reserve, combined with other budget adjustments, brought the budget into
balance. Tax increases in the fiscal 1992 budget included a $.01 increase in
the North Carolina sales tax and increases in the personal and corporate income
tax rates, as well as increases in the tax on cigarettes and alcohol, among
other items.
Fiscal year 1992 ended with a positive fund balance of approximately
$164.8 million. By law, $41.2 million of such positive fund balance was
required to be reserved in the General Fund of North Carolina as part of a
"Savings Reserve," leaving an unrestricted General Fund balance at June 30,
1992 of $123.6 million. Fiscal year 1993 ended with a positive General Fund
balance of approximately $537.3 million. Of this amount, $134.3 million was
reserved in the Savings Reserve and $57 million was reserved in a Reserve for
Repair and Renovation of State Facilities, leaving an unrestricted General Fund
balance at June 30, 1993 of $346 million. Fiscal year 1994 ended with a
positive General Fund balance of approximately $444.7 million. An additional
$178 million was available from a reserved fund balance. Of this aggregate
amount, $155.7 million was reserved in the Savings Reserve (bringing the total
reserve to $210.6 million after prior withdrawals) and $60 million was reserved
in the Reserve for Repair and Renovation of State Facilities (bringing the
total reserve to $60 million after prior
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withdrawals), leaving an unrestricted General Fund balance at June 30, 1994 of
$407 million.
The foregoing results are presented on a budgetary basis. Accounting
principles applied to develop data on a budgetary basis differ significantly
from those principles used to present financial statements in conformity with
generally accepted accounting principles (GAAP). Based on a modified accrual
basis (GAAP), the General Fund balance at June 30, 1993 and 1994 was $681.5
million and $1,240.9 million, respectively.
The General Assembly reduced departmental operating requirements by
$357.6 million for fiscal year 1995 and authorized continuation funding of
$8,489.3 million. The savings reductions were based on recommendations from
the Governor, a Governmental Performance Audit Committee, and selective savings
identified by the General Assembly. After review of the continuation budget,
the General Assembly authorized funding for planned expansion to existing
programs and funded new initiatives for children, economic development,
education, human services, and environmental programs. Expansion funds of
$1,650.4 million for fiscal year 1995 were approved. In addition to the
transfers to the Savings Reserve from the fiscal year-end credit balance, the
General Assembly in 1993 appropriated $66.7 million for the Savings Reserve.
The General Assembly authorized $189.4 million for capital improvements
spending and $60 million for the Reserve for Repair and Renovation of State
Facilities for fiscal year 1995.
The North Carolina budget is based upon a number of existing and
assumed State and non-State factors, including State and national economic
conditions, international activity, Federal government policies and legislation
and the activities of the State's General Assembly. Such factors are subject
to change which may be material and affect the budget. The Congress of the
United States is considering a number of matters affecting the federal
government's relationship with State governments that, if enacted into law,
could affect fiscal and economic policies of the States, including North
Carolina.
During recent years North Carolina has moved from an agricultural to a
service and goods producing economy. According to the North Carolina
Employment Security Commission (the "Commission"), in November 1994, North
Carolina ranked ninth among the states in non-agricultural employment and
eighth in manufacturing employment. The Commission estimated North Carolina's
seasonally adjusted unemployment rate in March 1995 to be 3.9% of the labor
force, as compared with an unemployment rate of 5.5% nationwide. As part of
its 1993-95 budget, the General Assembly provided major funding for economic
initiatives in an effort to create additional jobs.
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The following are certain cases pending in which the State of North
Carolina faces the risk of either a loss of revenue or an unanticipated
expenditure which, in the opinion of the North Carolina Department of State
Treasurer, would not materially adversely affect the State's ability to meet
its financial obligations:
1. Swanson Case -- State Tax Refunds - Federal Retirees. In
Davis v. Michigan (1989), the United States Supreme Court ruled that a Michigan
income tax statute which taxed federal retirement benefits while exempting
those paid by state and local governments violated the constitutional doctrine
of intergovernmental tax immunity. At the time of the Davis decision, North
Carolina law contained similar exemptions in favor of state and local retirees.
Those exemptions were repealed prospectively, beginning with the 1989 tax year.
All public pension and retirement benefits are now entitled to a $4,000 annual
exclusion.
Following Davis, federal retirees filed a class action suit in federal
court in 1989 seeking damages equal to the North Carolina income tax paid on
federal retirement income by the class members. A companion suit was filed in
state court in 1990. The complaints alleged that the amount in controversy
exceeded $140 million. The North Carolina Department of Revenue estimate of
refunds and interest liability is $280.89 million as of June 30, 1994. In
1991, the North Carolina Supreme Court ruled in favor of the State in the state
court action, concluding that Davis could only be applied prospectively and
that the taxes collected from the federal retirees were thus not improperly
collected. In 1993, the United States Supreme Court vacated that decision and
remanded the case back to the North Carolina Supreme Court. The North Carolina
Supreme Court then ruled in favor of the State on the grounds that the federal
retirees had failed to comply with state procedures for challenging
unconstitutional taxes. Plaintiffs petitioned the United States Supreme Court
for review of that decision, and the United States Supreme Court denied that
petition. The United States District Court has ruled in favor of the
defendants in the companion federal case, and a petition for reconsideration
was denied. Plaintiffs have appealed to the United States Court of Appeals.
Oral arguments were heard in the Court of Appeals in February 1995, and its
decision concurs with the lower court's ruling.
An additional lawsuit was recently filed in State Court by federal
pensioners to recover State income taxes paid on federal retirement benefits.
This case grew out of a claim by federal pensioners in the original federal
court case in Swanson. In the new lawsuit, the plaintiffs allege that when the
State granted an increase in retirement benefits to State retirees in the same
legislation that equalized tax treatment between state and
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federal retirees, the increased benefits to State retirees constituted an
indirect violation of Davis. The lawsuit seeks a refund of taxes paid by
federal retirees on federal retirement benefits received in the years 1989
through 1993 and refunds or monetary relief sufficient to equalize the alleged
on-going discriminatory treatment for those years. An extension of time to
answer the complaint has been filed by the North Carolina Attorney General,
which believes that sound legal authority and arguments support the denial of
this claim.
2. Bailey case -- State Tax Refunds - State Retirees. State and
local governmental retirees filed a class action suit in 1990 as a result of
the repeal of the income tax exemptions for state and local government
retirement benefits. The original suit was dismissed after the North Carolina
Supreme Court ruled in 1991 that the plaintiffs had failed to comply with state
law requirements for challenging unconstitutional taxes and the United States
Supreme Court denied review. In 1992, many of the same plaintiffs filed a new
lawsuit alleging essentially the same claims, including breach of contract,
unconstitutional impairment of contract rights by the State in taxing benefits
that were allegedly promised to be tax-exempt and violation of several state
constitutional provisions. On May 31, 1995 the Superior Court issued an order
ruling in favor of the plaintiffs. Under the terms of the order, the Superior
Court found that the act of the General Assembly that repealed the tax
exemption on State and local government retirement benefits is null, void, and
unenforceable and that retirement benefits which were vested before August 1989
are exempt from taxation. The North Carolina Attorney General intends to
pursue an appeal from this order.
The North Carolina Attorney General's office estimates that
the amount in controversy is approximately $40-$45 million annually for the tax
years 1989 through 1991. In addition, it is anticipated that the decision
reached in this case will govern the resolution of tax refund claims made by
retired state and local government employees for taxes paid on retirement
benefit income for tax years after 1991. Furthermore, if the order of the
Superior Court is upheld, its provisions would apply prospectively to prevent
future taxation of State and local government retirement benefits that were
vested before August 1989.
3. Fulton Case. The State's intangible personal property tax
levied on certain shares of stock has been challenged by the plaintiff on
grounds that it violates the United States Constitution Commerce Clause by
discriminating against stock issued by corporations that do all or part of
their business outside the State. The plaintiff in the action is a North
Carolina corporation that does all or part of its business outside the State.
The plaintiff seeks to invalidate the tax in
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its entirety and to recover tax paid on the value of its shares in other
corporations. The North Carolina Court of Appeals invalidated the taxable
percentage deduction and excised it from the statute beginning with the 1994
tax year. The effect of this ruling is to increase collections by rendering
all stock taxable on 100% of its value. The State and the plaintiff sought
further appellate review. On December 9, 1994, the North Carolina Supreme
Court ruled in favor of the State, reversing the decision of the Court of
Appeals and upholding the tax on intangible personal property. The plaintiff's
petition for review by the United States Supreme Court was granted. Oral
argument is expected in Fall 1995 and a decision expected by mid-1996. Net
collections from the tax for the fiscal year ended June 30, 1994 amounted to
$127.6 million. The North Carolina Attorney General's Office believes that
sound legal arguments support the State's position. In April 1995, the North
Carolina General Assembly repealed the State's intangible personal property
tax, effective for taxable years beginning on or after January 1, 1995.
In October 1993, the State issued a total of $194.7 million general
obligation bonds (consisting of $87.5 million Prison and Youth Services
Facilities Bonds, $61 million Public Improvement Refunding Bonds, $30.2 million
Highway Refunding Bonds, and $16 million Clean Water Refunding Bonds). An
additional $67.5 million general obligation bonds (Prison and Youth Services
Facilities Bonds) were issued in November, 1993. On November 2, 1993, a total
of $740 million general obligation bonds (consisting of $310 million University
Improvement Bonds, $250 million Community College Bonds, $145 million Clean
Water Bonds, and $35 million State Parks Bonds) were approved by the voters of
the State. Pursuant to this authorization, the State issued $400 million
general obligation bonds (Capital Improvement Bonds) in January, 1994. The
proceeds of these Capital Improvement Bonds may be used for any purpose for
which the proceeds of the University Improvement Bonds, Community College
Bonds, and State Parks Bonds may be used (none of such proceeds may be used for
Clean Water purposes). An additional $60 million general obligation bonds
(Clean Water Bonds) were issued in September and October, 1994. The remaining
$85 million general obligation bonds (Clean Water Bonds) were issued in June
and July, 1995. The offering of the remaining $195 million of these authorized
bonds is anticipated to occur over the next two years.
Currently, Moody's Investors Service, Inc., Standard & Poor's
Corporation, and Fitch Investors Service, Inc. rate North Carolina general
obligation bonds Aaa, AAA, and AAA, respectively. See Appendix A.
SPECIAL CONSIDERATIONS REGARDING INVESTMENT IN VIRGINIA MUNICIPAL
OBLIGATIONS. The Virginia Municipal Money Market
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Portfolio will invest primarily in Virginia Municipal Obligations. For this
reason, the Portfolio is affected by political, economic, regulatory or other
developments that constrain the taxing, revenue-collecting and spending
authority of Virginia issuers or otherwise affect the ability of Virginia
issuers to pay interest, principal, or any premium. The following information
constitutes only a brief summary of certain of these developments and does not
purport to be a complete description of them.
The Virginia Municipal Money Market Portfolio will invest primarily in
Virginia Municipal Obligations. For this reason, the Portfolio is affected by
political, economic, regulatory or other developments that constrain the
taxing, revenue-collecting and spending authority of Virginia issuers or
otherwise affect the ability of Virginia issuers to pay interest, principal, or
any premium. The following information constitutes only a brief summary of
certain of these developments and does not purport to be a complete description
of them.
The rate of economic growth in the Commonwealth of Virginia has
increased steadily over the past decade. From 1984 to 1993, the Commonwealth's
4.8 percent rate of growth in per capita personal income was slightly ahead of
the national rate of growth of 4.7 percent. During 1990 and 1992, Virginia's
per capita personal income grew at a slightly lower rate than the U.S. average.
Per capita income in Virginia has been consistently above national levels over
the past decade and, in 1993, was $21,634 compared with the national level of
$20,817. The services sector in Virginia generates the largest number of jobs,
followed by wholesale and retail trade, government employment and
manufacturing. Because of Virginia's proximity to Washington, D.C. and the
concentration of military installations in the Commonwealth (the largest such
concentration in the United States), the Federal government has a greater
economic impact on Virginia relative to its size than on any of the other
states except Alaska and Hawaii. It is unclear what effect the current efforts
by the Federal government to restructure the defense budget will have on the
long-term economic conditions of the Commonwealth.
According to statistics published by the U.S. Department of Labor, the
Commonwealth typically has one of the lowest unemployment rates in the nation.
This is generally attributed to the balance among the various sectors
represented in the economy. During 1993, an average of 5 percent of Virginians
were unemployed as compared with the national average of 6.8 percent. At the
same time, the population of the state has continued to grow over the last
decade at a rate that is substantially higher than the national average. The
rate of increase in such population growth has declined since reaching a high
of 2.1
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percent annually in 1987 and, in 1993, was approximately 1.8 percent.
Virginia is one of twenty states with a right-to-work law and is
generally regarded as having a favorable business climate marked by few strikes
or work stoppages. Virginia is also one of the least unionized among the
industrialized states.
Budget and Deficit Matters
Virginia's state government operates on a two-year budget. The
Constitution vests the ultimate responsibility and authority for levying taxes
and appropriating revenue in the General Assembly, but the Governor has broad
authority to manage the budgetary process. The budgetary process begins in May
of even-numbered years, approximately 14 months before the start of a biennium
when the Governor gives initial guidance to state agencies regarding base
budgets, maximum employment levels and policy initiatives. By the following
December, final revenue estimates are submitted by the Department of Taxation
and reviewed by the Governor, the Advisory Board of Economists and the Advisory
Council on Revenue Estimates. Final adjustments to revenues and services are
then made, and a bill detailing the Governor's budget is prepared. The
Governor is required by statute to present the budget bill and a narrative
summary of the bill to the General Assembly by December 20 in the year
immediately prior to each even-year session. In the odd-year sessions of the
General Assembly, amendments are considered to the Appropriation Act of the
previous year.
Once an appropriation act becomes law, revenue collections and
expenditures are constantly monitored by the Governor, assisted by the
Secretary of Finance and the Department of Planning and Budget, to ensure that
a balanced budget is maintained. If projected revenue collections fall below
amounts appropriated at any time, the Governor must reduce expenditures and
withhold allotments of appropriations (other than for debt service and other
specified purposes) to restore balance. Up to 15 percent of a general fund
appropriation to an agency may be withheld, if required.
The Constitution further requires the Governor to ensure that expenses
do not exceed anticipated total revenues plus fund balances during the
two-and-a-half-year period following the end of the General Assembly session in
which appropriations are made. An amendment to the Constitution, effective
January 1, 1993, established a Revenue Stabilization Fund. This fund is used
to offset a portion of anticipated shortfalls in revenues in years when
appropriations based on initial forecasts exceed expected revenues in any
subsequent forecast. The Revenue Stabilization Fund consists of an amount not
to exceed 10 percent of the
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Commonwealth's average annual tax revenues derived from taxes on income and
retail sales as certified by the Auditor of Public Accounts for the three
immediately preceding fiscal years. If in any year total revenues are
forecasted to decline by more than two percent of the certified tax revenues
collected in the most recently ended fiscal year, the General Assembly may
appropriate an amount for transfer from the Revenue Stabilization Fund to the
General Fund in an amount not to exceed one-half of the forecasted shortfall.
Earnings in excess of the 10 percent cap are transferred to the General Fund as
received.
In fiscal year 1994, revenues increased six percent from the previous
year, while total expenditures increased by 4.5 percent. Revenues exceeded
expenditures by $731.2 million, an increase of 20 percent over fiscal year
1993.
Tax Matters
General fund revenues are principally composed of direct taxes. In
fiscal year 1994, approximately 94.9 percent of total tax revenues was derived
from five major taxes imposed by the Commonwealth on individual and fiduciary
income, sales and use, corporate income, public services corporations and
premiums of insurance companies.
Nongeneral revenues consist of all revenues not formally accounted for
in the general fund. Included in this category are special taxes and user
charges earmarked for specific purposes, the majority of institutional revenues
and revenues from the sale of property and commodities, plus receipts from the
Federal government.
Approximately 50 percent of the nongeneral revenues consist of grants
and donations from the Federal government, motor vehicle taxes and
institutional revenues. Institutional revenues consist primarily of fees and
charges collected by institutions of higher education, medical and mental
hospitals and correctional institutions. Motor vehicle-related taxes include
the motor vehicle fuel tax, a motor vehicle sales and use tax, oil excise tax,
fees generated from driver's licenses, title registration, and motor vehicle
registrations and other miscellaneous revenues.
Debt Management
In September 1991, the Debt Capacity Advisory Committee was created by
the Governor through an executive order. The committee is charged with
annually estimating the amount of tax-supported debt that may prudently be
authorized consistent with the financial goals, capital needs and policies of
the
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Commonwealth. The committee reviews the outstanding debt of all agencies,
institutions, boards and authorities of the Commonwealth for which the
Commonwealth has either a direct or indirect pledge of tax revenues or moral
obligation. The committee released its first report in January 1992 and its
second in January 1994.
The Department of Planning and Budget has prepared a Six-Year Capital
Outlay Plan for the Commonwealth. The Plan lists proposed capital projects,
and it recommends how the proposed projects should be financed. More
specifically, the Plan distinguishes between immediate demands and longer-term
needs, assesses the state's ability to meet its highest priority needs and
outlines approaches for addressing priorities in terms of costs, benefits and
financing mechanisms.
The Constitution of Virginia prohibits the creation of debt by or on
behalf of the Commonwealth that is backed by the Commonwealth's full faith and
credit, except as provided in Section 9 of Article X. Section 9 of Article X
contains several different provisions for the issuance of general obligation
and other debt:
Section 9(a)(2) provides that the General Assembly may incur general
obligation debt to meet certain types of emergencies, subject to limitations on
amount and duration; to meet casual deficits in the revenue or in anticipation
of the collection of revenues of the Commonwealth; and to redeem a previous
debt obligation of the Commonwealth. Total indebtedness issued pursuant to
this Section may not exceed 30 percent of an amount equal to 1.15 times the
annual tax revenues derived from taxes on income and retail sales, as certified
by the Auditor of Public Accounts for the preceding fiscal year.
Section 9(b) provides that the General Assembly may authorize the
creation of general obligation debt for capital projects. Such debt is
required to be authorized by an affirmative vote of a majority of each house of
the General Assembly and approved in a statewide election. The outstanding
amount of such debt is limited to an amount equal to 1.15 times the average
annual tax revenues derived from taxes on income and retail sales, as certified
by the Auditor of Public Accounts for the three preceding fiscal years less the
total amount of bonds outstanding. The amount of 9(b) debt that may be
authorized in any single fiscal year is limited to 25 percent of the limit on
all 9(b) debt less the amount of 9(b) debt authorized in the current and prior
three fiscal years.
Section 9(c) provides that the General Assembly may authorize the
creation of general obligation debt for revenue-producing capital projects
(so-called "double-barrel" debt).
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Such debt is required to be authorized by an affirmative vote of two-thirds of
each house of the General Assembly and approved by the Governor. The Governor
must certify before the enactment of the authorizing legislation and again
before the issuance of the debt that the net revenues pledged are expected to
be sufficient to pay principal of and interest on the debt. The outstanding
amount of 9(c) debt is limited to an amount equal to 1.15 times the average
annual tax revenues derived from taxes on income and retail sales, as certified
by the Auditor of Public Accounts for the three preceding fiscal years. While
the debt limits under Sections 9(b) and 9(c) are each calculated as the same
percentage of the same average tax revenues, these debt limits are separately
computed and apply separately to each type of debt.
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Based on individual, fiduciary and corporate income taxes and the
state sales and use tax, as certified as of July 1, 1994, the debt limits and
remaining debt margins under Article X, Section 9 are set forth below (in $
thousands).
<TABLE>
<S> <C>
Section 9(a)(2) General Obligation Debt Limit(5):
- -------------------------------------------------
Debt Limit (30% of 1.15 times annual tax revenues for fiscal year 1994) $1,954,008
Less Bonds Outstanding: (none) -
----------
Debt Margin $1,954,008
==========
Section 9(b) General Obligation Debt Limit:
- -------------------------------------------
Debt Limit (1.15 times average tax revenues for three fiscal years as calculated above) $6,136,996
Less Bonds Outstanding:
Public Facilities Bonds 213,570
Transportation Facilities Refunding Bonds 71,825
----------
Debt Margin $5,851,601
Additional Section 9(b) Debt Borrowing Restriction:
Four-year authorization restriction (25% of 9(b) Debt Limit) $1,534,249
Less 9(b) Debt authorized in past three years 612,944
----------
Total Additional Borrowing Restriction (maximum amount
that could be authorized by the General Assembly) $921,305
==========
Section 9(c) General Obligation Debt Limit and Debt Margin
- ----------------------------------------------------------
Debt Limit (1.15 times average tax revenues for three fiscal years as calculated above) $6,136,996
Less Bonds Outstanding:
Parking Facilities 10,645
Transportation Facilities 80,115
Higher Education Institutions 406,427
----------
Debt Margin $5,639,809
==========
</TABLE>
Article X further provides in Section 9(d) that the restrictions of
Section 9 are not applicable to any obligation incurred by the Commonwealth or
any of its institutions, agencies or authorities if the full faith and credit
of the Commonwealth is not pledged or committed to the payment of such
obligation. There are currently outstanding various types of such 9(d) revenue
bonds. Certain of these bonds, however, are paid in part or in whole from
revenues received as appropriations by the General Assembly from general tax
revenues, while others are paid solely from revenues of the applicable project.
The debt repayments of the Virginia Public Building Authority, the
Virginia Port Authority, the Virginia College Building Authority Equipment
Leasing Program and The Innovative Technology Authority are supported in large
part by General Fund appropriations. Together, payments to these authorities
totaled $87.3 million in fiscal year 1994.
The Commonwealth Transportation Board ("CTB") in 1993 issued its
$111,680,000 Transportation Contract Revenue Refunding Bonds to refund in full
an earlier series of the same bonds issued to
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finance costs related to its Route 28 project. In 1989, CTB issued its
$200,000,000 Transportation Revenue Bonds, Series 1989 (U.S. Route 58 Corridor
Development Program). These bonds were refunded in part in 1993 by the
issuance of CTB's $91,455,000 Transportation Revenue Refunding Bonds, Series
1993A (U.S. Route 58 Corridor Development Program). Additional costs of that
program were financed through the issuance of CTB's $98,715,000 Transportation
Revenue Bonds, Series 1993B (U.S. Route 58 Corridor Development Program). In
August 1993, CTB also issued its $134,060,000 Transportation Revenue Bonds,
Series 1993C (Northern Virginia Transportation District Program). These bonds
are secured by and payable from funds appropriated by the General Assembly from
the Transportation Trust Fund for such purpose. The Transportation Trust Fund
was established by the General Assembly in 1986 as a special non-reverting fund
administered and allocated by the Transportation Board to provide increased
funding for construction, capital and other needs of state highways, airports,
mass transportation and ports. The Virginia Port Authority has also issued
bonds in the approximate amount of $106 million which are secured by a portion
of the Transportation Trust Fund. The fund balance of the Transportation Trust
Fund administered by the Transportation Board at June 30, 1994, was $278.9
million.
The Commonwealth is also involved in numerous leases that are subject
to appropriation of funding by the General Assembly. For all capital leases,
the principal balance was $21.1 million as of June 30, 1993.
The Commonwealth finances the acquisition of certain personal property
and equipment through installment purchase agreements. The length of the
agreements and the interest rates charged vary. In most cases, the agreements
are collateralized by the personal property and equipment acquired.
Installment purchase agreements contain nonappropriation clauses indicating
that continuation of the installment purchase is subject to funding by the
General Assembly. The balance of installment purchase obligations was $48.3
million as of June 30, 1993.
Bonds issued by the Virginia Housing Development Authority, the
Virginia Resources Authority and the Virginia Public School Authority are
designed to be self-supporting from their individual loan programs. A portion
of the Virginia Housing Development Authority and Virginia Public School
Authority bonds and all of the Virginia Resources Authority bonds are secured
in part by a moral obligation pledge of the Commonwealth. Should the need
arise, the Commonwealth may consider funding deficiencies in the respective
debt service reserves for such moral obligation debt. To date, none of these
authorities has advised the Commonwealth that any such deficiencies exist.
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Local Government
Local government in the Commonwealth is comprised of 95 counties, 41
incorporated cities, and 190 incorporated towns. The Commonwealth is unique
among the several states in that cities and counties are independent, and their
land areas do not overlap. Cities and counties are the units of general
government that have traditionally provided all services not provided by the
Commonwealth; they levy and collect their own taxes. On the other hand, towns
constitute a part of the counties in which they are located; they levy and
collect taxes for town purposes, but their residents are also subject to county
taxes. The largest expenditure by local governments in the Commonwealth are
for education, but local governments also provide other services such as water
and sewer, police and fire protection and recreational facilities.
According to figures prepared by the Auditor of Public Accounts of
Virginia, the total outstanding general obligation and revenue debt of counties
in the Commonwealth was approximately $4.1 billion as of June 30, 1993, most of
which was borrowed for school construction. The amount of debt of Virginia's
cities outstanding as of June 30, 1993, was approximately $3.6 billion, while
towns had approximately $233 million outstanding as of June 30, 1993.
Pending Litigation
On March 28, 1989, in Davis v. Michigan the United States Supreme
Court declared unconstitutional a Michigan statute exempting from state income
tax the retirement benefits paid to former workers by the state and local
governments but not comparable benefits paid by the Federal government. At
that time, Virginia exempted state and local but not Federal government
benefits.
Harper v. Department of Transportation is a suit by Federal retirees
seeking refund of four years of state income taxes paid during the period from
1985 to 1988. On May 27, 1994, the Virginia Supreme Court agreed to hear
Harper on appeal from the Alexandria Circuit Court. In a July 1994 special
session, the Virginia General Assembly passed emergency legislation to provide
payments to Federal retirees in settlement of the principal amount, excluding
interest, of the retirees' claims for overpaid taxes. On July 26, 1994, in
order to permit the settlement process to go forward, the Virginia Supreme
Court granted a stay in the proceedings in Harper for six months or until
further order of the Court, whichever occurred first.
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The settlement payments are to be made over a five-year period,
commencing on March 31, 1995. The total amount of the proposed settlement is
$340 million plus earnings on the investment of such amount that may be
appropriated. These amounts will be paid to participating retirees in
installments of $60 million on March 31, 1995, and $70 million on each
succeeding March 31 through 1999, subject to appropriation by the General
Assembly.
Retirees who choose to accept and remain eligible to recover such
taxes must have responded to the Department of Taxation by November 1, 1994.
By February 1, 1995, retirees must have signed and returned to the Tax
Commissioner a settlement agreement releasing the Commonwealth from any further
liability for claims arising out of such taxes and dismissing any related
litigation to which the taxpayer is a party. The legislation also provides
that in the event the total principal amount of the claims of taxpayers opting
out of the settlement exceeds $20 million, the entire settlement is null and
void unless reauthorized by the General Assembly on or before March 1, 1995.
The estimated amount of such claims, including interest calculated as of
December 31, 1993, is approximately $707.5 million.
After the decision in Davis v. Michigan, the General Assembly amended
applicable Virginia law to make all pensions taxable. On July 8, 1993, in
Stepka v. Commonwealth several former state employees and one current state
employee filed suit against the Commonwealth and the Department of Taxation in
the Circuit Court of the City of Richmond claiming that legislature's response
to Davis breached an implied contract not to tax state employees' pensions and
seeking refunds for all such taxes paid. The Commonwealth and the Department
have filed responsive pleadings. The case involves multiple plaintiffs with
claims aggregating approximately $19.2 million as of June 1994. The outcome of
this action cannot be predicted.
Current Rating
Most recently, Moody's has rated the long-term general obligation
bonds of the Commonwealth Aaa, and Standard & Poor's has rated such bonds AAA.
There can be no assurance that the economic conditions on which these ratings
are based will continue or that particular bond issues may not be adversely
affected by changes in economic or political conditions.
SPECIAL CONSIDERATIONS REGARDING INVESTMENT IN NEW JERSEY MUNICIPAL
OBLIGATIONS. The State of New Jersey and its political subdivisions, agencies
and public authorities are authorized to issue two general classes of
indebtedness: general obligation
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bonds and revenue bonds. Both classes of bonds may be included in the New
Jersey Municipal Money Market 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
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
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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, 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
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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 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.
Although the Portfolio generally intends to invest its assets
primarily in New Jersey Municipal Obligations rated within the two highest
rating categories of an NRSRO, there can be no assurance that such ratings will
remain in effect until such obligations mature or are redeemed or will not be
revised downward or withdrawn. Such revisions or withdrawals may have an
adverse affect on the market price of such securities.
ADDITIONAL INVESTMENT LIMITATIONS.
In addition to the investment limitations disclosed in the
Prospectuses, each Portfolio is subject to the investment limitations
enumerated in this subsection which may be changed with respect to a particular
Portfolio only by a vote of the holders of a majority of such Portfolio's
outstanding shares (as defined below under "Miscellaneous"). The Master
Portfolio's fundamental investment limitations are described separately.
No Portfolio may:
1. Purchase or sell real estate, except that each
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,
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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.
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 a Portfolio's transactions in futures contracts
and related options or a Portfolio's sale of securities short against the box,
and (b) a 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 each
Portfolio may, to the extent appropriate to its investment policies, purchase
securities (publicly traded securities in the case of each Money Market
Portfolio) 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 each 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.
9. Notwithstanding the investment limitations of the
Index Equity Portfolio, the Index Equity Portfolio may invest all of its assets
in shares of an open-end management investment company with substantially the
same investment objective, policies and limitations as the Portfolio.
Although the foregoing investment limitations would permit the Money
Market Portfolios to invest in options, futures contracts and options on
futures contracts, and to sell securities short against the box, those
Portfolios do not currently intend to trade in such instruments or engage in
such transactions during the next twelve months. Prior to making any
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<PAGE> 116
such investments, a Money Market Portfolio would notify its shareholders and
add appropriate descriptions concerning the instruments and transactions to its
Prospectus.
The investment limitations of the Master Portfolio, the Portfolio in
which the Index Equity Portfolio invests all of its investable assets, are
separate from those of the Index Equity Portfolio. The Master Portfolio may
not:
1. Invest in commodities or real estate, including limited
partnership interests therein, although it may purchase and sell securities of
companies which deal in real estate and securities which are secured by
interests in real estate, and may purchase or sell financial futures contracts
and options thereon;
2. Make loans of cash, except through the acquisition of
repurchase agreements and obligations customarily purchased by institutional
investors;
3. As to 75% of the total assets of the Master Portfolio, invest
in the securities of any issuer (except obligations of the U.S. Government and
its instrumentalities) if, as a result, more than 5% of the Master Portfolio's
total assets, at market, would be invested in the securities of such issuer;
4. Purchase or retain securities of an issuer if those officers
and trustees of the Trust or officers and directors of the Trust's investment
adviser owning more than 1/2 of 1% of such securities together own more than 5%
of such securities;
5. Borrow, except from banks and as a temporary measure for
extraordinary or emergency purposes and then, in no event, in excess of 5% of
the Master Portfolio's gross assets valued at the lower of market or cost;
provided that it may borrow amounts not exceeding 33% of its net assets from
banks and pledge not more than 33% of such assets to secure such loans;
6. Pledge, mortgage, or hypothecate any of its assets to an
extent greater than 10% of its total assets at fair market value, except as
described in (5) above;
7. Invest more than 10% of the value of its total assets in
illiquid securities which include certain restricted securities, repurchase
agreements with maturities of greater than seven days, and other illiquid
investments;
8. Engage in the business of underwriting securities issued by
others;
9. Invest for the purpose of exercising control over management
of any company;
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<PAGE> 117
10. Invest its assets in securities of any investment company,
except in connection with a merger, acquisition of assets, consolidation or
reorganization;
11. Invest more than 5% of its total assets in securities of
companies which have (with predecessors) a record of less than three years'
continuous operation;
12. Acquire any securities of companies within one industry if, as
a result of such acquisition, more than 25% of the value of its total assets
would be invested in securities of companies within such industry;
13. Write or acquire options (except as described in (1) above) or
interests in oil, gas or other mineral exploration, leases or development
programs;
14. Purchase warrants; however, it may acquire warrants as a
result of corporate actions involving its holdings of other equity securities;
15. Purchase securities on margin or sell short; or
16. Acquire more than 10% of the voting securities of any issuer.
Although (2) above prohibits cash loans, the Master Portfolio is authorized to
lend portfolio securities. With respect to (7) above, pursuant to Rule 144A
under the 1993 Act, the Master Portfolio may purchase certain unregistered
(i.e. restricted) securities upon a determination that a liquid institutional
market exists for the securities. If it is decided that a liquid market does
exist, the securities will not be subject to the 10% limitation on holdings of
illiquid securities stated in (7) above. While maintaining oversight, the
Board of Trustees of the Trust has delegated the day-to-day function of making
liquidity determinations to the Master Portfolio's Adviser. For Rule 144A
securities to be considered liquid, there must be at least two dealers making a
market in such securities. After purchase, the Board of Trustees of the Trust
and the Master Portfolio's Adviser will continue to monitor the liquidity of
Rule 144A securities.
For purposes of (12) above, utility companies will be divided
according to their services; e.g., gas, gas transmission, electric and gas,
electric, water and telephone will each be considered a separate industry.
[Because the structure of the Master Portfolio is based on the
relative market capitalizations of eligible holdings, it is possible that the
Master Portfolio might include at least 5% of the outstanding voting securities
of one or more issuers. In
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<PAGE> 118
such circumstances, the Trust and the issuer would be deemed "affiliated
persons" under the Investment Company Act of 1940, and certain requirements of
the Act regulating dealings between affiliates might become applicable.]
TRUSTEES AND OFFICERS
THE FUND
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; 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,
</TABLE>
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<PAGE> 119
<TABLE>
<S> <C> <C>
Inc.; Director or Trustee of
Independence Square Income
Securities, Chestnut Street
Exchange Fund, Temporary
Investment Fund, Inc., and
Trust for Federal Securities.
Rodney D. Johnson Trustee President, Fairmount
Fairmount 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 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
</TABLE>
- --------------------
1. This trustee may be deemed an "interested person" of the Fund as defined in
the 1940 Act.
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<PAGE> 120
<TABLE>
<S> <C> <C>
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, Director, Wharton
Financial Institutions
Center, since July 1995,
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, Municipal
Fund for California Investors,
Inc., Municipal Fund for New
York Investors, Inc., and
</TABLE>
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<PAGE> 121
<TABLE>
<S> <C> <C>
Provident Institutional Fund.
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; 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>
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<PAGE> 122
The Fund pays trustees who are not affiliated with PNC Institutional
Management Corporation ("PIMC") or Provident Distributors, Inc. ("PDI" or
"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 PIMC 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 PIMC, Provident Capital Management, Inc. ("PCM"), PNC Bank,
National Association ("PNC Bank"), BlackRock Financial Management, Inc.
("BlackRock"), PNC Equity Advisors Company ("PEAC"), 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> 123
The table below sets forth the compensation actually received from the
Fund Complex of which the Fund is a part by the trustees for the fiscal year
ended September 30, 1995:
<TABLE>
<CAPTION>
PENSION OR TOTAL COMPENSATION
NAME OF PERSON, AGGREGATE RETIREMENT BENEFITS ESTIMATED ANNUAL FROM REGISTRANT AND
COMPENSATION FROM ACCRUED AS PART OF BENEFITS UPON FUND COMPLEX1 PAID
POSITION REGISTRANT FUND EXPENSES RETIREMENT TO TRUSTEES
--------------- ---------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Philip E. Coldwell, Trustee $ n/a n/a (_)(2) $
Robert R. Fortune, Trustee $ n/a n/a (_)(2) $
Rodney D. Johnson, Trustee $ n/a n/a (_)(2) $
G. Willing Pepper, Chairman $ n/a n/a (_)(2) $
of the Board and President
Anthony M. Santomero, $ n/a n/a (_)(2) $
Trustee
David R. Wilmerding, Jr., $ n/a n/a (_)(2) $
Trustee
</TABLE>
THE TRUST
The names, ages and addresses of the trustees and officers of the
Trust and a brief statement of their present positions and principal
occupations during the past five years is set forth below. As used below, "DFA
Entities" refers to the following: Dimensional Fund Advisors Inc., Dimensional
Fund Advisors Ltd., DFA Australia Pty. Limited, DFA Investment Dimensions Group
Inc. (Registered Investment Company), Dimensional Emerging Markets Fund Inc.
(Registered Investment Company), Dimensional Investment Group Inc. (Registered
Investment Company) and DFA Securities Inc.
Trustees
--------------------
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> 124
<TABLE>
<S> <C> <C>
David G. Booth* Trustee, President and President, Chairman-Chief Executive Officer and Director of
Santa Monica, CA Chairman-Chief Executive all DFA Entities, except Dimensional Fund Advisors Ltd., of
Age: 48 Officer which he is Chairman and Director
George M. Constantinides Trustee Leon Carroll Marshall Professor of Finance, Graduate School
Chicago, IL of Business, University of Chicago. Director, DFA
Age: 47 Investment Dimensions Group Inc., Dimensional Investment
Group Inc. and Dimensional Emerging Markets Fund Inc.
John P. Gould Trustee Distinguished Service Professor of Economics, Graduate
Chicago, IL School of Business, University of Chicago. Trustee, First
Age: 56 Prairie Funds (Registered Investment Company). Director,
DFA Investment Dimensions Group Inc., Dimensional Investment
Group Inc., Dimensional Emerging Markets Fund Inc. and
Harbor Investment Advisors.
Roger G. Ibbotson Trustee Professor in Practice of Finance, Yale School of Management.
New Haven, CT Director, DFA Investment Dimensions Group Inc., Dimensional
Age: 52 Investment Group Inc., Dimensional Emerging Markets Fund
Inc., Hospital Fund, Inc. (investment management services)
and Birr Portfolio Analysis, Inc. (software products).
Chairman, Institute Study of Securities Markets. Chairman
and President, Ibbotson Associates, Inc., Chicago, IL
(software, data, publishing and consulting).
Merton H. Miller Trustee Robert R. McCormick Distinguished Service Professor
Chicago, IL Emeritus, Graduate School of Business, University of
Age: 72 Chicago. Director, DFA Investment Dimensions Group Inc.,
Dimensional Investment Group Inc. and Dimensional Emerging
Markets Fund Inc.
</TABLE>
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<PAGE> 125
<TABLE>
<S> <C> <C>
Myron S. Scholes Trustee Frank E. Buck Professor of Finance, Graduate School of
Greenwich, CT Business and Professor of Law, Law School, Senior Research
Age: 54 Fellow, Hoover Institution, (all) Stanford University.
Director, DFA Investment Dimensions Group Inc., Dimensional
Investment Group Inc., Dimensional Emerging Markets Fund
Inc., Benham Capital Management Group of Investment
Companies and Smith Breedon Group of Investment Companies.
Limited Partner, Long-Term Capital Management L.P. (money
manager).
Rex A. Sinquefield* Trustee, Chairman and Chief Chairman, Chief Investment Officer and Director of all DFA
Santa Monica, CA Investment Officer Entities, except Dimensional Fund Advisors Ltd., of which he
Age: 50 is Chairman, Chief Executive Officer and Director.
*Interested Trustees of the
Trust.
-------------------
Officers
--------
Arthur Barlow Vice President Vice President of all DFA Entities.
Santa Monica, CA
Age: 39
Maureen Connors Vice President Vice President of all DFA Entities.
Santa Monica, CA
Age: 58
Robert Deere Vice President Vice President of all DFA Entities.
Santa Monica, CA
Age: 37
Irene R. Diamant Vice President, Vice President and Secretary of all DFA Entities. Associate
Santa Monica, CA Secretary attorney, Cahill Gordon & Reindel from 1987 to 1991.
Age: 45
Eugene Fama, Jr. Vice President Vice President of all DFA Entities.
Santa Monica, CA
Age: 34
</TABLE>
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<PAGE> 126
<TABLE>
<S> <C> <C>
David Plecha Vice President Vice President of all DFA Entities. Assistant Vice
Santa Monica, CA President, Leland O'Brien Rubenstein Associates, Los
Age: 33 Angeles, CA from 1987 to 1989.
George Sands Vice President Vice President of all DFA Entities. Managing Director,
Santa Monica, CA Assets Strategy Consulting, Los Angeles, CA from 1991 to
Age: 39 1992 and previously Vice President of Wilshire Associates,
Santa Monica, CA.
Michael T. Scardina Vice President, Vice President, Chief Financial Officer, Controller and
Santa Monica, CA Chief Financial Officer, Treasurer of all DFA Entities.
Age: 39 Controller and Treasurer
Cem Severoglu Vice President Vice President of all DFA Entities.
Santa Monica, CA
Age: 32
Jeanne C. Sinquefield, Executive Vice President Executive Vice President of all DFA Entities.
Ph.D.
Santa Monica, CA
Age: 48
</TABLE>
Rex A. Sinquefield, Trustee, Chairman and Chief Investment Officer of the Trust
and Jeanne C. Sinquefield, Executive Vice President of the Trust, are husband
and wife.
Set forth below is a table listing, for each trustee of the Trust
entitled to receive compensation, the compensation received from the Trust
during the fiscal year ended November 30, 1994 and the total compensation
received from all four registered investment companies for which Dimensional
Fund Advisers Inc. ("DFA") served as investment adviser during that same fiscal
year.
<TABLE>
<CAPTION>
Aggregate Total Compensation
Compensation from Trust and
Trustee from Trust Trust Complex
------- ------------ -------------
<S> <C> <C>
George M. Constantinides $5,125 $30,750
John P. Gould $5,125 $30,750
Roger G. Ibbotson $5,125 $30,750
Merton H. Miller $5,000 $30,000
Myron S. Scholes $4,000 $24,000
</TABLE>
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<PAGE> 127
SHAREHOLDER AND TRUSTEE LIABILITY OF THE FUND
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 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 PIMC, BlackRock, PCM, PEAC, PNC Bank and, with respect to
the Master Portfolio, Dimensional Fund Advisors Inc. ("DFA") and the fees
received by each of them for such services are described in the Prospectuses.
As stated in
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<PAGE> 128
the Prospectuses, PIMC may from time to time voluntarily waive its advisory
fees with respect to a Portfolio and may voluntarily reimburse Portfolios for
expenses. In addition, if the total expenses borne by any Portfolio in any
fiscal year exceed the expense limitations imposed by applicable state
securities regulations, PIMC and the Administrators with respect to the Index
Equity Portfolio, 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 1/2% of average annual net assets in excess of $100
million.
PIMC renders advisory services to each of the Portfolios, except the
Index Equity Portfolio, pursuant to an Investment Advisory Agreement. PCM
renders sub-advisory services to the Value Equity, Small Cap Value Equity,
International Equity, International Fixed Income and International Emerging
Markets Portfolios pursuant to Sub-Advisory Agreements. PNC Bank renders
sub-advisory services to the Money Market, Government Money Market, Municipal
Money Market, Ohio Municipal Money Market, Pennsylvania Municipal Money Market,
North Carolina Municipal Money Market, Virginia Municipal Money Market, New
Jersey Municipal Money Market, Balanced and Tax-Free Income Portfolios pursuant
to Sub-Advisory Agreements. BlackRock renders sub-advisory services to the
Managed Income, Intermediate Government, Ohio Tax-Free Income, Pennsylvania
Tax-Free Income, Short-Term Bond, Intermediate-Term Bond and Government Income
Portfolios pursuant to Sub-Advisory Agreements. PEAC renders sub-advisory
services to the Growth Equity, Small Cap Growth Equity and Core Equity
Portfolios pursuant to Sub-Advisory Agreements. DFA renders advisory services
to the Master Portfolio, the investment company in which the Index Equity
Portfolio invests all of its assets, pursuant to an Investment Management
Agreement. These Advisory and Sub-Advisory Agreements are collectively
referred to as the "Advisory Contracts." From December 1, 1992 (commencement
of operations) to March 29, 1995, PNC Bank, Ohio, National Association ("PNC
Bank Ohio") served as sub-adviser to the Ohio Tax-Free Income Portfolio. From
November 1, 1989 (commencement of operations) to May 8, 1992, PNC Bank Ohio
served as sub-adviser to the Municipal Money Market Portfolio. From November
1, 1989 (commencement of operations) to September 10, 1993, PNC Bank Ohio
served as sub-adviser to the Managed Income and Growth Equity Portfolios. From
April 20, 1992 (commencement of operations) to July 22, 1992, Advanced
Investment Management, Inc. and from July 23, 1993 to December __, 1995, PEAC
served as sub-adviser to the Index Equity Portfolio. From April 20, 1992
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to September 10, 1993, PCM served as sub-adviser to the Intermediate Government
Portfolio. From July 23, 1992 to March 29, 1995, PNC Bank served as
sub-adviser to the Index Equity Portfolio. From September 11, 1993 to March
29, 1995, PNC Bank served as sub-adviser to the Managed Income, Intermediate
Government and Growth Equity Portfolios. From December 1, 1992 (commencement
of operations) to March 29, 1995, PNC Bank served as sub-adviser to the Ohio
Tax-Free Income and Pennsylvania Tax-Free Income Portfolios. From September 1,
1993 (commencement of operations) to March 29, 1995, PNC Bank served as
sub-adviser to the Short-Term Bond Portfolio. From September 13, 1993
(commencement of operations) to March 29, 1995, PNC Bank served as sub-adviser
to the Core Equity Portfolio. From September 14, 1993 (commencement of
operations) to March 29, 1995, PNC Bank served as sub-adviser to the Small Cap
Growth Equity Portfolio. From September 17, 1993 (commencement of operations)
to March 29, 1995, PNC Bank served as sub-adviser to the Intermediate-Term Bond
Portfolio. From May 14, 1990 (commencement of operations) to July 1, 1995, PNC
Bank served as sub-adviser to the Tax-Free Income Portfolios.
Under the Advisory Contracts, PIMC, PCM, PEAC, PNC Bank, and BlackRock
are not liable for any error of judgment or mistake of law or for any loss
suffered by the Fund or a Portfolio in connection with the performance of the
Advisory Contracts. Under the Advisory Contracts, PIMC, PCM, PEAC, PNC Bank,
BlackRock and DFA are liable for 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. Each
of the Advisory Contracts (except the Advisory Contract relating to the Master
Portfolio) is terminable as to a Portfolio by vote of the Fund's Board of
Trustees or by the holders of a majority of the outstanding voting securities
of the relevant Portfolio, at any time without penalty, on 60 days' written
notice to PIMC, PCM, PEAC, PNC Bank or BlackRock, as the case may be. PIMC,
PCM, PEAC, PNC Bank, BlackRock may also terminate their advisory relationship
with respect to a Portfolio, on 60 days' written notice to the Fund. The
Advisory Contract relating to the Master Portfolio is terminable by vote of the
Trust's Board of Trustees or by the holders of a majority of the outstanding
voting securities of the Master Portfolio at any time without penalty on 60
days' written notice to DFA. DFA may also terminate its advisory relationship
with respect to the Master Portfolio on 90 days' written notice to the Trust.
Each of the Advisory Contracts terminates automatically in the event of its
assignment.
For the year ended September 30, 1994, the Fund paid advisory fees to
PIMC, after waivers, of $951,230, $171,405, $281,771, $6,724, $42,612, $0,
$1,398,343, $0, $368,546, $0, $49,646, $36,893, $131,294, $2,306,672, $467,637,
$55,825,
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$303,169, $28,392, $890,883, $1,408,053 and $470,579 with respect to the Money
Market, Municipal Money Market, Government Money Market, Ohio Municipal Money
Market, Pennsylvania Municipal Money Market, North Carolina Municipal Money
Market, Managed Income, Tax-Free Income, Intermediate Government, Ohio Tax-Free
Income, Pennsylvania Tax-Free Income, Short-Term Bond, Intermediate-Term Bond,
Value Equity, Growth Equity, Small Cap Growth Equity, Core Equity, Index
Equity, Small Cap Value Equity, International Equity and Balanced Portfolios.
For that year, PIMC waived advisory fees of $3,359,847, $599,920, $986,201,
$217,938, $336,382, $249,914, $599,290, $47,655, $552,819, $35,709, $227,003,
$137,696, $206,071, $865,002, $175,364, $160,320, $113,689, $376,934, $197,974,
$477,733 and $202,166 for such respective Portfolios, and reimbursed the Ohio
Municipal Money Market, Pennsylvania Municipal Money Market, North Carolina
Municipal Money Market, Tax-Free Income, Ohio Tax-Free Income and Pennsylvania
Tax-Free Income Portfolios for certain operational expenses totalling $20,660,
$19,022, $26,804, $35,898, $35,496, and $9,645, respectively. For the period
from commencement of operations (July 25, 1994 for the Virginia Municipal Money
Market Portfolio and June 17, 1994 for the International Emerging Market
Portfolio) through September 30, 1994, the Fund paid advisory fees to PIMC,
after waivers, of $0 and $7,672 with respect to the Virginia Municipal Money
Market and International Emerging Markets Portfolios, respectively. For the
same periods, PIMC waived advisory fees of $8,925 and $16,051 for such
respective Portfolios, and reimbursed the Virginia Municipal Money Market
Portfolio for certain operational expenses totalling $4,816.
For the year ended September 30, 1993, the Fund paid advisory fees to
PIMC, after waivers, of $2,899,093, $509,475, $601,820, $1,522,695, $0,
$594,202, $1,996,726, $400,652, $212,413, $564,065, $598,040 and $124,556 for
the Money Market, Municipal Money Market, Government Money Market, Managed
Income, Tax-Free Income, Intermediate Government, Value Equity, Growth Equity,
Index Equity, Small Cap Value Equity, International Equity and Balanced
Portfolios, respectively. For that year, PIMC waived advisory fees of
$815,911, $131,249, $195,459, $87,513, $43,457, $77,301, $108,242, $31,912,
$161,606, $34,794, $47,134 and $45,203 for such respective Portfolios, and
reimbursed the Tax-Free Income Portfolio for certain operational expenses
totalling $7,314. For the period from commencement of operations (December 1,
1992 for each of the Ohio Tax-Free Income and Pennsylvania Tax-Free Income
Portfolios; May 3, 1993 for the North Carolina Municipal Money Market
Portfolio; June 1, 1993 for each of the Ohio Municipal Money Market and
Pennsylvania Municipal Money Market Portfolios; September 1, 1993 for the
Short-Term Bond Portfolio; September 13, 1993 for the Core Equity Portfolio;
September 14, 1993 for the Small Cap Growth Equity Portfolio; and September 17,
1993 for the Intermediate-Term Bond Portfolio) to September 30, 1993, the Fund
paid advisory fees to
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PIMC, after waivers, of $0, $0, $0, $0, $0, $0, $5,432, $0 and $14,325 for the
Ohio Municipal Money Market, Pennsylvania Municipal Money Market, North
Carolina Municipal Money Market, Ohio Tax-Free Income, Pennsylvania Tax-Free
Income, Short-Term Bond, Intermediate-Term Bond, Small Cap Growth Equity and
Core Equity Portfolios, respectively. For the same periods, PIMC waived
advisory fees of $28,953, $18,117, $47,085, $8,781, $87,528, $2,078, $5,432,
$2,773 and $5,372 for such respective Portfolios, and reimbursed the Ohio
Municipal Money Market, Pennsylvania Municipal Money Market, North Carolina
Municipal Money Market, Ohio Tax-Free Income, Pennsylvania Tax-Free Income and
Short-Term Bond Portfolios for certain operational expenses totalling $8,630,
$11,411, $11,729, $20,906, $19,064 and $1,349, respectively.
For the year ended September 30, 1992, the Fund paid advisory fees to
PIMC, after waivers, of $2,526,929, $495,175, $706,211, $303,330, $8,166,
$815,088 and $0 for the Money Market, Municipal Money Market, Government Money
Market, Growth Equity, Balanced, Managed Income and Tax-Free Income Portfolios,
respectively. For that year, PIMC waived advisory fees of $315,866, $61,909,
$88,276, $6,541, $26,089 and $22,281 for the Money Market, Municipal Money
Market, Government Money Market, Growth Equity, Balanced and Tax-Free Income
Portfolios, respectively, and reimbursed the Tax-Free Income Portfolio for
certain operational expenses totalling $19,415. For the period from
commencement of operations (April 13, 1992 for the Small Cap Value Equity
Portfolio, April 20, 1992 for the Value Equity, Index Equity and Intermediate
Government Portfolios and April 27, 1992 for the International Equity
Portfolio) to September 30, 1992, the Fund paid advisory fees to PIMC, after
waivers, of $786,513, $88,130, $177,897, $187,950 and $208,451, for the Value
Equity, Index Equity, Small Cap Value Equity, International Equity and
Intermediate Government Portfolios, respectively. For the same periods, PIMC
waived advisory fees of $67,979, $4,597, $3,247 and $178 for the Index Equity,
Small Cap Value Equity, International Equity and Intermediate Government
Portfolios, respectively.
For the year ended September 30, 1994, PIMC paid sub-advisory fees to
the specified Portfolios' sub-adviser, after waivers, of $0, $0, $0, $0, $0,
$0, $1,198,580, $0, $276,410, $0, $33,198, $36,893, $97,470, $2,018,338,
$409,182, $55,825, $265,273, $28,392, $791,896, $1,257,191, and $409,420 with
respect to the Money Market, Municipal Money Market, Government Money Market,
Ohio Municipal Money Market, Pennsylvania Municipal Money Market, North
Carolina Municipal Money Market, Managed Income, Tax-Free Income, Intermediate
Government, Ohio Tax-Free Income, Pennsylvania Tax-Free Income, Short-Term
Bond, Intermediate-Term Bond, Value Equity, Growth Equity, Small Cap Growth
Equity, Core Equity, Index Equity, Small Cap Value Equity,
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International Equity and Balanced Portfolios. For that year, such sub-advisers
waived sub-advisory fees of $479,008, $85,703, $140,886, $24,962, $42,110,
$27,768, $199,763, $33,359, $368,546, $24,996, $160,456, $85,319, $138,685,
$288,334, $58,455, $101,371, $37,896, $275,602, $0, $251,438, and $79,849 for
such respective Portfolios. For the period from commencement of operations
(July 25, 1994 for the Virginia Municipal Money Market Portfolio and June 17,
1994 for the International Emerging Markets Portfolio) through September 30,
1994, PIMC paid sub-advisory fees to the specified Portfolios' sub-adviser,
after waivers, of $0 and $6,723 with respect to the Virginia Municipal Money
Market and International Emerging Markets Portfolios, respectively. For the
same periods, such sub-advisers waived sub-advisory fees of $992 and $14,153
for such respective Portfolios.
For the year ended September 30, 1993, PIMC paid sub-advisory fees to
the specified Portfolios' sub-adviser, after waivers, of $0, $0, $0,
$1,065,887, $0, $415,941, $1,452,164, $291,383, $159,310, $410,229, $478,432
and $90,586 for the Money Market, Municipal Money Market, Government Money
Market, Managed Income, Tax-Free Income, Intermediate Government, Value Equity,
Growth Equity, Index Equity, Small Cap Value Equity, International Equity and
Balanced Portfolios, respectively. For that year, such sub-advisers waived
sub-advisory fees of $412,778, $71,192, $88,587, $61,259, $30,420, $54,111,
$78,721, $25,967, $121,205, $25,305, $37,707 and $32,875 for such respective
Portfolios. For the period from commencement of operations to September 30,
1993, the Fund paid sub-advisory fees to the specified Portfolios' sub-adviser,
after waivers, of $0, $0, $0, $0, $0, $0, $3,802, $0 and $10,418 for the Ohio
Municipal Money Market, Pennsylvania Municipal Money Market, North Carolina
Municipal Money Market, Ohio Tax-Free Income, Pennsylvania Tax-Free Income,
Short-Term Bond, Intermediate-Term Bond, Small Cap Growth Equity and Core
Equity Portfolios, respectively. For the same periods, such sub-advisers
waived sub-advisory fees of $3,217, $2,013, $5,232, $6,147, $61,270, $1,456,
$3,802, $2,017 and $3,906 for such respective Portfolios. For the period from
October 1, 1992 to September 10, 1993, PIMC paid sub-advisory fees of
$1,017,364 and $274,275 to PNC Bank Ohio for the Managed Income and Growth
Equity Portfolios, respectively. For the period from October 1, 1992 to
September 10, 1993, PIMC paid sub-advisory fees of $397,885 to PCM with respect
to the Intermediate Government Portfolio.
For the year ended September 30, 1992, PIMC paid sub-advisory fees to
the specified Portfolios' sub-adviser, after waivers, of $0, $0, $220,604,
$5,939, $0 and $570,562, for the Money Market, Government Money Market, Growth
Equity, Balanced, Tax-Free Income and Managed Income Portfolios, respectively.
For that year, such sub-advisers waived sub-advisory fees of
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$315,866, $88,276, $4,757, $18,974 and $15,597 for the Money Market, Government
Money Market, Growth Equity, Balanced and Tax-Free Income Portfolios,
respectively. For the period from commencement of operations to September 30,
1992, PIMC paid sub-advisory fees to the specified Portfolios' sub-adviser,
after waivers, of $572,004, $129,380, $150,360 and $145,916 for the Value
Equity, Small Cap Value Equity, International Equity and Intermediate
Government Portfolios, respectively. For the same periods, the specified
Portfolios' sub-adviser waived sub-advisory fees of $3,343, $2,598 and $125,
for the Small Cap Value Equity, International Equity and Intermediate
Government Portfolios, respectively. For the period from October 1, 1991 to
May 8, 1992 for the Tax-Free Money Market Portfolio and the period April 20,
1992 to July 22, 1992 for the Index Equity Portfolio, PIMC paid sub-advisory
fees to the particular Portfolio's sub-adviser, after waivers, of $192,992 and
$35,282, respectively, and such sub-advisers waived sub-advisory fees of $0 and
$30,027, respectively. Such sub-advisory fees have no effect on the advisory
fees payable by each Portfolio to PIMC.
For the services it provides as investment adviser to the Master
Portfolio, DFA is paid a monthly fee calculated as a percentage of average net
assets of the Master Portfolio. For the fiscal years ending November 30, 1993
and 1994, the Master Portfolio paid advisory fees to DFA totalling $7,231 and
$11,000, respectively. The Index Equity Portfolio did not invest in the Master
Portfolio during such periods. The Master Portfolio is currently seeking
shareholder approval of a new investment management agreement with DFA. It is
anticipated that the Master Portfolio's sole shareholder will approve the new
agreement and that the advisory and other operating expenses of the Index
Equity Portfolio will be consistent with the expenses described in the Index
Equity Portfolio's Prospectus. If the Master Portfolio's shareholder fails to
approve the new agreement, the directors of the current shareholder will
consider appropriate action.
ADMINISTRATION AGREEMENTS. The Administrators serve as the Fund's
co-administrators pursuant to an Administration Agreement (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 Agreement provides 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 a Portfolio in connection with the performance of the
Administration Agreement, except a loss resulting from willful misfeasance, bad
faith or gross negligence in the performance of
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their respective duties or from reckless disregard of their respective duties
and obligations thereunder.
PFPC serves as the administrative services agent for the Master
Portfolio pursuant to an Administration and Accounting Services Agreement. The
services provided by PFPC are subject to supervision by the executive officers
and the Board of Trustees of the Trust, and include day-to-day keeping and
maintenance of certain records, calculation of the offering price of the
shares, preparation of reports and acting as liaison with the Trust's
custodians and dividend disbursing agents. PFPC also charges each investor in
the Master Portfolio a monthly fee of $1,000.
For the year ended September 30, 1994, the Fund paid the
Administrators combined administration fees, after waivers, of $803,349,
$42,931, $132,901, $2,241, $11,758, $0, $521,204, $0, $186,742, $0, $19,858,
$14,758, $52,518, $1,075,209, $128,262, $20,166, $52,164, $27,115, $354,486,
$502,876 and $125,112 with respect to the Money Market, Municipal Money Market,
Government Money Market, Ohio Municipal Money Market, Pennsylvania Municipal
Money Market, North Carolina Municipal Money Market, Managed Income, Tax-Free
Income, Intermediate Government, Ohio Tax-Free Income, Pennsylvania Tax-Free
Income, Short-Term Bond, Intermediate-Term Bond, Value Equity, Growth Equity,
Small Cap Growth Equity, Core Equity, Index Equity, Small Cap Value Equity,
International Equity and Balanced Portfolios. For that year, the
Administrators waived combined administration fees of $541,066, $214,178,
$289,756, $72,646, $114,573, $83,304, $277,849, $19,062, $181,804, $14,284,
$90,020, $55,078, $82,428, $61,908, $105,557, $58,432, $99,421, $378,211,
$41,462, and $119,522 with respect to the Money Market, Municipal Money Market,
Government Money Market, Ohio Municipal Money Market, Pennsylvania Municipal
Money Market, North Carolina Municipal Money Market, Managed Income, Tax-Free
Income, Intermediate Government, Ohio Tax-Free Income, Pennsylvania Tax-Free
Income, Short-Term Bond, Intermediate-Term Bond, Value Equity, Growth Equity,
Small Cap Growth Equity, Core Equity, Index Equity, Small Cap Value Equity and
Balanced Portfolios, respectively, and reimbursed the Ohio Municipal Money
Market, Pennsylvania Municipal Money Market, North Carolina Municipal Money
Market, Tax-Free Income, Ohio Tax-Free Income, and Pennsylvania Tax-Free Income
Portfolios for certain operational expenses totalling $6,887, $6,340, $8,934,
$14,359, $14,199 and $3,858, respectively. For the period from commencement of
operations (July 25, 1994 for the Virginia Municipal Money Market Portfolio and
June 17, 1994 for the International Emerging Markets Portfolio) through
September 30, 1994, the Fund paid Administrators combined administration fees,
after waivers, of $0 and $1,259 with respect to the Virginia Municipal Money
Market and International Emerging Market Portfolios, respectively. For the
same periods, the Administrators waived combined administration fees of $2,975
and $2,537 for such respective Portfolios, and reimbursed the
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Virginia Municipal Money Market Portfolio for certain operational expenses
totalling $1,605.
For the period from February 1, 1993 to September 30, 1993, the Fund
paid the Administrators combined administration fees, after waivers, of
$674,120, $117,768, $157,519, $397,750, $0, $167,611, $0, $0, $528,584,
$101,208, $195,736, $156,048, $123,924 and $44,667 for the Money Market,
Municipal Money Market, Government Money Market, Managed Income, Tax-Free
Income, Intermediate Government, Pennsylvania Tax-Free Income, Ohio Tax-Free
Income, Value Equity, Growth Equity, Index Equity, Small Cap Value Equity,
International Equity and Balanced Portfolios, respectively. For that period,
the Administrators waived combined administration fees of $101,509, $21,036,
$30,288, $87,513, $11,914, $24,673, $85,754, $8,757, $9,382, $12,879, $59,581,
$5,441, $6,477 and $8,046 for such respective Portfolios, and reimbursed the
Pennsylvania Tax-Free Income and Ohio Tax-Free Income Portfolios for certain
operational expenses totalling $5,766 and $6,515, respectively. For the period
from commencement of operations to September 30, 1993, the Fund paid the
Administrators combined administration fees, after waivers, of $0, $0, $0, $0,
$1,262, $173 and $4,722 for the Ohio Municipal Money Market, Pennsylvania
Municipal Money Market, North Carolina Municipal Money Market, Short-Term Bond,
Intermediate-Term Bond, Small Cap Growth Equity and Core Equity Portfolios,
respectively. For the same period, the Administrators waived combined
administration fees of $9,651, $6,039, $15,695, $831, $3,084, $835 and $2,441
for such respective Portfolios.
For the period from October 1, 1992 to January 31, 1993, the Fund paid
PFPC and the former co-administrator combined administration fees, before
waivers, of $397,594, $74,771, $77,953, $212,227, $0, $76,317, $227,477,
$43,210, $118,702, $56,278, $41,645 and $4,938 Money Market, Municipal Money
Market, Government Money Market, Managed Income, Tax-Free Income, Intermediate
Government, Value Equity, Growth Equity, Index Equity, Small Cap Value Equity,
International Equity and Balanced Portfolios, respectively. For that period,
PFPC and the former co-administrator waived combined administration fees of $0,
$0, $0, $0, $5,469, $0, $0, $0, $0, $0, $0 and $4,080 for such respective
Portfolios, and reimbursed the Tax-Free Income Portfolio for certain
operational expenses totalling $0. For the period from commencement of
operations to January 31, 1993, the Fund paid PFPC and the former
co-administrator combined administration fees, before waivers, of $0 and $0 for
the Ohio Tax-Free Income and Pennsylvania Tax-Free Income Portfolios,
respectively. For the same period, PFPC and the former co-administrator waived
combined administration fees of $124 and $1,774 for such respective Portfolios,
and reimbursed such Portfolios for certain operational expenses totalling
$1,848 and $1,859, respectively.
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For the year ended September 30, 1992, the Fund paid PFPC and the
former co-administrator combined administration fees, after waivers, of
$923,307, $185,695, $264,829, $112,680, $3,511, $326,035 and $0 for the Money
Market, Municipal Money Market, Government Money Market, Growth Equity,
Balanced, Managed Income and Tax-Free Income Portfolios, respectively. For
that year, PFPC and the former co-administrator waived combined administration
fees of $8,946 and $8,912 for the Balanced and Tax-Free Income Portfolios,
respectively. For the services provided and expenses assumed by PFPC and the
former co-administrator, the Fund paid them combined administration fees of
$286,005, $156,109, $66,361, $50,986 and $83,451 for the Value Equity, Index
Equity, Small Cap Value Equity, International Equity and Intermediate
Government Portfolios, respectively, for the periods from the dates the
respective Portfolios commenced operations to September 30, 1992. See
"Investment Advisory, Administration, Distribution and Servicing Agreements -
Advisory and Sub-Advisory Agreements" regarding the Administrators' agreement
to reimburse the Fund in the event the expenses of a Portfolio exceed
applicable state expense limitations.
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 each Portfolio, (ii)
holds and transfers portfolio securities on account of each Portfolio, (iii)
accepts receipts and makes disbursements of money on behalf of each Portfolio,
(iv) collects and receives all income and other payments and distributions on
account of each Portfolio's securities and (v) makes periodic reports to the
Board of Trustees concerning each 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 each investment 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. PNC Bank currently intends to waive its custody fees with
respect to the Index Equity Portfolio.
PFPC, an affiliate of PNC Bank, serves as the transfer and dividend
disbursing agent for the Fund pursuant to a Transfer
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Agency Agreement (the "Transfer Agency Agreement"), under which PFPC (i) issues
and redeems Service, Investor, and Institutional classes of shares in each
Portfolio, (ii) addresses and mails all communications by each 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
each 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 each 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 each
Portfolio, plus disbursements.
PNC Bank serves as the Trust's custodian and PFPC serves as the
Trust's transfer and dividend disbursing agent. The Index Equity Portfolio
will bear its pro rata portion of the Master Portfolio's custody and transfer
and dividend disbursing fees and expenses.
DISTRIBUTOR AND DISTRIBUTION PLANS. The Fund has entered into a
distribution agreement with the Distributor under which the Distributor, as
agent, offers shares of each 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 is entitled to payments by each class of Series A
Investor Shares and Series B Investor Shares for certain distribution and other
expenses in addition to the sales charges described in the Prospectuses (if
applicable). The Fund's Distribution and Service Plan for Series A Investor
Shares and the Fund's Series B Distribution Plan (collectively, "the Plans")
provide, among other things, that: (i) the Distributor shall submit quarterly
reports to the Board of Trustees regarding the amounts expended under each Plan
and the purposes for which such expenditures were made; (ii) each 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 Plans or any agreement
entered into in connection with the Plans ("12b-1 Trustees"), acting in person
at a meeting called for said purpose; (iv) any amendment to increase
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materially the costs which any class of shares may bear for distribution
pursuant to the Plans shall be effective only upon approval by a vote of a
majority of the outstanding shares of such class; and (v) while the Plans
remain 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 Distribution and Service and Series B Distribution Plans are
terminable as to any class of Series A and Series B Investor Shares,
respectively, 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 either
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.
The front-end sales charge and amounts payable to the Distributor
under the Distribution and Service Plan are used by the Distributor to pay
commissions and other fees payable to Service Organizations and other
broker/dealers who sell Series A Shares.
Service Organizations and other broker/dealers receive commissions
from the Distributor 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. The fees payable under the Series B Distribution
Plan (at an annual rate of .75% of the average daily net asset value of each
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.
For the fiscal year ended September 30, 1994, the Series A Investor
Shares of the Money Market, Municipal Money Market,
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Government Money Market, Ohio Municipal Money Market, Pennsylvania Municipal
Money Market, Managed Income, Tax-Free Income, Intermediate Government,
Pennsylvania Tax-Free Income, Short-Term Bond, Intermediate-Term Bond, Value
Equity, Growth Equity, Small Cap Growth Equity, Core Equity, Index Equity,
Small Cap Value Equity, International Equity and Balanced Portfolios bore
expenses relating to the Distribution and Service Plan in the amount of
$10,092, $165, $427, $252, $193, $43,985, $33,891, $20,618, $53,423, $316, $34,
$31,135, $16,155, $3,297, $921, $8,190, $54,045, $39,012 and $222,954,
respectively. For the period from commencement of operations to September 30,
1994, the Series A Investor Shares of the International Emerging Markets
Portfolio bore expenses relating to the Distribution and Service Plan in the
amount of $2,703. All such amounts paid under the Distribution and Service
Plan were paid as compensation to dealers for distribution assistance. For the
period from commencement of operations to September 30, 1994, Series A Investor
Shares of the Ohio Tax-Free Income Portfolio bore no expenses relating to the
Distribution and Service Plan. As of September 30, 1994, the public offering
of Series A Investor Shares of the North Carolina Municipal Money Market and
Virginia Municipal Money Market Portfolios had not commenced. No Series B
Investor Shares of any Portfolio were issued during the fiscal year ended
September 30, 1994.
No compensation is payable by the Fund to the Distributor for its
distribution services for Service or Institutional Shares.
Service Organizations may charge their clients additional fees for
account services.
SERVICE PLAN. As stated in the Prospectus for the Fund's Service
Shares, the Fund intends 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 Service Shares ("Customers"). 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 a service fee of up to
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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 the Prospectus in light of the
terms and fees governing their accounts with institutions. These servicing
fees are not paid to institutions with respect to other classes of shares of
the Portfolios ("Series A Investor Shares," "Series B Investor Shares" and
"Institutional Shares").
For the fiscal year ended September 30, 1994, the Service Shares of
the Money Market, Municipal Money Market, Government Money Market, Ohio
Municipal Money Market, Pennsylvania Municipal Money Market, North Carolina
Municipal Money Market, Managed Income, Tax-Free Income, Intermediate
Government, Ohio Tax-Free Income, Pennsylvania Tax-Free Income, Short-Term
Bond, Intermediate-Term Bond, Value Equity, Growth Equity, Small Cap Growth
Equity, Core Equity, Index Equity, Small Cap Value Equity, International Equity
and Balanced Portfolios bore expenses relating to the Fund's Service Plan and
other service fees aggregating $1,382,350, $368,547, $677,020, $97,034,
$56,294, $87, $106,193, $3,523, $99,744, $5,089, $24,652, $13,458, $69,088,
$177,459, $58,828, $28,347, $66,516, $52,752, $84,160, $110,459 and $123,661,
respectively. For the period from commencement of operations to September 30,
1994, the Service Shares of the International Emerging Markets Portfolio bore
expenses relating to the Fund's Service Plan and other servicing fees
aggregating $1,620. As of September 30, 1994, the public offering of Service
Shares of the Virginia Municipal Money Market Portfolio had not commenced.
SERIES B SERVICE PLAN. As stated in the Prospectus for the Fund's
Series B Investor Shares, the Fund intends to enter into service agreements
with Service Organizations pursuant to which Service Organizations and
sometimes the Distributor will render certain support services to their
customers who are the beneficial owners of Series B Investor Shares. Such
services will be provided to customers who are the beneficial owners of Series
B Investor Shares and are intended to supplement the services provided by the
Fund's Administrators and transfer agent. In consideration for payment
aggregating up to .25% (on an annualized basis) of the average daily net asset
value of Series B Investor Shares owned beneficially by their customers,
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
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invest in Series B Shares; processing dividend and distribution payments from
the Fund on behalf of customers; arranging for bank wires; providing
sub-accounting with respect to Series B 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 Series B Shares pursuant to specific or pre-authorized
instructions; providing information periodically to customers showing their
positions in Series B 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 Series B Shares; and
providing other similar shareholder liaison services. Fees relating to the
Series B Service Plan are not paid to Service Organizations or the Distributor
with respect to other classes of shares of the Portfolios ("Service Shares,"
"Series A Investor Shares" and "Institutional Shares"). Customers who are
beneficial owners of Series B Investor Shares should read the Prospectus in
light of the terms and fees governing their accounts with Service
Organizations. No Series B Investor Shares of any Portfolio were issued during
the fiscal year ended September 30, 1994.
PORTFOLIO TRANSACTIONS
In executing portfolio transactions, the adviser and sub-advisers, and
seek to obtain the best price and execution for a 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, sub-advisers
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 the Trust with respect to
the Master Portfolio, (or affiliated persons of such persons) will be made in
accordance with Rule 17e-1 under the 1940 Act. With respect to the Master
Portfolio, commissions paid on such transactions would be commensurate with the
rate of commissions paid on similar transactions to brokers that are not so
affiliated.
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No Portfolio has any obligation to deal with any broker or group of
brokers in the execution of portfolio transactions. The adviser and
sub-advisers may, consistent with the interests of a Portfolio, select brokers
on the basis of the research, statistical and pricing services they provide to
a 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, sub-advisers and DFA
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
a Portfolio and its other clients and that the total commissions paid by a
Portfolio will be reasonable in relation to the benefits to a Portfolio over
the long-term.
With respect to the Master Portfolio, it will seek to acquire and
dispose of securities in a manner which would cause as little fluctuation in
the market prices of stocks being purchased or sold as possible in light of the
size of the transactions being effected, and brokers will be selected with this
goal in view. DFA monitors the performance of brokers which effect transactions
for the Master Portfolio to determine the effect that the Master Portfolio's
trading has on the market prices of the securities in which they invest. DFA
also checks the rate of commission being paid by the Master Portfolio to its
brokers to ascertain that they are competitive with those charges by other
brokers for similar services. Transactions also may be placed with brokers who
provide DFA with investment research, such as reports concerning individual
issuers, industries and general economic and financial trends and other
research services. The Investment Management Agreement permits DFA knowingly
to pay commissions on such transactions which are greater than another broker
might charge if DFA, in good faith, determines that the commissions paid are
reasonable in relation to the research or brokerage services provided by the
broker or dealer when viewed in terms of either a particular transaction or
DFA's overall responsibilities to the Trust.
Commission rates for brokerage transactions on foreign stock exchanges
are generally fixed. 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 year or period ended September 30, 1994, the Value Equity,
Growth Equity, Small Cap Growth Equity, Core Equity, Index Equity, Small Cap
Value Equity, International Equity, International Emerging Markets and Balanced
Portfolios paid brokerage commissions of $431,232, $530,428, $62,339, $156,700,
$47,190, $185,560, $1,031,631, $32,367, and $164,460, respectively.
For the year or period ended September 30, 1993, the Value Equity,
Growth Equity, Small Cap Growth Equity, Core Equity, Index Equity, Small Cap
Value Equity, International Equity and Balanced Portfolios paid brokerage
commissions of $136,565, $366,421, $1,186, $4,770, $18,386, $105,423, $308,297
and $68,556, respectively, of which $4,390, $264 and $636 for the Growth
Equity, Small Cap Growth Equity and Small Cap Value Equity Portfolios,
respectively, was paid to Shearson Lehman Hutton Inc. ("Shearson"), an
affiliate of the Fund's former distributor. Approximately 1%, 22% and 1% of
the aggregate brokerage commissions of the Growth Equity, Small Cap Growth
Equity and Small Cap Value Equity Portfolios, respectively, were paid to
Shearson, representing approximately 1%, 22% and 1% of the aggregate dollar
amounts of transactions by those respective Portfolios involving the payment of
commissions.
For the year ended September 30, 1992, the Growth Equity and Balanced
Portfolios paid brokerage commissions of $300,421 and $11,821, respectively, of
which $19,840 for the Growth Equity
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Portfolio was paid to Shearson Lehman Hutton Inc. ("Shearson"), an affiliate of
the Fund's former distributor. Approximately 7% of the Growth Equity
Portfolio's aggregate brokerage commissions for the year ended September 30,
1992 were paid to Shearson, representing approximately 7% of the aggregate
dollar amount of transactions by that Portfolio involving the payment of
commissions. For the period from commencement of operations to September 30,
1992, the Value Equity, Index Equity, Small Cap Value Equity and International
Equity Portfolios paid brokerage commissions of $68,214, $43,725, $23,728 and
$84,226, respectively.
For the Master Portfolio's fiscal years ended November 30, 1993 and
1994, the Master Portfolio paid brokerage commissions totalling $41,393 and
$10,610, respectively.
Over-the-counter issues, including corporate debt and 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
Portfolios 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 with respect to both foreign and
domestic securities 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 a Portfolio are made from
dealers, underwriters and issuers. The Portfolios do 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. Each Money Market
Portfolio intends to purchase only securities with remaining maturities of 13
months or less as determined in accordance with the rules of the SEC. As a
result, the portfolio turnover rates of a Money Market Portfolio will be
relatively high. However, because brokerage commissions will not normally be
paid with respect to investments made by a Money Market Portfolio, the turnover
rates should not adversely affect the Portfolio's net asset values or net
income.
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
Portfolios to give primary consideration to obtaining the most favorable price
and efficient execution of transactions involving
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money market instruments. In seeking to implement this policy of the
Portfolios, the adviser and sub-advisers 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-advisers may seek to obtain an undertaking from
issuers of commercial paper or dealers selling commercial paper to consider the
repurchase of such securities from a Portfolio prior to maturity at their
original cost plus interest (sometimes adjusted to reflect the actual maturity
of the securities), if it believes that a Portfolio's anticipated need for
liquidity makes such action desirable. Any such repurchase prior to maturity
reduces the possibility that a 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 each Portfolio and for other investment
accounts managed by the adviser or sub-advisers 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 a Portfolio is
concerned, in other cases it could be beneficial to a Portfolio. A 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 a Portfolio is calculated by dividing
the lesser of a 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. The Master Portfolio
ordinarily will not sell portfolio securities except to reflect additions or
deletions of stocks that comprise the S&P 500 Index, including mergers,
reorganizations and similar transactions and, to the extent necessary, to
provide cash to pay redemptions of the Master Portfolio's shares.
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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 PRICES FOR SERIES A INVESTOR SHARES OF
THE NON-MONEY MARKET PORTFOLIOS. An illustration of the computation of the
public offering price per Series A Investor Share of each Non-Money Market
Portfolio, based on the value of the Managed Income, Tax-Free Income,
Intermediate Government, Ohio Tax-Free Income, Pennsylvania Tax-Free Income,
Short-Term Bond, Intermediate-Term Bond, Value Equity, Growth Equity, Small Cap
Growth Equity, Core Equity, Index Equity, Small Cap Value Equity, International
Equity, International Emerging Markets and Balanced Portfolios' net assets as
of September 30, 1994 and the value of the Government Income and International
Fixed Income Portfolios' initial capitalization prior to the commencement of
operations, follows:
TABLE
<TABLE>
<CAPTION>
Value Growth Small Cap Index
Equity Equity Growth Equity Core Equity Equity
Portfolio Portfolio Portfolio Portfolio Portfolio
--------- --------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C> <C>
Net Assets . . . . . $10,412,074 $5,049,054 $1,620,407 $601,053 $2,631,836
Outstanding
Shares . . . . . . . 895,820 496,922 160,041 60,595 240,770
============ =========== =========== ========== ==========
Net Asset Value
Per Share . . . . . $11.62 $10.16 $10.12 $9.92 $10.93
Maximum Sales Charge,
4.50% of offering price
(4.71% of net asset
value per share) . . $ .55 $ .48 $ .48 $ .47 $ .52
------ ------- ------- ------- ------
Offering to Public . $12.17 $10.64 $10.60 $10.39 $11.45
======= ======= ======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
Small
Cap Value International Managed Tax-Free
Equity Equity Balanced Income Income
Portfolio Portfolio Portfolio Portfolio Portfolio
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Assets . . . . . $16,883,673 $14,432,684 $62,306,981 $10,921,371 $6,972,180
Outstanding
Shares . . . . . . . 1,243,462 1,077,374 5,200,179 1,115,757 694,590
============ =========== ============ ============ ===========
Net Asset Value
Per Share . . . . . $13.58 $13.40 $11.98 $9.79 $10.04
Maximum Sales Charge,
4.50% of offering price
(4.71% of net asset
value per share) . . $ .64 $ .63 $ .56 $ .46 $ .47
-------- -------- -------- -------- -------
Offering to Public . $14.22 $14.03 $12.54 $10.25 $10.51
======== ======== ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
Pennsylvania
Intermediate Ohio Tax- Tax-Free Short-Term Intermediate-
Government Free Income Income Bond Term Bond
Portfolio Portfolio Portfolio Portfolio Portfolio
--------- --------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Net Assets . . . . . $8,508,396 $3,824,845 $46,562,641 $276,554 $87,119
Outstanding
Shares . . . . . . . 882,983 398,330 4,742,341 28,876 9,630
============ ============ ============= ========== ========
Net Asset Value
Per Share . . . . . $9.64 $9.60 $9.82 $9.58 $9.05
Maximum Sales Charge,
4.50% of offering price
(4.71% of net asset
value per share) . . $ .45 $ .45 $ .46 $ .45 $ .43
-------- -------- -------- -------- --------
Offering to Public . $10.09 $10.05 $10.28 $10.03 $9.48
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
International
Government International Emerging
Income Fixed Income Markets
Portfolio Portfolio Portfolio
--------- --------- ---------
<S> <C> <C> <C>
Net Assets . . . . . $100 $100 $2,857,212
Outstanding
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Shares . . . . . . . 10 10 271,033
======= ======== ==========
Net Asset Value
Per Share . . . . . $10.00 $10.00 $10.54
Maximum Sales Charge,
4.50% of offering price
(4.71% of net asset
value per share) . . $ .47 $ .47 $ .50
--------- -------- --------
Offering to Public . $10.47 $10.47 $11.04
========= ======== ========
</TABLE>
Total front-end sales charges paid by shareholders of Series A
Investor Shares of the Managed Income, Tax-Free Income, Intermediate
Government, Ohio Tax-Free Income, Pennsylvania Tax-Free Income, Short-Term
Bond, Intermediate-Term Bond, Value Equity, Growth Equity, Small Cap Growth
Equity, Core Equity, Index Equity, Small Cap Value Equity, International
Equity, International Emerging Markets and Balanced Portfolios for the year or
period ended September 30, 1994 were $150,150, $37,504, $50,694, $64,596,
$678,464, $10,268, $2,124, $195,675, $81,496, $44,054, $17,550, $38,454,
$230,590, $303,547, $130,755 and $1,213,056, respectively. The Distributor
retained no front-end sales loads during the year ended September 30, 1994.
The public offering of Series A Investor Shares of the Government Income and
International Fixed Income Portfolios had not commenced as of September 30,
1994.
Total front-end sales charges paid by shareholders of Series A
Investor Shares of the Value Equity, Growth Equity, Small Cap Value Equity,
International Equity, Balanced, Managed Income, Tax-Free Income, Intermediate
Government, Ohio Tax-Free Income, Pennsylvania Tax-Free Income and Index Equity
Portfolios for the year or period ended September 30, 1993 were $155,096,
$60,863, $250,615, $86,294, $1,304,538, $202,926, $128,003, $127,347, $68,959,
$1,083,103 and $37,281, respectively. The Distributor retained no front-end
sales loads during the year ended September 30, 1993. The public offering of
Series A Investor Shares of the Short-Term Bond, Intermediate-Term Bond, Core
Equity, Government Income, International Fixed Income and International
Emerging Markets Portfolios had not commenced as of September 30, 1993.
Total front-end sales charges paid by shareholders of Series A
Investor Shares of the Value Equity, Growth Equity, Small Cap Value Equity,
International Equity, Balanced, Managed Income, Tax-Free Income and
Intermediate Government Portfolios for the year or period ended September 30,
1992 were $36, $5,072, $802, $452, $162,649, $48,926, $145,624 and $21,284,
respectively. The Distributor retained non front-end sales loads during the
year ended September 30, 1992. The Ohio Tax-Free Income and Pennsylvania
Tax-Free Income Portfolios had not commenced operations as of September 30,
1992.
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Series B Investor Shares of the Non-Money Market Portfolios are sold
at the net asset value per share next determined after a purchase order is
received. Series B Investor Shares of the Non-Money Market Portfolios are
subject to a contingent deferred sales charge which is payable on redemption of
such Series B Investor Shares.
Service and Institutional Shares of each 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 a Non-Money Market Portfolio.
INVESTMENTS OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES.
Investors may purchase Series A Shares of the Non-Money Market Portfolios 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 Prospectuses. 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
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<PAGE> 149
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 a 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 a 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 a 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 a Portfolio.
With respect to the Master Portfolio, if the Board of Trustees of the
Trust determines that it would be detrimental to the best interests of the
remaining shareholders of the Master Portfolio to make payment wholly or partly
in cash, the Master Portfolio may pay the redemption price in whole or in part
by a distribution of portfolio securities from the Master Portfolio of the
shares being redeemed in lieu of cash in accofdance with Rule 18f-1 under the
Investment Company Act of 1940. Investors, such as the Portfolio, may incur
brokerage charges and other transaction costs selling securities that were
received in payment of redemptions.
Under the 1940 Act, a 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.
(A 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 Prospectuses, the Fund
may redeem shares involuntarily to reimburse a 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> 150
MONEY MARKET PORTFOLIOS. The value of the portfolio securities of
each Money Market Portfolio is calculated using the amortized cost method of
valuation. Under this method the market value of an instrument is approximated
by amortizing the difference between the acquisition cost and value at maturity
of the instrument on a straight-line basis over the remaining life of the
instrument. The effect of changes in the market value of a security as a
result of fluctuating interest rates is not taken into account. The market
value of debt securities usually reflects yields generally available on
securities of similar quality. When such yields decline, market values can be
expected to increase, and when yields increase, market values can be expected
to decline.
As indicated, the amortized cost method of valuation may result in the
value of a security being higher or lower than its market price, the price a
Money Market Portfolio would receive if the security were sold prior to
maturity. The Fund's Board of Trustees has established procedures for the
purpose of maintaining a constant net asset value of $1.00 per share for each
Money Market Portfolio, which include a review of the extent of any deviation
of net asset value per share, based on available market quotations, from the
$1.00 amortized cost per share. Should that deviation exceed 1/2 of 1% for a
Money Market Portfolio, the Fund's Board of Trustees will promptly consider
whether any action should be initiated to eliminate or reduce material dilution
or other unfair results to shareholders. Such action may include redeeming
shares in kind, selling portfolio securities prior to maturity, reducing or
withholding dividends, shortening the average portfolio maturity, reducing the
number of outstanding shares without monetary consideration, and utilizing a
net asset value per share as determined by using available market quotations.
Each Money Market Portfolio will maintain a dollar-weighted average
portfolio maturity of 90 days or less, will not purchase any instrument with a
deemed maturity under Rule 2a-7 of the 1940 Act greater than 13 months, and
will limit portfolio investments, including repurchase agreements, to those
instruments that the adviser or sub-adviser (depending on the Money Market
Portfolio) determines present minimal credit risks pursuant to guidelines
adopted by the Fund's Board of Trustees. There can be no assurance that a
constant net asset value will be maintained for any Money Market Portfolio.
NON-MONEY MARKET PORTFOLIOS. The valuation of securities held by the
Non-Money Market Portfolios is discussed in their respective Prospectuses. The
valuation of securities held by the Master Portfolio is described in its
Registration Statement.
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<PAGE> 151
PERFORMANCE INFORMATION
MONEY MARKET PORTFOLIO YIELD. Each Money Market Portfolio's current
and effective yields for Service, Series A Investor and Institutional Shares
and the Money Market Portfolio's current and effective yields for Series B
Investor Shares are computed separately using standardized methods required by
the SEC. The annualized yield for a class of Service, Series A Investor,
Series B Investor or Institutional Shares is computed by: (a) determining the
net change in the value of a hypothetical account having a balance of one share
at the beginning of a seven-calendar day period; (b) dividing the net change by
the value of the account at the beginning of the period to obtain the base
period return; and (c) annualizing the results (i.e., multiplying the base
period return by 365/7). The net change in the value of the account reflects
the value of additional shares purchased with dividends declared and all
dividends declared on both the original share and such additional shares, but
does not include realized gains and losses or unrealized appreciation and
depreciation. Compound effective yields are computed by adding 1 to the base
period return (calculated as described above) raising the sum to a power equal
to 365/7 and subtracting 1. In addition, a standardized "tax-equivalent yield"
may be quoted for Service, Series A Investor and Institutional Shares in the
Municipal 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, which is computed
separately for each class by: (a) dividing the portion of the Portfolio's yield
for shares (as calculated above) that is exempt from Federal or state income
tax by one minus a stated Federal or state income tax rate; and (b) adding the
figure resulting from (a) above to that portion, if any, of the yield that is
not exempt from Federal and state income tax.
The annualized yield information for each Money Market Portfolio for
the seven-day period ended March 31, 1995 was as follows:
<TABLE>
<CAPTION>
Tax-Equivalent Yield
Effective (assumes a Federal income
Portfolio Yield Yield tax rate of 28%)
--------- ----- ----- ----------------
<S> <C> <C> <C>
Money Market
Service Shares 5.71% 5.87% N/A
Series A Investor Shares 5.51 5.66 N/A
Institutional Shares 6.01 6.19 N/A
Series B Investor Shares N/A N/A N/A
</TABLE>
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<PAGE> 152
<TABLE>
<CAPTION>
Tax-Equivalent Yield
Effective (assumes a Federal income
Portfolio Yield Yield tax rate of 28%)
--------- ----- ----- ----------------
<S> <C> <C> <C>
Municipal Money Market
Service Shares 3.66 3.73 5.08%
Series A Investor Shares 3.47 3.53 4.82
Institutional Shares 3.96 4.04 5.50
Government Money Market
Service Shares 5.59 5.75 N/A
Series A Investor Shares 5.39 5.53 N/A
Institutional Shares 5.89 6.06 N/A
Ohio Municipal Money Market
Service Shares 3.59 3.65 5.00
Series A Investor Shares 3.41 3.47 4.74
Institutional Shares 3.89 3.96 5.40
Pennsylvania Municipal Money Market
Service Shares
Series A Investor Shares 3.56% 3.62% 4.94%
Institutional Shares 3.36 3.42 4.67
3.86 3.94 5.36
North Carolina Municipal Money Market
Service Shares
Series A Investor Shares 3.55 3.62 4.93
Institutional Shares 3.32 3.37 4.61
3.85 3.93 5.35
Virginia Municipal Money Market
Service Shares
Series A Investor Shares 3.54 3.60 4.92
Institutional Shares N/A N/A N/A
3.84 3.91 5.33
</TABLE>
The fees which may be imposed by institutions on their Customers are
not reflected in the calculations of yields for the Money Market Portfolios.
No Series A Investor Shares of the Virginia Municipal Money Market Portfolio,
no Series B Investor Shares of the Money Market Portfolio, and no shares of any
class of the New Jersey Municipal Money Market Portfolio had been issued prior
to March 31, 1995. Yields on Institutional Shares will generally be higher
than yields on Service Shares; yields on Service Shares will generally be
higher than yields on Series A Investor Shares; and yields on Series A Investor
Shares will generally be higher than yields on Series B Investor Shares.
From time to time, in advertisements or in reports to shareholders,
the yields of a Portfolio's Service, Series A Investor, Series B Investor or
Institutional Shares may be quoted and compared to those of other mutual funds
with similar investment objectives and to stock or other relevant indexes.
-83-
<PAGE> 153
For example, the yield of a Portfolio's Service, Series A Investor, Series B
Investor or Institutional Shares may be compared to the Donoghue's Money Fund
Average, which is an average compiled by IBC/Donoghue's MONEY FUND REPORT of
Holliston, MA 01746, a widely-recognized independent publication that monitors
the performance of money market funds, or to the data prepared by Lipper
Analytical Services, Inc., a widely-recognized independent service that
monitors the performance of mutual funds.
TOTAL RETURN. For purposes of quoting and comparing the performance
of shares of the Non-Money Market Portfolios 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 a Non-Money Market Portfolio will
be calculated independently of the other classes within that 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 Fund's Non-Money Market Portfolios, the maximum front-end sales
charge is deducted from the initial $1,000 payment and all dividends and
distributions by the particular Portfolio are assumed to have been reinvested
at net asset value as described in the particular Prospectus on the
reinvestment dates during the period. In calculating the ending redeemable
value for Series B Investor Shares of the Non-Money Market Portfolios, the
maximum contingent deferred sales charge is deducted at the end of the period
and all dividends and distributions by the particular Portfolio are assumed to
have been reinvested at net asset value as described in the particular
Prospectus on the reinvestment dates during the period. Total return, or "T"
in the formula above, is computed by finding the
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<PAGE> 154
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 returns
for each Non-Money Market Portfolio for periods ended March 31, 1995 were as
follows:
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<PAGE> 155
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
FOR THE FOR THE 5
YEAR ENDED YEARS ENDED SINCE COMMENCEMENT OF
PORTFOLIO 3/31/95 3/31/95 OPERATIONS
--------- ------- ------- ----------
<S> <C> <C> <C>
Managed Income
Service Shares(1) 3.42% N/A 1.67%
Series A Investor Shares(2) (1.40) N/A 4.36
Institutional Shares(3) 3.66 8.29% 7.64
Series B Investor Shares(4) N/A N/A N/A
Tax-Free Income
Service Shares(1) 8.09 N/A 3.89
Series A Investor Shares(5) 3.00 N/A 6.82
Institutional Shares(6) 8.35 N/A 5.98
Series B Investor Shares(7) N/A N/A N/A
Intermediate Government
Service Shares(1) 3.21 N/A 1.77
Series A Investor Shares(8) (1.45) N/A 3.01
Institutional Shares(9) 3.45 N/A 5.06
Series B Investor Shares(10) N/A N/A N/A
Ohio Tax-Free Income
Service Shares(1) 6.80 N/A 2.89
Series A Investor Shares(11) 2.12 N/A 2.40
Institutional Shares(11) 7.06 N/A 4.46
Series B Investor Shares(12) N/A N/A 0.05
Pennsylvania Tax-Free Income
Service Shares(1) 6.70 N/A 2.97
Series A Investor Shares(11) 1.78 N/A 3.43
Institutional Shares(11) 6.96 N/A 5.59
Series B Investor Shares(13) N/A N/A (0.39)
Short-Term Bond
Service Shares(14) 2.38 N/A 1.48
Series A Investor Shares(15) (2.22) N/A (1.93)
Institutional Shares(14) 2.64 N/A 1.73
Series B Investor Shares(16) N/A N/A N/A
Intermediate-Term Bond
Service Shares(17) 3.56 N/A 0.10
Series A Investor Shares(18) N/A N/A (0.48)
Institutional Shares(19) 3.83 N/A 0.30
Series B Investor Shares(20) N/A N/A N/A
Government Income
Service Shares N/A N/A N/A
Series A Investor Shares(21) N/A N/A 0.26
Institutional Shares N/A N/A N/A
Series B Investor Shares(22) N/A N/A (0.21)
</TABLE>
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<PAGE> 156
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
FOR THE FOR THE 5
YEAR ENDED YEARS ENDED SINCE COMMENCEMENT OF
PORTFOLIO 3/31/95 3/31/95 OPERATIONS
--------- ------- ------- ----------
<S> <C> <C> <C>
Value Equity
Service Shares(1) 13.84% N/A 9.97%
Series A Investor Shares(23) 8.55 N/A 9.27
Institutional Shares(24) 14.12 N/A 10.85
Series B Investor Shares(25) N/A N/A N/A
Growth Equity
Service Shares(26) 6.28 N/A 3.02
Series A Investor Shares(27) 1.23 N/A 3.49
Institutional Shares(3) 6.47 7.05% 7.45
Series B Investor Shares(28) N/A N/A N/A
Small Cap Growth Equity
Service Shares(29) 18.08 N/A 10.60
Series A Investor Shares(29) 12.62 N/A 7.14
Institutional Shares(30) 18.39 N/A 10.51
Series B Investor Shares(31) N/A N/A N/A
Core Equity
Service Shares(29) 11.87 N/A 5.57
Series A Investor Shares(32) 6.75 N/A 2.77
Institutional Shares(33) 12.14 N/A 5.80
Series B Investor Shares(34) N/A N/A N/A
Index Equity(46)
Service Shares(1) 14.94 N/A 9.33
Series A Investor Shares(35) 9.51 N/A 7.10
Institutional Shares(9) 15.21 N/A 9.02
Series B Investor Shares(36) N/A N/A N/A
Small Cap Value Equity
Service Shares(1) 4.51 N/A 8.37
Series A Investor Shares(35) (0.27) N/A 11.10
Institutional Shares(37) 4.77 N/A 12.70
Series B Investor Shares(38) N/A N/A (6.04)
International Equity
Service Shares(1) (1.76) N/A 6.64
Series A Investor Shares(35) (6.39) N/A 6.31
Institutional Shares(39) (1.60) N/A 10.44
Series B Investor Shares(40) N/A N/A (17.83)
International Emerging Markets
Service Shares(41)
Series A Investor Shares(41) N/A N/A (19.40)
Institutional Shares(41) N/A N/A (23.21)
Series B Investor Shares(42) N/A N/A (19.30)
N/A N/A N/A
</TABLE>
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<PAGE> 157
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
FOR THE FOR THE 5
YEAR ENDED YEARS ENDED SINCE COMMENCEMENT OF
PORTFOLIO 3/31/95 3/31/95 OPERATIONS
--------- ------- ------- ----------
<S> <C> <C> <C>
Balanced
Service Shares(1) 6.38% N/A 5.63%
Series A Investor Shares(43) 1.53 N/A 8.36
Institutional Shares(44) 6.62 N/A 8.60
Series B Investor Shares(45) N/A N/A 2.67
</TABLE>
- -------------------------------
(1) Commenced operations on July 29, 1993.
(2) Commenced operations on February 5, 1992.
(3) Commenced operations on November 1, 1989.
(4) Class had not commenced operations at March 31, 1995.
(5) Commenced operations on May 14, 1990.
(6) Commenced operations on January 21, 1993.
(7) Class had not commenced operations at March 31, 1995.
(8) Commenced operations on May 11, 1992.
(9) Commenced operations on April 20, 1992.
(10) Class had not commenced operations at March 31, 1995.
(11) Commenced operations on December 1, 1992.
(12) Commenced operations on October 13, 1994.
(13) Commenced operations on October 3, 1994.
(14) Commenced operations on September 1, 1993.
(15) Commenced operations on November 17, 1993.
(16) Class had not commenced operations at March 31, 1995.
(17) Commenced operations on September 23, 1993.
(18) Commenced operations on May 20, 1994.
(19) Commenced operations on September 17, 1993.
(20) Class had not commenced operations at March 31, 1995.
(21) Commenced operations on October 4, 1994.
(22) Commenced operations on October 3, 1994.
(23) Commenced operations on May 2, 1992.
(24) Commenced operations on May 20, 1992.
(25) Class had not commenced operations at March 31, 1995.
(26) Commenced operations on July 28, 1993.
(27) Commenced operations on March 14, 1992.
(28) Class had not commenced operations at March 31, 1995.
(29) Commenced operations on September 15, 1993.
(30) Commenced operations on September 14, 1993.
(31) Class had not commenced operations at March 31, 1995.
(32) Commenced operations on October 13, 1993.
(33) Commenced operations on September 13, 1993.
(34) Class had not commenced operations at March 31, 1995.
(35) Commenced operations on June 2, 1992.
(36) Class had not commenced operations at March 31, 1995.
(37) Commenced operations on April 13, 1992.
(38) Commenced operations on October 3, 1994.
(39) Commenced operations on April 27, 1992.
(40) Commenced operations on October 3, 1994.
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<PAGE> 158
(41) Commenced operations on June 17, 1994.
(42) Class had not commenced operations at March 31, 1995.
(43) Commenced operations on May 14, 1990.
(44) Commenced operations on May 1, 1992.
(45) Commenced operations on October 3, 1994.
(46) Reflects total returns prior to investing all of its assets in
the Master Portfolio.
No shares of any class of the International Fixed Income Portfolio had
been issued prior to March 31, 1995.
Each class of the Non-Money Market Portfolios 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 a
Non-Money Market Portfolio's shares with other performance measures. For
example, in comparing the total return of a Non-Money Market 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 Shearson Lehman Hutton Government Corporate Bond
Index, as appropriate, a Non-Money Market 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
such Non-Money Market 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. A Non-Money Market 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.
NON-MONEY MARKET PORTFOLIO YIELD. The Balanced, Managed Income,
Tax-Free Income, Intermediate Government, Ohio Tax-Free Income, Pennsylvania
Tax-Free Income, Short-Term Bond, Intermediate-Term Bond, Government Income and
International Fixed Income Portfolios may advertise their yields on their
Service, Series A Investor, Series B Investor and Institutional Shares. Under
the rules of the SEC, each such Portfolio advertising the respective yields for
its Service, Series A Investor, Series B Investor and Institutional Shares must
calculate yield using the following formula:
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<PAGE> 159
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 a 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> 160
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) a 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 a Non-Money Market Portfolio, a 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.
Each of the Tax-Free Income, Ohio Tax-Free Income and Pennsylvania
Tax-Free Income Portfolios may advertise the tax-equivalent yield for its
shares of a specified class. Under the rules of the SEC, such a Portfolio
advertising its tax-equivalent yield 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.
The annualized yield information for the 30-day period ended March 31,
1995 for the Portfolios referenced below was as follows:
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<PAGE> 161
<TABLE>
<CAPTION>
TAX-EQUIVALENT YIELD
(ASSUMES A FEDERAL INCOME
PORTFOLIO YIELD TAX RATE OF 28%)
--------- ----- ----------------
<S> <C> <C>
Managed Income
Service Shares 6.56% N/A
Series A Investor Shares 6.08 N/A
Institutional Shares 6.81 N/A
Series B Investor Shares N/A N/A
Tax-Free Income
Service Shares 4.94% 6.86%
Series A Investor Shares 4.51 6.26
Institutional Shares 5.17 7.18
Series B Investor Shares N/A N/A
Intermediate Government
Service Shares 6.70 N/A
Series A Investor Shares 6.44 N/A
Institutional Shares 6.93 N/A
Series B Investor Shares N/A N/A
Ohio Tax-Free income
Service Shares 5.78 8.03
Series A Investor Shares 5.52 7.67
Institutional Shares 6.00 8.33
Series B Investor Shares 5.10 7.08
Pennsylvania Tax-Free Income
Service Shares 5.32 7.39
Series A Investor Shares 4.90 6.81
Institutional Shares 5.55 7.71
Series B Investor Shares 4.65 6.46
Short-Term Bond
Service Shares 6.20 N/A
Series A Investor Shares 5.89 N/A
Institutional Shares 6.42 N/A
Series B Investor Shares N/A N/A
Intermediate-Term Bond
Service Shares 6.27 N/A
Series A Investor Shares 6.06 N/A
Institutional Shares 6.53 N/A
Series B Investor Shares N/A N/A
Government Income
Service Shares N/A N/A
Series A Investor Shares 7.18 N/A
Institutional Shares N/A N/A
Series B Investor Shares 6.92 N/A
</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 a Portfolio over a specified period of time,
the Fund may provide certain
-92-
<PAGE> 162
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 a Non-Money Market Portfolio.
The Money and Non-Money Market Municipal Portfolios 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, Tables 2, 3, 4, 5 and 6
show Pennsylvania, Ohio, North Carolina, Virginia and 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 Pennsylvania
Municipal Money Market and Pennsylvania Tax-Free Income Portfolios, the Ohio
Municipal Money Market and Ohio Tax-Free Income Portfolios, the North Carolina
Municipal Money Market Portfolio, the Virginia Municipal Money Market
Portfolio, and the New Jersey Municipal Money Market Portfolio, respectively.
The yields below are for illustration purposes only and are not intended to
represent current or future yields for the Money and Non-Money Market Municipal
Portfolios, which may be higher or lower than the yields shown.
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<PAGE> 163
TABLE 1
<TABLE>
<CAPTION>
Federal TAX-EXEMPT YIELD
1995 Taxable Marginal
Income Bracket Tax Rate* 3.0% 3.5% 4.0% .5% 5.0% 5.5% 6.0%
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Single Return Joint Return
$ 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> 164
TABLE 2
<TABLE>
<CAPTION>
Approx.
Combined
Federal
and PA TAX-EXEMPT YIELD
1995 Federal Marginal
Taxable Income Bracket Tax Rate* 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Single Return Joint Return
$ 0 - $ 23,350 $ 0 - $39,000 17.380% 3.631% 4.236% 4.841% 5.447% 6.052% 6.657% 7.262%
$23,351 - $ 56,550 $ 39,001 - $94,250 30.016% 4.287% 5.001% 5.716% 6.430% 7.144% 7.859% 8.573%
$56,551 - $117,950 $ 94,251 -$143,600 32.932% 4.473% 5.219% 5.964% 6.710% 7.455% 8.201% 8.946%
$117,951- $256,500 $143,601 -$256,500 37.792% 4.823% 5.626% 6.430% 7.234% 8.038% 8.841% 9.645%
Over $256,500 Over $256,500 41.291% 5.110% 5.962% 6.813% 7.665% 8.517% 9.368% 10.220%
</TABLE>
*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 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 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.
-95-
<PAGE> 165
TABLE 3
<TABLE>
<CAPTION>
Weighted Approximate
Federal Ave.Ohio Combined Federal Tax-Exempt Yield
1995 Marginal Marginal and Ohio
Income Bracket* Tax Rate Tax Rate* Marginal Tax Rate* 3.0% 3.5% 4.0% 4.5%
- -------------- -------- -------- ----------------- ---- ----- ----- ------
Single Return Taxable Yield - Single Return
- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
0 - 23,350 15.0% 2.549% 17.166% 3.622% 4.225% 4.829% 5.433%
23,351 - 56,550 28.0% 4.828% 31.476% 4.378% 5.108% 5.837% 6.567%
56,551 - 100,000 31.0% 5.543% 34.824% 4.603% 5.370% 6.137% 6.904%
100,001 - 117,950 31.0% 6.900% 35.761% 4.670% 5.448% 6.227% 7.005%
117,951 - 200,000 36.0% 6.900% 40.416% 5.035% 5.874% 6.713% 7.552%
200,001 - 256,500 36.0% 7.500% 40.800% 5.068% 5.912% 6.757% 7.601%
Over 256,500 39.6% 7.500% 44.130% 5.370% 6.265% 7.159% 8.054%
</TABLE>
<TABLE>
<CAPTION>
Tax-Exempt Yield
1995
Income Bracket* 5.0% 5.5% 6.0%
- -------------- ------ ----- -----
Single Return Taxable Yield - Single Return
- -------------
<S> <C> <C> <C>
0 - 23,350 6.036% 6.640% 7.243%
23,351 - 56,550 7.297% 8.026% 8.756%
56,551 - 100,000 7.672% 8.439% 9.206%
100,001 - 117,950 7.783% 8.562% 9.340%
117,951 - 200,000 8.392% 9.231% 10.070%
200,001 - 256,500 8.446% 9.291% 10.135%
Over 256,500 8.949% 9.844% 10.739%
</TABLE>
<TABLE>
<CAPTION>
Weighted Approximate
Federal Ave.Ohio Combined Federal Tax-Exempt Yield
1995 Marginal Marginal and Ohio
Income Bracket* Tax Rate Tax Rate* Marginal Tax Rate* 3.0% 3.5% 4.0% 4.5%
- -------------- -------- -------- ----------------- ---- ----- ----- ------
Joint Return Taxable Yield - Joint Return
- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
0 - 39,000 15.0% 2.711% 17.304% 3.628% 4.232% 4.837% 5.442%
39,001 - 94,250 28.0% 4.881% 31.514% 4.380% 5.111% 5.841% 6.571%
94,251 - 100,000 31.0% 5.646% 34.896% 4.608% 5.376% 6.144% 6.912%
100,001 - 143,600 31.0% 6.555% 35.523% 4.653% 5.428% 6.204% 6.979%
143,601 - 200,000 36.0% 6.555% 40.195% 5.016% 5.852% 6.688% 7.524%
200,001 - 219,900 36.0% 7.125% 40.560% 5.047% 5.888% 6.729% 7.571%
219,901 - 256,500 36.0% 7.500% 40.800% 5.068% 5.912% 6.757% 7.601%
Over 256,500 39.6% 7.500% 44.130% 5.370% 6.265% 7.159% 8.054%
</TABLE>
<TABLE>
<CAPTION>
Tax-Exempt Yield
1995
Income Bracket* 5.0% 5.5% 6.0%
- -------------- ------ ----- -----
Joint Return Taxable Yield - Joint Return
- ------------
<S> <C> <C> <C>
0 - 39,000 6.046% 6.651% 7.255%
39,001 - 94,250 7.301% 8.031% 8.761%
94,251 - 100,000 7.680% 8.448% 9.216%
100,001 - 143,600 7.755% 8.530% 9.306%
143,601 - 200,000 8.361% 9.197% 10.033%
200,001 - 219,900 8.412% 9.253% 10.094%
219,901 - 256,500 8.446% 9.291% 10.135%
Over 256,500 8.949% 9.844% 10.739%
</TABLE>
*The income brackets applicable to the state of Ohio do not correspond to the
Federal taxable income brackets. In addition, Ohio taxable income will likely
be different than Federal taxable income because it is computed by reference to
Federal adjusted gross income with specifically-defined Ohio modifications and
exemptions, and does not consider many of the deductions allowed from Federal
adjusted gross income in computing Federal taxable income. In arriving at the
combined marginal tax rate, a weighted average of Ohio's marginal tax rate was
used within each Federal taxable income bracket up to $100,000, at which point
Ohio's actual 6.9% marginal rate was applied up to taxable income of $200,000,
at which point Ohio's top actual marginal rate of 7.5% was applied. The Ohio
joint filing credit has been taken into account in determining the
-96-
<PAGE> 166
marginal tax rate for the taxable yield on joint returns up to the maximum
credit amount allowed. However, no other 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 1994, taxpayers with
adjusted gross income in excess of a $111,800 threshold amount 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 $111,800 threshold 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 1994 is
from $111,800 to $234,301 and for married taxpayers filing a joint return the
range is from $167,700 to $290,201. 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 1994.
-97-
<PAGE> 167
TABLE 4
<TABLE>
<CAPTION>
1995 Taxable North
Income Bracket Federal Carolina Combined Federal Tax-Exempt Yield
Marginal Marginal and North Carolina
Single Return Joint Return Tax Rate Tax Rate Marginal Tax Rate* 3.0% 3.5% 4.0%
- ------------- ------------ -------- -------- ---------------------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
0 - 12,750 0 - 21,250 15.0% 6.00% 20.100% 3.755% 4.380% 5.006%
12,751 - 23,350 21,251 - 39,000 15.0% 7.00% 20.950% 3.795% 4.428% 5.060%
23,351 - 56,550 39,001 - 94,250 28.0% 7.00% 33.040% 4.480% 5.227% 5.974%
56,551 - 60,000 94,251 -100,000 31.0% 7.00% 35.830% 4.675% 5.454% 6.233%
60,001 - 117,950 100,001 -143,600 31.0% 7.75% 36.348% 4.713% 5.499% 6.284%
117,951 - 256,500 143,601 -256,500 36.0% 7.75% 40.960% 5.081% 5.928% 6.775%
Over 256,500 Over 256,500 39.6% 7.75% 44.281% 5.384% 6.282% 7.179%
</TABLE>
<TABLE>
<CAPTION>
1995 Taxable
Income Bracket Tax-Exempt Yield
Single Return Joint Return 4.5% 5.0% 5.5% 6.0%
- ------------- ------------ ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
0 - 12,750 0 - 21,250 5.632% 6.258% 6.884% 7.509%
12,751 - 23,350 21,251 - 39,000 5.693% 6.325% 6.958% 7.590%
23,351 - 56,550 39,001 - 94,250 6.720% 7.467% 8.214% 8.961%
56,551 - 60,000 94,251 -100,000 7.013% 7.792% 8.571% 9.350%
60,001 - 117,950 100,001 -143,600 7.070% 7.855% 8.641% 9.426%
117,951 - 256,500 143,601 -256,500 7.622% 8.469% 9.316% 10.163%
Over 256,500 Over 256,500 8.076% 8.974% 9.871% 10.768%
</TABLE>
*The taxable income brackets applicable to North Carolina 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 North Carolina
marginal tax rate changes. When applying these brackets, Federal taxable
income may be different than North Carolina taxable income. 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.
-98-
<PAGE> 168
TABLE 5
<TABLE>
<CAPTION>
1995 Taxable
Income Bracket Federal Virginia Combined Federal Tax-Exempt Yield
Marginal Marginal and Virginia
Single Return Joint Return Tax Rate Tax Rate Marginal Tax Rate* 3.0% 3.5% 4.0% 4.5%
- ------------- ------------ -------- -------- ------------------ ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
0 - 22,750 0 - 38,000 15.0% 5.75% 19.888% 3.745% 4.369% 4.993% 5.617%
22,751 - 55,100 38,001 - 91,850 28.0% 5.75% 32.140% 4.421% 5.158% 5.894% 6.631%
55,101 - 115,000 91,851 - 140,000 31.0% 5.75% 34.968% 4.613% 5.382% 6.151% 6.920%
115,001 - 250,000 140,001 - 250,000 36.0% 5.75% 39.680% 4.973% 5.802% 6.631% 7.460%
OVER 250,000 OVER 250,000 39.6% 5.75% 43.073% 5.270% 6.148% 7.027% 7.905%
</TABLE>
<TABLE>
<CAPTION>
1995 Taxable
Income Bracket Tax-Exempt Yield
Single Return Joint Return 5.0% 5.5% 6.0%
- ------------- ------------ ---- ---- ----
<S> <C> <C> <C> <C>
0 - 22,750 0 - 38,000 6.241% 6.865% 7.489%
22,751 - 55,100 38,001 - 91,850 7.368% 8.105% 8.842%
55,101 - 115,000 91,851 - 140,000 7.688% 8.457% 9.226%
115,001 - 250,000 140,001 - 250,000 8.289% 9.118% 9.947%
OVER 250,000 OVER 250,000 8.783% 9.661% 10.540%
</TABLE>
*The taxable income brackets applicable to Virginia do not correspond to the
Federal taxable income brackets. Because Virginia imposes a maximum tax rate
of 5.75% on taxable income over $17,000, the taxable income brackets presented
in this table represent the breakpoints only for the Federal marginal tax rate
changes. When applying these brackets, Federal taxable income may be different
than Virginia taxable income. 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 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 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.
-99-
<PAGE> 169
TABLE 6
<TABLE>
<CAPTION>
Approximate
Federal NJ Combined Federal Tax-Exempt Yield
1995 Taxable Marginal Marginal and NJ
Income Bracket* Tax Rate Tax Rate Marginal Tax Rate 3.0% 3.5% 4.0% 4.5% 5.0%
--------------- -------- -------- ----------------- ---- ---- ---- ---- ----
Single Return Taxable Yield - Single Return
-------------
<S> <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%
20,001 - 23,350 15.0% 2.125% 16.806% 3.606% 4.207% 4.808% 5.409% 6.010%
23,251 - 35,000 28.0% 2.125% 29.530% 4.257% 4.967% 5.676% 6.386% 7.095%
35,001 - 40,000 28.0% 4.250% 31.060% 4.352% 5.077% 5.802% 6.527% 7.253%
40,001 - 56,550 28.0% 6.013% 32.329% 4.433% 5.172% 5.911% 6.650% 7.389%
56,551 - 75,000 31.0% 6.013% 35.149% 4.626% 5.397% 6.168% 6.939% 7.710%
75,001 - 117,950 31.0% 6.580% 35.540% 4.654% 5.430% 6.205% 6.981% 7.757%
117,951 - 256,500 36.0% 6.580% 40.211% 5.018% 5.854% 6.690% 7.526% 8.363%
OVER 256,500 39.6% 6.580% 43.574% 5.317% 6.203% 7.089% 7.975% 8.861%
</TABLE>
<TABLE>
<CAPTION>
Tax-Exempt Yield
1995 Taxable
Income Bracket* 5.5% 6.0% 6.5% 7.0%
--------------- ---- ---- ---- ----
Single Return Taxable Yield - Single Return
-------------
<S> <C> <C> <C> <C>
0 - 20,000 6.582% 7.181% 7.779% 8.378%
20,001 - 23,350 6.611% 7.212% 7.813% 8.414%
23,251 - 35,000 7.805% 8.514% 9.224% 9.933%
35,001 - 40,000 7.978% 8.703% 9.428% 10.154%
40,001 - 56,550 8.128% 8.866% 9.605% 10.344%
56,551 - 75,000 8.481% 9.252% 10.023% 10.794%
75,001 - 117,950 8.532% 9.308% 10.084 10.859%
117,951 - 256,500 9.199% 10.035% 10.872% 11.708%
OVER 256,500 9.747% 10.633% 11.520% 12.406%
</TABLE>
<TABLE>
<CAPTION>
Approximate
Federal NJ Combined Federal Tax-Exempt Yield
1995 Taxable Marginal Marginal and NJ
Income Bracket* Tax Rate Tax Rate Marginal Tax Rate 3.0% 3.5% 4.0% 4.5% 5.0%
--------------- -------- -------- ----------------- ---- ---- ---- ---- ----
Joint Return Taxable Yield - Joint Return
------------
<S> <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%
20,001 - 39,000 15.0% 2.125% 16.806% 3.606% 4.207% 4.808% 5.409% 6.010%
39,001 - 50,000 28.0% 2.125% 29.530% 4.257% 4.967% 5.676% 6.386% 7.095%
50,001 - 70,000 28.0% 2.975% 30.142% 4.294% 5.010% 5.726% 6.442% 7.157%
70,001 - 80,000 28.0% 4.250% 31.060% 4.352% 5.077% 5.802% 6.527% 7.253%
80,001 - 94,250 28.0% 6.013% 32.329% 4.433% 5.172% 5.911% 6.650% 7.389%
94,251 - 143,600 31.0% 6.013% 35.149% 4.626% 5.397% 6.168% 6.939% 7.710%
143,601 - 150,000 36.0% 6.013% 39.848% 4.987% 5.819% 6.650% 7.481% 8.312%
150,001 - 256,500 36.0% 6.580% 40.211% 5.018% 5.854% 6.690% 7.526% 8.363%
OVER 256,500 39.6% 6.580% 43.574% 5.317% 6.203% 7.089% 7.975% 8.861%
</TABLE>
<TABLE>
<CAPTION>
Tax-Exempt Yield
1995 Taxable
Income Bracket* 5.5% 6.0% 6.5% 7.0%
--------------- ---- ---- ---- ----
Joint Return Taxable Yield - Joint Return
------------
<S> <C> <C> <C> <C>
0 - 20,000 6.582% 7.181% 7.779% 8.378%
20,001 - 39,000 6.611% 7.212% 7.813% 8.414%
39,001 - 50,000 7.805% 8.514% 9.224% 9.933%
50,001 - 70,000 7.873% 8.589% 9.305% 10.020%
70,001 - 80,000 7.978% 8.703% 9.428% 10.154%
80,001 - 94,250 8.128% 8.866% 9.605% 10.344%
94,251 - 143,600 8.481% 9.252% 10.023% 10.794%
143,601 - 150,000 9.144% 9.975% 10.806 11.637%
150,001 - 256,500 9.199% 10.035% 10.872% 11.708%
OVER 256,500 9.747% 10.633% 11.520% 12.406%
</TABLE>
-100-
<PAGE> 170
* 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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MISCELLANEOUS. Yields on shares of a 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 Portfolios.
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 a Portfolio
investment are reinvested by being paid in additional Portfolio shares, any
future income or capital appreciation of a 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 a 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 a
Portfolio), as well as the views of the Portfolios' adviser and/or sub-advisers
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 a 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 a Portfolio. In
addition, advertisement or shareholder communications may include a discussion
of certain attributes or benefits to be derived by an investment in a
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 Portfolios and their
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shareholders that are not described in the Prospectuses. No attempt is made to
present a detailed explanation of the tax treatment of the Portfolios or their
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.
Each 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, each 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, each
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 a 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 a 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
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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 each 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 a Portfolio has not invested more than 5% of the value of
its total assets in securities of such issuer and as to which a Portfolio does
not hold more than 10% of the outstanding voting securities of such issuer),
and no more than 25% of the value of each 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.
Each of the Money and Non-Money Market Municipal Portfolios is
designed to provide investors with tax-exempt interest income. Shares of the
Money and Non-Money Market Municipal Portfolios 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 Money and Non-Money Market Municipal Portfolios
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 Money and Non-Money Market Municipal Portfolios 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 each such 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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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 a Money or Non-Money Market Municipal 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 such Portfolio.
The Ohio Municipal Money Market and Ohio Tax-Free Income Portfolios
are not subject to the Ohio personal income tax, school district income taxes
in Ohio, the Ohio corporation franchise tax, or the Ohio dealers intangibles
tax, provided that, with respect to the Ohio corporation franchise tax and the
Ohio dealers intangibles tax, the Fund timely files the annual report required
by Section 5733.09 of the Ohio Revised Code. Distributions with respect to the
Ohio Municipal Money Market and Ohio Tax-Free Income Portfolios properly
attributable to proceeds of insurance paid to those Portfolios that represent
maturing or matured interest on defaulted Obligations held by those Portfolios
and that are excluded from gross income for federal income tax purposes will
not be subject to Ohio personal income tax or municipal or school district
income taxes in Ohio if, and to the same extent as, such interest would not
have been subject to such taxes if paid in the normal course by the issuer of
such defaulted Obligations.
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An investment in a Portfolio (including the North Carolina Municipal
Money Market Portfolio) by a corporation subject to the North Carolina
franchise tax will be included in the capital stock, surplus and undivided
profits base in computing the North Carolina franchise tax. Investors in a
Portfolio including, in particular, corporate investors which may be subject to
the North Carolina franchise tax, should consult their tax advisors with
respect to the effects on such tax of an investment in a Portfolio and with
respect to their North Carolina tax situation in general.
Distributions of investment company taxable income will be taxable
(other than interest on tax-exempt Municipal Obligations held by the Money
Market and Non-Money Market Municipal Portfolios and 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 distribution from a 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 Money Market and
Non-Money Market Municipal Portfolios may each purchase securities that do not
bear Tax-Exempt Interest. Any income on such securities recognized by such a
Portfolio will be distributed and will be taxable to its shareholders.
Each 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) of a Non-Money Market Portfolio for any taxable year
generally qualify for the dividends received deduction to the extent of the
gross amount of "qualifying dividends" received by such 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
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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 and 38% for taxable income
between $15,000,000 and 18,333,333. 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 a 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 a Portfolio holds the futures contract
("the 40-60 rule"). The amount of any capital gain or loss actually realized
by a 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, a 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, a 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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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 Portfolios,
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 a
Portfolio's futures contracts and securities that qualify as part of a
"designated hedge," as defined in the Code, may be netted.
Special rules govern the Federal income tax treatment of the portfolio
transactions of the International Equity, International Emerging Markets and
International Fixed Income Portfolios and certain transactions of the other
Portfolios that are denominated in terms of a currency other than the U.S.
dollar or determined by reference to the value of one or more currencies other
than the U.S. dollar. The types of transactions covered by the special rules
include the following: (i) the acquisition of, or becoming the obligor under,
a bond or other debt instrument (including, to the extent provided in Treasury
regulations, certain preferred stock); (ii) the accruing of certain trade
receivables and payables; (iii) the entering into or acquisition of any forward
contract or similar financial instruments; and (iv) the entering into or
acquisition of any futures contract, option or similar financial instrument, if
such instrument is not marked-to-market. The disposition of a currency other
than the U.S. dollar by a U.S. taxpayer also is treated as a transaction
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subject to the special currency rules. With respect to such transactions,
foreign currency gain or loss is calculated separately from any gain or loss on
the underlying transaction and is normally taxable as ordinary gain or loss. A
taxpayer may elect to treat as capital gain or loss foreign currency gain or
loss arising from certain identified forward contracts that are capital assets
in the hands of the taxpayer and which are not part of a straddle ("Capital
Asset Election"). In accordance with Treasury regulations, certain
transactions with respect to which the taxpayer has not made the Capital Asset
Election and that are part of a "Section 988 hedging transaction" (as defined
in the Code and the Treasury regulations) are integrated and treated as a
single transaction or otherwise treated consistently for purposes of the Code.
"Section 988 hedging transactions" (as identified by such Treasury regulations)
are not subject to the mark-to-market or loss deferral rules under the Code.
Some of the non-U.S. dollar-denominated investments that the Portfolios may
make (such as non-U.S. dollar-denominated debt securities and obligations and
preferred stock) and some of the foreign currency contracts the International
Equity, International Emerging Markets and International Fixed Income
Portfolios may enter into will be subject to the special currency rules
described above. Gain or loss attributable to the foreign currency component
of transactions engaged in by a Portfolio which is not subject to the special
currency rules (such as foreign equity investments other than certain preferred
stocks) will be treated as capital gain or loss and will not be segregated from
the gain or loss on the underlying transaction.
In addition, certain forward foreign currency contracts held by a
Portfolio at the close of the Fund's taxable year will be subject to
"mark-to-market" treatment. If the Fund makes the Capital Asset Election with
respect to such contracts, the contract will be subject to the 40-60 rule
described above. Otherwise, such gain or loss will be ordinary in nature. To
receive such Federal income tax treatment, a foreign currency contract must
meet the following conditions: (1) the contract must require delivery of a
foreign currency of a type in which regulated futures contracts are traded or
upon which the settlement value of the contract depends; (2) the contract must
be entered into at arm's length at a price determined by reference to the price
in the interbank market; and (3) the contract must be traded in the interbank
market. The Treasury Department has broad authority to issue regulations under
these provisions respecting foreign currency contracts. As of the date of this
Statement of Additional Information the Treasury has not issued any such
regulations. Forward foreign currency contracts entered into by the
International Equity, International Emerging Markets and International Fixed
Income Portfolios also may result in the creation of one or more straddles for
Federal income tax purposes, in which case certain loss deferral, short sales,
and
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wash sales rules and requirements to capitalize interest and carrying charges
may apply.
If for any taxable year any 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 such
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). Each 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 Portfolios 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 each 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, each
Portfolio may be subject to the tax laws of such
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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 after
the assets belonging to such class have been distributed to its shareholders.
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MISCELLANEOUS
COUNSEL. The law firm of Drinker Biddle & Reath, 1345 Chestnut Street,
Philadelphia, Pennsylvania 19107-3496, serves as the Fund's counsel. The law
firm of Stradley, Ronon, Stevens & Young, 2600 One Commerce Square,
Philadelphia, Pennsylvania 19103, serves as the Trust's counsel.
INDEPENDENT ACCOUNTANTS. Coopers & Lybrand, L.L.P., 2400 Eleven Penn
Center, Philadelphia, Pennsylvania 19103, serves as the Fund's and the Trust'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 which had commenced operations as
of that date 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%; First Citizens Bank,
McWood & Co., 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%;
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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, 32.2%; 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 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
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company, or from purchasing shares of such a company as agent for and upon the
order of customers. PIMC, BlackRock, PCM, PEAC and PNC Bank are subject to
such banking laws and regulations.
PIMC, BlackRock, PCM, PEAC 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 "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 Fund's Annual Report to Shareholders for the fiscal year ended
September 30, 1994 (the "1994 Annual Report") and its Semi-Annual Report to
Shareholders dated March 31, 1995 (the "1995 Semi-Annual Report") are
incorporated by reference in this Statement of Additional Information. The
financial statements and notes thereto in the 1994 Annual Report and the 1995
Semi-
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<PAGE> 184
Annual Report are incorporated in this Statement of Additional Information by
reference. The financial statements included in the 1994 Annual Report have
been audited by the Fund's independent accountants, Coopers & Lybrand, L.L.P.,
whose reports thereon are incorporated herein by reference. Such financial
statements have been incorporated herein in reliance upon such report given
upon their authority as experts in accounting and auditing. Additional copies
of the 1994 Annual Report and the 1995 Semi-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.
With respect to the Master Portfolio, the financial statements and
notes thereto included in the Trust's Annual Report with respect to the Master
Portfolio for the fiscal year ended November 30, 1994 (the "1994 Master
Portfolio Annual Report") and the financial statements and notes thereto
included in its Semi-Annual Report with respect to the Master Portfolio dated
May 31, 1995 (the "1995 Master Portfolio Semi-Annual Report") are incorporated
by reference in this Statement of Additional Information. The financial
statements and notes thereto in the 1994 Master Portfolio Annual Report have
been audited by the Trust's independent accountants, Coopers & Lybrand, L.L.P.,
whose reports thereon are incorporated herein by reference. Such financial
statements have been incorporated herein in reliance upon such reports given
upon their authority as experts in accounting and auditing.
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<PAGE> 185
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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<PAGE> 190
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.
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"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"
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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.
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"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.
410-244-7742 (general fax no.)
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THE PNC(R) FUND
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
(1) Included in Part A are audited Financial
Highlights for the Registrant's 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, Value Equity, Growth
Equity, Index Equity, Small Cap Value Equity,
Small Cap Growth Equity, Core Equity,
International Equity, International Emerging
Markets, Balanced, Managed Income, Tax-Free
Income, Intermediate Government, Ohio
Tax-Free Income, Pennsylvania Tax-Free
Income, Short-Term Bond and Intermediate-Term
Bond Portfolios for the fiscal years ended
September 30, 1994, September 30, 1993,
September 30, 1992, September 30, 1991 and
September 30, 1990.
(2) Included in Part A are unaudited semi-annual
Financial Highlights for the Registrant's
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 Index
Equity Portfolios for the six month period
ended March 31, 1995.
(3) Incorporated herein by reference into Part B
are the Registrant's financial statements,
notes thereto and auditor's report thereon
included in the Registrant's September 30,
1994 Annual Reports to Shareholders and in
the Registrant's March 31, 1995 Semi-Annual
Reports to Shareholders, all of which reports
have been previously filed with the
Commission. The Trust's financial
statements, notes thereto and auditor's
report thereon with respect to the Master
Portfolio included in the Trust's November
30, 1994 Annual Report and in the Trust's May
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31, 1995 Semi-Annual Report, both of which
have been previously filed with the
Commission, are also incorporated herein by
reference into Part B.
(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
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<PAGE> 199
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.
(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
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<PAGE> 200
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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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
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<PAGE> 202
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
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<PAGE> 203
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
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<PAGE> 204
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.
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<PAGE> 205
(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.
(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,
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<PAGE> 206
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.
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<PAGE> 207
(d) Appendix B to Custodian Agreement
dated October 4, 1989 between
Registrant and PNC Bank, National
Association is incorporated herein
by reference to Exhibit (8)(d) of
Post-Effective Amendment No. 15 to
Registrant's Registration Statement
on Form N-1A filed on May 11, 1995.
(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
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<PAGE> 208
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) Appendix A to the Administration
Agreement dated January 18, 1993
among Registrant, PFPC Inc. and
Provident
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<PAGE> 209
Distributors, Inc. is incorporated
herein by reference to Exhibit
(9)(c) of Post-Effective Amendment
No. 15 to Registrant's Registration
Statement on Form N-1A filed on May
11, 1995.
(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) 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.
(f) 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.
(g) 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.
(h) 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
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<PAGE> 210
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.
(i) 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.
(j) Appendix C to Transfer Agency
Agreement dated October 4, 1989
between Registrant and PFPC Inc. is
incorporated herein by reference to
Exhibit (9)(j) of Post-Effective
Amendment No. 15 to Registrant's
Registration Statement on Form N-1A
filed on May 11, 1995.
(k) 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.
(l) 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.
(m) Trademark License Agreement between
Registrant and PNC Bank Corp. is
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<PAGE> 211
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 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.
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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.
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<PAGE> 213
(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.
(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.
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.
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<PAGE> 214
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>
C-18
<PAGE> 215
<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-32 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> 216
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> 217
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> 218
(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> 219
are engaged in any other business, profession, vocation or employment of a
substantial nature.
C-23
<PAGE> 220
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> 221
<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> 222
<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> 223
<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> 224
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> 225
<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>
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<PAGE> 226
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>
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<PAGE> 227
<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> 228
<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> 229
<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> 230
<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>
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<PAGE> 231
<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> 232
<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>
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<PAGE> 233
<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>
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<PAGE> 234
<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> 235
<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> 236
<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> 237
<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> 238
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> 239
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> 240
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> 241
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> 242
(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> 243
(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> 244
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> 245
(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) 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> 246
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. 17 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Philadelphia and the
Commonwealth of Pennsylvania on the 5th 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. 17 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>
Chairman of the
/s/ G. Willing Pepper Board and President October 5, 1995
- --------------------- (Principal Executive
(G. Willing Pepper) Officer)
*David R. Wilmerding, Jr. Vice-Chairman of October 5, 1995
- -------------------------- the Board
(David R. Wilmerding, Jr.)
Vice-President
/s/ Edward J. Roach and Treasurer
- -------------------- (Principal
(Edward J. Roach) Financial and
Accounting Officer) October 5, 1995
*Robert R. Fortune Trustee October 5, 1995
- ------------------------
(Robert R. Fortune)
*Philip E. Coldwell Trustee October 5, 1995
- ------------------------
(Philip E. Coldwell)
*Rodney D. Johnson Trustee October 5, 1995
- ------------------------
(Rodney D. Johnson)
*Anthony M. Santomero Trustee October 5, 1995
- ------------------------
(Anthony M. Santomero)
</TABLE>
*By:/s/ Edward J. Roach
---------------------------------
Edward J. Roach, Attorney-in-Fact
<PAGE> 247
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> 248
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> 249
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> 250
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> 251
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> 252
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> 253
EXHIBIT INDEX
Exhibit No. Description Page No.
- ----------- ----------- --------
(11) (a) Consent of Coopers & Lybrand, L.L.P.
(b) Consent of Drinker Biddle & Reath.
(18) Plan Pursuant to Rule 18f-3 for Operation of a
Multi-Class Distribution System.
<PAGE> 1
EXHIBIT (11)(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Post-Effective Amendment
No. 17 to the Registration Statement on Form N-1A (File No. 33-26305) under the
Securities Act of 1933 of the PNC Fund of each of our reports dated November
23, 1994 on our audits of the financial statements and financial highlights as
of September 30, 1994 and for the respective periods then ended. We also
consent to the incorporation by reference of our reports dated January 23, 1995
on our audits of the financial statements and financial highlights of DFA
Investment Dimensions Group Inc. and The DFA Investment Trust Company as of
November 30, 1994 and for the respective periods then ended.
We also consent to the reference to our Firm under the captions "Financial
Highlights" in the applicable prospectuses and "Miscellaneous--Independent
Accountants" and "Financial Statements" in the Statement of Additional
Information.
/s/ COOPERS & LYBRAND L.L.P.
- ----------------------------
2400 Eleven Penn Center
Philadelphia, PA 19103
October 5, 1995
<PAGE> 1
EXHIBIT (11)(b)
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. 17 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 5, 1995
<PAGE> 1
EXHIBIT (18)
THE PNC(R) FUND
(THE "FUND")
PLAN PURSUANT TO RULE 18f-3 FOR OPERATION OF
A MULTI-CLASS DISTRIBUTION SYSTEM
I. INTRODUCTION
On February 23, 1995, the Securities and Exchange Commission (the
"Commission") promulgated Rule 18f-3 under the Investment Company Act of 1940,
as amended (the "1940 Act"), which permits the creation and operation of a
multi-class distribution system without the need to obtain an exemptive order
under Section 18 of the 1940 Act. Rule 18f-3, which became effective on April
3, 1995, requires an investment company to file with the Commission a written
plan specifying all of the differences among the classes, including the various
services offered to shareholders, the different distribution arrangements for
each class, the methods for allocating expenses relating to those differences
and any conversion features or exchange privileges. Currently, the Fund
operates a multi-class distribution system pursuant to an exemptive order
granted by the Commission on August 9, 1994. On September 29, 1995, the Board
of Trustees of the Fund authorized the Fund to operate its current multi-class
distribution system in compliance with Rule 18f-3. This Plan pursuant to Rule
18f-3 shall become effective immediately when it is filed with the Commission.
II. ATTRIBUTES OF CLASSES
A. Generally
Each investment portfolio of the Fund (each a "Portfolio" and,
collectively, the "Portfolios") may initially offer five classes of shares: i)
Service Shares, ii) Series A Investor Shares; iii) Series B Investor Shares;
iv) Series C Investor Shares; and v) Institutional Shares.
In general, shares of each class shall be identical except for
different expense variables (which will result in different yields or total
returns for each class), certain related rights and certain shareholder
services. More particularly, Series A Investor, Series B Investor, Series C
Investor, Service and Institutional Shares of each Portfolio shall represent
equal pro rata interests in the same portfolio of investments of the particular
Portfolio, and shall be identical
<PAGE> 2
in all respects, except for: (a) the impact of (i) distribution, shareholder
servicing and shareholder processing expenses assessed to each particular share
class; and (ii) any incremental expenses identified from time to time that
should be properly allocated to each particular share class so long as any
changes in expense allocations are reviewed and approved by a vote of the Board
of Trustees, including a majority of the non-interested trustees; (b) the fact
that each class shall vote separately on any matter submitted to shareholders
that pertains to (i) the distribution and/or shareholder servicing plan
applicable to such class and (ii) the class expenses borne by such class; (c)
the exchange privileges and/or conversion features of each class of shares; (d)
the designation of each class of shares of a Portfolio; and (e) the different
shareholder services relating to each class of shares.
B. Distribution Arrangements, Expenses and Sales Charges
SERIES A INVESTOR SHARES
Series A Investor Shares shall be available for purchase through PNC
Bank, National Association ("PNC Bank") and its banking affiliates,
institutional investors and registered broker-dealers.
Series A Investor Shares of the Fund's equity portfolios (the "Equity
Portfolios") and fixed income portfolios (the "Fixed Income Portfolios")
generally shall be subject to a front-end sales charge at the rates (and
subject to the reductions and exemptions) described in the prospectus. Series
A Investor Shares of the Fund's money market portfolios (the "Money Market
Portfolios") shall not be subject to a sales load.
Series A Investor Shares of a Portfolio shall be subject to
distribution, shareholder servicing and shareholder processing fees payable to
service organizations. Services provided by service organizations with respect
to the Series A Investor Shares may include: (a) providing reasonable
assistance in connection with the distribution of Series A Investor Shares to
their clients as requested from time to time by the Fund's distributor (the
"Distributor"), which assistance may include forwarding sales literature and
advertising provided by the Distributor; and (b) the following support services
to their clients who may from time to time acquire and beneficially own Series
A Investor Shares: (i) establishing and maintaining accounts and records
relating to clients that invest in Series A Investor Shares; (ii) processing
dividend and distribution payments from the Fund on behalf of clients; (iii)
providing information periodically to clients showing their positions in Series
A Investor Shares; (iv) arranging for bank wires; (v) responding to client
inquiries relating to the services performed by the service organization; (vi)
responding to routine
<PAGE> 3
inquiries from clients concerning their investments in Series A Investor
Shares; (vii) providing subaccounting with respect to Series A Investor Shares
beneficially owned by clients or the information to the Fund necessary for
subaccounting; (viii) if required by law, forwarding shareholder communications
from the Fund (such as proxies, shareholder reports, annual and semi-annual
financial statements and dividend, distribution and tax notices) to clients;
(ix) assisting in processing purchase, exchange and redemption requests from
clients and in placing such orders with the Fund's service contractors; (x)
assisting clients in changing dividend options, account designations and
addresses; (xi) providing clients with a service that invests the assets of
their accounts in Series A Investor Shares pursuant to specific or
pre-authorized instructions; and (xii) providing such other similar services as
the Distributor may reasonably request to the extent the service organization
is permitted to do so under applicable statutes, rules and regulations.
SERIES B AND SERIES C INVESTOR SHARES
Series B and Series C Investor Shares of the Equity and Fixed Income
Portfolios shall be available for purchase through PNC Bank and its banking
affiliates, institutional investors and registered broker-dealers. Series B
and Series C Investor Shares of the Equity and Fixed Income Portfolios
generally shall be subject to a contingent deferred sales charge at the rates
(and subject to the reductions and exemptions) described in the prospectus.
Series B Investor Shares of the Money Market Portfolios shall be
available only to holders of Series B Investor Shares in the Equity Portfolios
and the Fixed Income Portfolios who exchange their Series B investor Shares in
such Portfolios for Series B Investor Shares in the Money Market Portfolios.
Series C Investor Shares of the Money Market Portfolios shall be
available only to holders of Series C Investor Shares in the Equity or Fixed
income Portfolios who exchange their Series C Investor Shares in such
Portfolios for Series C Investor Shares in the Money Market Portfolios.
Series B and Series C Investor Shares of a Portfolio shall be subject
to a distribution fee payable to the Distributor and/or to PNC Mutual Fund
Company ("PMFC") pursuant to a distribution plan. Series B and Series C
Investor Shares of a Portfolio shall also be subject to shareholder servicing
and shareholder processing fees payable to service organizations, the
Distributor and PMFC pursuant to a shareholder servicing and processing plan.
Services provided by service organizations, the Distributor and PMFC to their
customers beneficially owning
<PAGE> 4
Series B and Series C Investor Shares may include: (i) establishing
and maintaining accounts and records relating to their customers that invest in
Series B or Series C Investor Shares; (ii) processing dividend and distribution
payments from the Fund on behalf of customers; (iii) arranging for bank wires;
(iv) providing sub-accounting with respect to Series B or Series C Investor
Shares beneficially owned by customers or the information necessary for
sub-accounting; (v) 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; (vi) assisting in
processing purchase, exchange and redemption requests from customers and
placing such orders with the Fund's service contractors; (vii) assisting
customers in changing dividend options, account designations and addresses;
(viii) providing customers with a service that invests the assets of their
account in Series B or Series C Investor Shares pursuant to specific or
pre-authorized instructions; (ix) providing information periodically to
customers showing their positions in Series B or Series C Investor Shares and
integrating such statements with those of other transactions and balances in
customers' other accounts; (x) responding to customer inquiries relating to the
services performed by the service organization or the Distributor; and (xi)
responding to customer inquiries concerning their investments in Series B or
Series C Investor Shares.
SERVICE SHARES
Service Shares shall be available for purchase by institutions which
act on behalf of their customers maintaining accounts with such institutions
and which provide their customers with certain shareholder services. Service
Shares shall also be available to investors acquiring Service Shares in
connection with certain business combinations and holding such shares
exclusively for their own account and for whom PFPC Inc. provides certain
shareholder services.
Service Shares of a Portfolio shall not be subject to a sales load,
but shall be subject to shareholder servicing and shareholder processing fees
payable to institutions (including PMFC). In consideration of such shareholder
servicing and shareholder processing fees, institutions shall provide services
to their customers which may include: (i) processing purchase and redemption
requests from customers and placing orders with the Fund's transfer agent or
Distributor; (ii) processing dividend payments from the Fund on behalf of
customers; (iii) providing sub-accounting with respect to Service Shares
beneficially owned by customers or the information necessary for
sub-accounting; (iv) responding to customer inquiries relating to the services
performed by the institution and to customer inquiries concerning their
investments in Service
<PAGE> 5
Shares; (v) providing information periodically to customers showing their
positions in Service Shares; and (vi) other similar shareholder liaison
services.
INSTITUTIONAL SHARES
Institutional Shares shall be available from the Distributor for
purchase by institutional investors. Institutional Shares shall not be subject
to a sales load or a separate fee payable pursuant to any distribution plan or
service plan.
C. Exchange Privileges
SERIES A INVESTOR SHARES
A holder of Series A Investor Shares in an Equity or a Fixed Income
Portfolio generally shall be permitted to exchange his shares for Series A
Investor Shares of any other Portfolio of the Fund at the net asset value of
such shares next determined after the transfer agent's receipt of a request for
an exchange. A holder of Series A Investor Shares in a Money Market Portfolio
generally shall be permitted to exchange his shares for Series A Investor
Shares of another Money Market Portfolio, or for Series A Investor Shares or
Series B Investor Shares or Series C Investor Shares of any Equity or Fixed
Income Portfolio of the Fund at the net asset value of such shares next
determined after the transfer agent's receipt of a request for an exchange,
plus any applicable sales charge.
SERIES B INVESTOR SHARES
A holder of Series B Investor Shares of a Portfolio generally shall
be permitted to exchange his shares for Series B Investor Shares of any other
Portfolio of the Fund at the net asset value of such shares next determined
after the transfer agent's receipt of a request for an exchange.
SERIES C INVESTOR SHARES
A holder of Series C Investor Shares of a Portfolio generally shall
be permitted to exchange his shares for Series C Investor Shares of any other
Portfolio of the Fund at the net asset value of such shares next determined
after the transfer agent's receipt of a request for an exchange.
SERVICE SHARES
A holder of Service Shares in a Portfolio generally shall be
permitted to exchange his shares for Service Shares of any other Portfolio of
the Fund at the net asset value
<PAGE> 6
of such shares next determined after the transfer agent's receipt of a request
for an exchange.
INSTITUTIONAL SHARES
A holder of Institutional Shares in a Portfolio generally shall be
permitted to exchange his shares for Institutional Shares of any other
Portfolio of the Fund at the net asset value of such shares next determined
after the transfer agent's receipt of a request for an exchange.
D. Conversion Features
SERIES A INVESTOR SHARES
The Fund initially shall not offer Series A Investor Shares with a
conversion feature.
SERIES B INVESTOR SHARES
Six years after the date of purchase, Series B Investor Shares of a
Portfolio shall automatically convert to Series A Investor Shares of the same
Portfolio at the net asset value of each class of shares at the time of
conversion. Upon each conversion of Series B Investor Shares of a Portfolio
that were not acquired through reinvestment of dividends or distributions, a
proportionate amount of Series B Investor Shares of such Portfolio that were
acquired through reinvestments of dividends or distributions will likewise
automatically convert to Series A Investor Shares of the same Portfolio.
SERIES C INVESTOR SHARES
The Fund initially shall not offer Series C Investor Shares with a
conversion feature.
SERVICE SHARES
At the election of the holders of Service Shares who desire
additional shareholder services, Service Shares of a Portfolio on the basis of
the net asset values of such shares next determined after the transfer agent's
receipt of a conversion request.
INSTITUTIONAL SHARES
The Fund initially shall not offer Institutional Shares with a
conversion feature.
<PAGE> 7
E. Shareholder Services
1. Redemption by Check
Holders of Series A Investor Shares in the Fund's Money Market
Portfolios shall be able to redeem such shares by check. The checkwriting
option shall not be available in connection with the redemption of Series B or
Series C Investor Shares of the Money Market Portfolios, Service Shares or
Institutional Shares of the Money Market Portfolios or shares of any class of
the Equity and Fixed Income Portfolios.
2. Systematic Withdrawal Program
The Fund initially shall offer a systematic withdrawal program
whereby, in general, investors may arrange to have Series A Investor Shares,
Series B Investor Shares or Series C Investor Shares redeemed automatically.
The Fund initially shall not offer a systematic withdrawal
program to investors in Service Shares or Institutional Shares.
3. Automatic Investing
The Fund shall initially offer an automatic investing program
whereby, in general, an investor may arrange to have Series A Investor Shares,
Series B Investor Shares or Series C Investor Shares purchased automatically by
authorizing the Fund's transfer agent to withdraw funds from the investor's
bank account.
The Fund initially shall not offer the automatic investment
program to investors in Service Shares or Institutional Shares.
F. Methodology for Allocating Expenses Among Classes
Class-specific expenses of a Portfolio shall be allocated to the
specific class of shares of that Portfolio. Non-class-specific expenses of a
Portfolio shall be allocated in accordance with Rule 18f-3(c).
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-1-1994
<PERIOD-END> MAR-31-1995
<INVESTMENTS-AT-COST> 171,249,964
<INVESTMENTS-AT-VALUE> 196,913,781
<RECEIVABLES> 15,522,373
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<NET-INVESTMENT-INCOME> 2,640,649
<REALIZED-GAINS-CURRENT> 2,354,850
<APPREC-INCREASE-CURRENT> 12,032,560
<NET-CHANGE-FROM-OPS> 17,028,059
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,820,973
<DISTRIBUTIONS-OF-GAINS> 2,014,670
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<NUMBER-OF-SHARES-SOLD> 4,349,344
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<SHARES-REINVESTED> 430,917
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<PER-SHARE-NAV-BEGIN> 10.93
<PER-SHARE-NII> .16
<PER-SHARE-GAIN-APPREC> .86
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