<PAGE> 1
As filed with the Securities and Exchange Commission on April 14, 1995
Registration No. 33-26305
==============================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. __ Post-Effective Amendment No. __
(Check appropriate box or boxes)
THE PNC(R) FUND
(formerly NCP Funds)
(Exact Name of Registrant as Specified in Charter)
(302) 792-2555
(Area Code and Telephone Number)
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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
for Service)
</TABLE>
Copies to:
Morgan R. Jones, Esq.
DRINKER BIDDLE & REATH
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, PA 19107-3496
Approximate Date of Proposed Public Offering: As soon as practicable
after the Registration Statement becomes effective under the Securities Act of
1933.
It is proposed that this filing will become effective on May 14,
1995 pursuant to Rule 488.
No filing fee is required because an indefinite number of shares have
previously been registered on Form N-1A (Registration No. 33-26305) pursuant
to Rule 24f-2 under the Investment Company Act of 1940. The Registrant is
filing as an exhibit to this Registration Statement a copy of its earlier
declaration under Rule 24f-2. Pursuant to Rule 429, this Registration
Statement relates to shares previously registered on the aforesaid registration
statement.
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THE PNC(R) FUND
FORM N-14
Cross Reference Sheet
Pursuant to Rule 481(a) under the Securities Act of 1933
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<CAPTION>
LOCATION IN COMBINED PROXY
ITEM NO. STATEMENT/PROSPECTUS
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PART A
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1. Cover Page . . . . . . . . . . . . . . . . . . . . Cover Page
2. Beginning and Outside Back Cover Page . . . . . . . Table of Contents
3. Synopsis and Risk Factors . . . . . . . . . . . . . Summary; Risk Factors
4. Information About the Transaction . . . . . . . . . Summary; Information Relating to the Proposed
Reorganization; Comparison of the Trust and PNC Fund
5. Information About the Registrant . . . . . . . . . Summary; Information Relating to the Proposed
Reorganization; Additional Information About PNC
Fund
6. Information About the Company Being Acquired . . . Summary; Information Relating to the Proposed
Reorganization; Additional Information About the
Trust
7. Voting Information . . . . . . . . . . . . . . . . Summary; Information Relating to Voting Matters
8. Interest of Certain Persons and Experts . . . . . . Additional Information About PNC Fund; Additional
Information About the Trust
9. Additional Information Required for Reoffering by
Persons Deemed to be Underwriters . . . . . . . . . Not Applicable
</TABLE>
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PRELIMINARY COPIES
PORTFOLIOS FOR DIVERSIFIED INVESTMENT
BELLEVUE PARK CORPORATE CENTER
400 BELLEVUE PARKWAY
SUITE 100
WILMINGTON, DELAWARE 19809
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held on June 12, 1995
TO PORTFOLIOS FOR DIVERSIFIED INVESTMENT SHAREHOLDERS:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the
"Meeting") of the Fixed Income Fund of Portfolios for Diversified Investment
(the "Trust") will be held at the Bellevue Park Corporate Center, 400 Bellevue
Parkway, 4th Floor Conference Room, Wilmington, Delaware, on June 12, 1995 at
10:00 A.M. Eastern Time, for the following purposes:
ITEM 1. To consider and act upon a proposal to approve an Agreement
and Plan of Reorganization (the "Reorganization Agreement") by and
among the Trust and The PNC(R) Fund ("PNC Fund") and the transactions
contemplated thereby, including the transfer of all of the assets and
known liabilities of the Trust's Fixed Income Fund to the
Intermediate-Term Bond Portfolio (the "Bond Portfolio"), an investment
portfolio of PNC Fund, in exchange for Service Class shares and
Institutional Class shares of the Bond Portfolio which shall
thereafter be distributed by the Trust to the holders of Fixed Income
Dollar Shares and Fixed Income Shares, respectively, of the Fixed
Income Fund in connection with the liquidation and termination of the
Trust.
ITEM 2. To transact such other business as may properly come before
the Meeting or any adjournment thereof.
The proposed reorganization and the transactions contemplated thereby
are described in the attached Combined Proxy Statement/Prospectus. A copy of
the Reorganization Agreement is appended as Exhibit A thereto.
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Shareholders of record as of the close of business on May 12, 1995 are
entitled to notice of, and to vote at, the Meeting or any adjournment thereof.
SHAREHOLDERS ARE REQUESTED TO EXECUTE AND RETURN PROMPTLY IN THE
ENCLOSED ENVELOPE THE ACCOMPANYING PROXY CARD WHICH IS BEING SOLICITED BY THE
TRUST'S BOARD OF TRUSTEES. THIS IS IMPORTANT FOR THE PURPOSE OF ENSURING A
QUORUM AT THE MEETING. PROXIES MAY BE REVOKED BY ANY SHAREHOLDER AT ANY TIME
BEFORE THEY ARE EXERCISED BY EXECUTING AND SUBMITTING A REVISED PROXY, BY
GIVING WRITTEN NOTICE OF REVOCATION TO THE TRUST'S SECRETARY, OR BY WITHDRAWING
THE PROXY AND VOTING IN PERSON AT THE MEETING.
W. Bruce McConnel, III
Secretary
, 1995
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PRELIMINARY COPIES
PORTFOLIOS FOR DIVERSIFIED INVESTMENT
BELLEVUE PARK CORPORATE CENTER
400 BELLEVUE PARKWAY
SUITE 100
WILMINGTON, DELAWARE 19809
800-821-7432
THE PNC(R) FUND
BELLEVUE PARK CORPORATE CENTER
400 BELLEVUE PARKWAY
SUITE 100
WILMINGTON, DELAWARE 19809
800-422-6538
COMBINED PROXY STATEMENT/PROSPECTUS
Dated __________, 1995
This Combined Proxy Statement/Prospectus is furnished in connection
with the solicitation of proxies by the Board of Trustees of Portfolios for
Diversified Investment (the "Trust") in connection with the Special Meeting of
Shareholders of the Fixed Income Fund of the Trust (the "Meeting") to be held
at 10:00 A.M. Eastern Time on June 12, 1995 at the Bellevue Park Corporate
Center, 400 Bellevue Parkway, 4th Floor Conference Room, Wilmington, Delaware,
at which shareholders of the Fixed Income Fund of the Trust will be asked to
approve a proposed Agreement and Plan of Reorganization dated ____________,
1995 (the "Reorganization Agreement") by and between the Trust and The PNC(R)
Fund ("PNC Fund") and the transactions contemplated thereby (the
"Reorganization").
The Trust and PNC Fund are open-end, series type management investment
companies. The Board of Trustees of the Trust, including the disinterested
Trustees, has determined that it is in the best interests of the Trust and its
shareholders to be reorganized into the Intermediate-Term Bond Portfolio (the
"Bond Portfolio"), an investment portfolio of PNC Fund. In reaching that
determination, the Board of Trustees considered the small asset size and the
lack of expected asset growth of the Fixed Income Fund and the problems
associated with the resulting lack of significant economies of scale. The
Board of Trustees concluded that each of these disadvantages would be
addressed, to some degree, by combining the assets of the Fixed Income Fund
with the assets of the Bond Portfolio of PNC Fund pursuant to the
Reorganization described below. Further, the Board of Trustees concluded that,
among other advantages, the Reorganization is likely to reduce the total
expense ratios of the Fixed Income Fund (absent voluntary fee waivers and
expense reimbursements)
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and to produce a competitive rate of return through a portfolio that has the
same investment objective and similar policies, restrictions, maturity
parameters and expense ratios as those of the Fixed Income Fund.
The Reorganization Agreement provides that all of the assets and known
liabilities of the Fixed Income Fund of the Trust will be transferred to the
Bond Portfolio of PNC Fund. In exchange for the transfer of these assets and
liabilities, PNC Fund will simultaneously issue a number of full and fractional
shares of beneficial interest in the Bond Portfolio of the Service and
Institutional Classes ("Service Shares" and "Institutional Shares,"
respectively) having an aggregate net asset value equal to the aggregate net
asset value of the Fixed Income Fund. The ratio of Service Shares to
Institutional Shares of the Bond Portfolio so issued to the Fixed Income Fund
shall be equal to the ratio of outstanding Fixed Income Dollar Shares to
outstanding Fixed Income Shares of the Fixed Income Fund at the time the
Reorganization becomes effective (the "Effective Time of the Reorganization").
The Fixed Income Fund will then make a liquidating distribution to its
shareholders of Bond Portfolio shares received from PNC Fund, so that holders
of Fixed Income Dollar Shares and holders of Fixed Income Shares of the Fixed
Income Fund at the Effective Time of the Reorganization will receive that
number of full and fractional Service Shares and Institutional Shares,
respectively, of the Bond Portfolio having a value equal to the value of the
shareholder's shares in the Fixed Income Fund immediately before the Effective
Time of the Reorganization. Following the Reorganization, the Trust will be
terminated under state law and deregistered as an investment company under the
Investment Company Act of 1940 (the "1940 Act").
This Combined Proxy Statement/Prospectus sets forth concisely the
information that a shareholder of the Fixed Income Fund should know before
voting on the Reorganization Agreement (and the transactions contemplated
thereby), and should be retained for future reference. The Reorganization
Agreement is attached to this Combined Proxy Statement/Prospectus as Exhibit A
and is incorporated herein by reference.
The Prospectuses relating to the Service Shares and Institutional
Shares of the Bond Portfolio of PNC Fund dated January 30, 1995, which describe
the investment programs and operations of the Service Shares and Institutional
Shares of the Bond Portfolio, accompany this Combined Proxy
Statement/Prospectus. Additional information is set forth in the Statement of
Additional Information of the Bond Portfolio dated January 30, 1995, in this
Combined Proxy Statement/Prospectus,
<PAGE> 7
and in the Trust's Prospectus and Statement of Additional Information dated
October 28, 1994. Each of these documents is on file with the Securities and
Exchange Commission ("SEC"), and is available without charge upon oral or
written request by writing or calling the Trust or PNC Fund at the respective
addresses or telephone numbers shown on the cover page of this Combined Proxy
Statement/Prospectus. The information contained in each of these Prospectuses
and Statements of Additional Information is incorporated herein by reference.
This Combined Proxy Statement/Prospectus constitutes the proxy
statement of the Trust for the Meeting and the Prospectus for Service Shares
and Institutional Shares of PNC Fund's Bond Portfolio, which shares have been
registered with the SEC and are to be issued in connection with the
Reorganization.
This Combined Proxy Statement/Prospectus is expected to first be sent
to shareholders of the Trust on or about May 15, 1995. Shareholders of the
Trust may redeem their shares of the Fixed Income Fund at any time prior to the
Effective Time of the Reorganization.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS COMBINED PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS COMBINED PROXY
STATEMENT/PROSPECTUS AND IN THE MATERIALS EXPRESSLY INCORPORATED HEREIN BY
REFERENCE AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRUST OR PNC FUND.
SHARES IN THE BOND PORTFOLIO OF PNC FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION OR ANY OTHER BANK,
AND SUCH SHARES ARE NOT FEDERALLY INSURED BY, GUARANTEED BY, OBLIGATIONS OF OR
OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENTAL AGENCY.
INVESTMENTS IN SHARES OF THE BOND PORTFOLIO OF PNC FUND INVOLVE INVESTMENT
RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
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SUMMARY
The following is a summary of certain information relating to the
proposed Reorganization, the parties thereto and the transactions contemplated
thereby, and is qualified by reference to the more complete information
contained elsewhere in this Combined Proxy Statement/Prospectus, the
Prospectuses and Statements of Additional Information of the Fixed Income Fund
and the Bond Portfolio, and the Reorganization Agreement dated ___________,
1995 attached to this Combined Proxy Statement/Prospectus as Exhibit A and
which is incorporated herein by reference.
PROPOSED REORGANIZATION. Based upon their evaluations of the relevant
information presented to them, and in light of their fiduciary duties under
Federal and state law, the Trust's Board of Trustees and PNC Fund's Board of
Trustees, including all of the non-interested members of each Board, have
determined that the proposed Reorganization is in the best interests of the
shareholders of the Trust and PNC Fund, respectively. THE TRUST'S BOARD
RECOMMENDS THE APPROVAL OF THE REORGANIZATION AGREEMENT BY THE SHAREHOLDERS OF
THE FIXED INCOME FUND AT THE MEETING.
Subject to shareholder approval, the Reorganization Agreement provides
for: (a) the acquisition by the Bond Portfolio of all of the assets, and the
assumption by the Bond Portfolio of the known liabilities, of the Fixed Income
Fund in exchange for Service Shares and Institutional Shares of the Bond
Portfolio; (b) the distribution of the Service Shares and Institutional Shares
of the Bond Portfolio to the holders of Fixed Income Dollar Shares and Fixed
Income Shares, respectively, in liquidation of the Fixed Income Fund; and (c)
the termination of the Trust under state law and its deregistration as an
investment company under the 1940 Act.
As a result of the proposed Reorganization, each holder of Fixed
Income Dollar Shares and Fixed Income Shares of the Fixed Income Fund will
become a holder of Service Shares and Institutional Shares, respectively, of
the Bond Portfolio and will hold, immediately after the Effective Time of the
Reorganization, shares of the Bond Portfolio having a net asset value equal to
the net asset value of the shares the shareholder held in the Fixed Income Fund
immediately before the Effective Time of the Reorganization.
For further information, see "Information Relating to the Proposed
Reorganization -- Description of the Reorganization Agreement."
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REASONS FOR REORGANIZATION. In light of certain potential benefits and other
factors, the Board of Trustees of the Trust, including the disinterested
Trustees, has determined that it is in the best interests of the Trust, and of
the Fixed Income Fund's shareholders, to reorganize into a portfolio of PNC
Fund. In making such determination, the Board of Trustees considered, among
other things, as described more fully below under "Information Relating to the
Proposed Reorganization -- Board Consideration," the small asset size and lack
of expected asset growth of the Fixed Income Fund, and the resulting problems
associated with the Fixed Income Fund's inability to achieve significant
economies of scale. The Board of Trustees felt that each of these problems
would be addressed by the Reorganization.
In addition, among other advantages, the Board of Trustees felt that
the Reorganization: (i) would likely reduce the overall expense ratios for the
Fixed Income Fund's shareholders (as calculated before advisory and
administration fee waivers and expense reimbursements); (ii) would provide
potentially greater portfolio diversification (through potential access to
other money market, equity, and bond investment portfolios offered by PNC
Fund); (iii) would provide an investment portfolio with the same investment
objective, and with similar policies and restrictions as those of the Fixed
Income Fund; and (iv) would be a tax-free event. The Board of Trustees also
considered the possible risks and disadvantages of the Reorganization and
determined that the Reorganization is likely to provide benefits to the Trust
and its shareholders that outweigh any possible risks and disadvantages of the
Reorganization, and the Board of Trustees concluded that there are no
significant risks or disadvantages to the Trust, or any of its shareholders,
from the Reorganization.
Similarly, the Board of Trustees of PNC Fund, in approving the
Reorganization, determined that it would be advantageous for PNC Fund, and
specifically for the Bond Portfolio and its shareholders, to acquire the assets
and known liabilities of the Fixed Income Fund.
FEDERAL INCOME TAX CONSEQUENCES. Drinker Biddle & Reath, counsel to the Trust
and PNC Fund, will issue an opinion as of the Effective Time of the
Reorganization to the effect that the Reorganization will not give rise to the
recognition of income, gain or loss for Federal income tax purposes to the
Fixed Income Fund, the Bond Portfolio or their respective shareholders.
OVERVIEW OF THE TRUST AND PNC FUND. The investment objectives of the Fixed
Income Fund and the Bond Portfolio are identical. Both the Fixed Income Fund
and the Bond Portfolio seek a high level of current income consistent with
prudent investment risk. In addition, the investment policies and limitations
of the Fixed
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Income Fund and the Bond Portfolio are similar. There are, however, some
noteworthy differences. For example, the Bond Portfolio may invest without
limitation in long-term debt obligations rated at the time of purchase within
the four highest ratings assigned by Moody's Investors Service, Inc.
("Moody's") (i.e., "Aaa," "Aa," "A" and "Baa") and Standard & Poor's Ratings
Group ("S&P")(i.e., "AAA," "AA," "A" and "BBB"). The Bond Portfolio may also
purchase commercial paper rated "Prime-1" or "Prime-2" by Moody's or "A-1" or
"A-2" by S&P. By contrast, the Fixed Income Fund may only purchase long-term
debt instruments rated within the top three ratings by Moody's or S&P, and may
only purchase commercial paper rated "Prime-1" by Moody's or "A-1" by S&P.
In addition to the quality parameters noted above, there are also
significant differences in the range of investments expressly permitted under
the respective investment policies of the Fixed Income Fund and the Bond
Portfolio. For example, the Fixed Income Fund may invest in preferred stock
and obligations convertible into common stock. The Fixed Income Fund may also
invest in common stock and stock warrants if they are attached to a
fixed-income obligation. The Fixed Income Fund may also purchase debt
obligations issued by or on behalf of states, territories and possessions of
the United States, the District of Columbia and other political subdivisions,
agencies, instrumentalities and authorities. None of the instruments
referenced in this paragraph are expressly permitted under the Bond Portfolio's
investment policies.
The Bond Portfolio may also invest in securities that fall outside the
scope of the Fixed Income Fund's investment policies. For example, the Bond
Portfolio may invest in mortgage-related securities, asset-backed securities,
options and futures. For more information on the similarities and differences
between the investment policies and limitations of the Fixed Income Fund and
the Bond Portfolio, see "Comparison of the Trust and PNC Fund" below.
Trustees and Officers. With the exception of the Secretaries of the
Trust and PNC Fund, the current trustees and officers of the Trust and PNC Fund
are the same. See "Additional Information About PNC Fund" and "Additional
Information about the Trust" below.
Certain Service Provider Arrangements - the Fixed Income Fund. PNC
Institutional Management Corporation ("PIMC") serves as investment adviser to
the Fixed Income Fund and is entitled to receive advisory fees from the Fixed
Income Fund, computed daily and paid monthly, at the annual rate of .20% of the
Fixed Income Fund's average daily net assets after taking into account agreed
upon advisory fee waivers. As a result of PIMC's voluntary
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agreement to limit the Fixed Income Fund's expenses, PIMC received no advisory
fees and reimbursed expenses at the annual rate of .20% of the Fixed Income
Fund's average daily net assets for the fiscal year ended June 30, 1994.
PIMC and PNC Bank, National Association ("PNC Bank") have entered into
a sub-advisory agreement with respect to the Fixed Income Fund. PNC Bank is an
affiliate of PIMC. As sub-adviser to the Fixed Income Fund, PNC Bank is
entitled to receive from PIMC an amount equal to 75% of the advisory fee paid
by the Trust to PIMC (subject to adjustment in certain circumstances). For the
fiscal year ended June 30, 1994, PNC Bank received no sub-advisory fees. All
sub-advisory fees paid to such sub-adviser are the sole responsibility of PIMC
and the Trust has no liability with respect to the payment of such fees.
Administrative services are provided to the Fixed Income Fund by PFPC
Inc. ("PFPC") and Provident Distributors, Inc. ("PDI"). PFPC also serves as the
Trust's transfer agent, registrar, and dividend disbursing agent. For their
administrative services, PFPC and PDI are entitled to receive combined
administration fees, computed daily and paid monthly, at the annual rate of
.20% of the value of the Fixed Income Fund's average daily net assets. For the
fiscal year ended June 30, 1994, PFPC and PDI voluntarily waived all
administration fees payable to them by the Fixed Income Fund and reimbursed
expenses at the annual rate of .20% of the Fixed Income Fund's average daily net
assets.
For its services as transfer agent, PFPC receives fees with respect to
the Fixed Income Fund based upon the number of shareholder accounts maintained
by PFPC, transaction charges and out-of-pocket expenses. Specifically, PFPC
receives an annual fee of $12.00 for each account and sub-account maintained by
PFPC or a duly authorized sub-transfer agent. PFPC receives $1.00 for each
purchase and redemption transaction (other than purchase transactions made in
connection with the reinvestment of dividends) made by an account. PFPC is
also reimbursed for the expense of sub-accounting services provided by others
and for certain out-of-pocket expenses.
PIMC, PFPC and PDI have agreed to reduce the advisory and
administration fees otherwise payable to them and to reimburse the Trust for
its operating expenses to the extent necessary to ensure that its operating
expense ratio (excluding fees paid to service organizations pursuant to the
Trust's Shareholder Services Plan for Fixed Income Dollar Shares) does not
exceed .40% of the Fixed Income Fund's average net assets. PIMC, PFPC and PDI
may terminate this agreement to reduce fees and limit expenses at any time upon
120 days' notice to the Trust.
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Custodial services are provided to the Fixed Income Fund by PNC Bank.
For its services as custodian, PNC Bank receives fees from the Fixed Income
Fund based upon asset levels, certain transaction charges and out-of-pocket
expenses. Specifically, PNC Bank receives annual custody fees of $.25 for each
$1,000 of the Fixed Income Fund's first $250 million of average daily gross
assets, $.20 for each $1,000 of its next $250 million of average daily gross
assets, $.15 for each $1,000 of its next $500 million of average daily gross
assets, $.09 for each $1,000 of its next $2 billion of average daily gross
assets and $.08 for each $1,000 of its average daily gross assets in excess of
$3 billion. With respect to all fixed income and equity securities (not
including money market obligations), PNC Bank receives $15.00 for each
purchase, sale or delivery of each such security upon its maturity date. With
respect to each interest collection or claim item, PNC Bank receives a fee of
$40.00. PNC Bank is also reimbursed for certain out-of-pocket expenses.
PDI also serves as the distributor of the Trust's shares. No
compensation is payable by the Fixed Income Fund to PDI for its distribution
services.
Under its Shareholder Services Plan, the Trust will enter into an
agreement with each service organization which purchases Fixed Income Dollar
Shares requiring it to provide support services to its customers who are the
beneficial owners of Fixed Income Dollar Shares in consideration of the Trust's
payment of .25% (on an annualized basis) of the average daily net asset value
of the Fixed Income Dollar Shares held by the service organization for the
benefit of its customers. Such services include aggregating and processing
purchase and redemption requests from customers and placing net purchase and
redemption orders with PFPC; processing dividend payments from the Trust on
behalf of customers; providing information periodically to customers showing
their positions in Fixed Income Dollar Shares; and providing sub-accounting or
the information necessary for sub-accounting with respect to Fixed Income
Dollar Shares beneficially owned by customers. Under the terms of the
agreements, service organizations are required to provide to their customers a
schedule of any fees that they may charge to the customers relating to the
investment of the customers' assets in Fixed Income Dollar Shares. Fixed
Income Shares do not bear the expense of payments under the Shareholder
Services Plan.
Certain Service Provider Arrangements - PNC Fund. PIMC serves as
investment adviser to the Bond Portfolio and is entitled to a fee, computed
daily and paid monthly, at the following annual rates: .50% of the Bond
Portfolio's first $1 billion of average daily net assets, .45% of its next $1
billion of average daily net assets, .425% of its next $1 billion of average
daily net assets and .40% of its average daily net assets
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<PAGE> 13
in excess of $3 billion. PNC Fund paid PIMC advisory fees at the annual rate
of .19% of the average daily net assets of the Bond Portfolio for the year
ended September 30, 1994, and PIMC waived advisory fees at the annual rate of
.31% of the average daily net assets of the Bond Portfolio for that year.
PIMC and BlackRock Financial Management, Inc. ("BlackRock") have
entered into a sub-advisory agreement with respect to the Bond Portfolio. As
sub-adviser to the Bond Portfolio, BlackRock is entitled to receive from PIMC a
fee, computed daily and payable monthly, at the following annual rates: .35%
of the Bond Portfolio's first $1 billion of average daily net assets, .30% of
its next $1 billion of average daily net assets, .275% of its next $1 billion
of average daily net assets, and .25% of its average daily net assets in excess
of $3 billion. From March 1, 1993 through March 29, 1995, PNC Bank served as
sub-adviser to the Bond Portfolio under a sub-advisory agreement that was
substantially the same as the sub-advisory agreement currently in effect
between PIMC and BlackRock. PIMC paid PNC Bank sub-advisory fees at the annual
rate of .14% of the average daily net assets of the Bond Portfolio for the year
ended September 30, 1994, and PNC Bank waived sub- advisory fees at the annual
rate of .21% of the average daily net assets of the Bond Portfolio for that
year. All sub-advisory fees payable to BlackRock with respect to the Bond
Portfolio are the sole responsibility of PIMC.
PFPC and PDI also serve as co-administrators for the Bond Portfolio.
PFPC also serves as the Bond Portfolio's transfer agent, registrar and dividend
disbursing agent. As compensation for their administrative services, PFPC and
PDI are jointly entitled to combined administration fees, computed daily and
paid monthly, at the following annual rates: .20% of the first $500 million of
the Bond Portfolio's average daily net assets, .18% of its next $500 million of
average daily net assets, .16% of its next $1 billion of average daily net
assets, and .15% of its average daily net assets in excess of $2 billion. PNC
Fund paid PFPC and PDI combined administration fees at the annual rate of .08%
of the Bond Portfolio's average daily net assets for the year ended September
30, 1994, and PFPC and PDI waived combined administration fees at the annual
rate of .12% of the Bond Portfolio's average daily net assets for that year.
For its services as transfer agent, PFPC receives fees with respect to
the Bond Portfolio based upon the number and type of shareholder accounts
maintained by PFPC, the average net assets allocable to each class of shares in
the Bond Portfolio and out-of-pocket expenses. Specifically, PFPC receives
fees at the annual rate of .03% of the average net asset value of outstanding
Service and Institutional Shares in the Bond Portfolio. For each Bond
Portfolio account serviced through third parties providing
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<PAGE> 14
sub-accounting services, PFPC receives an annual account fee of $11.00. For
each Bond Portfolio account serviced directly by PFPC, PFPC receives an annual
account fee of $13.00. PFPC is also reimbursed for certain out-of-pocket
expenses.
PNC Bank also serves as custodian of the assets of the Bond Portfolio.
For its custodian services, PNC Bank receives fees from PNC Fund based upon
asset levels, certain transaction charges and out-of-pocket expenses.
Specifically, PNC Bank receives annual custody fees of $.25 for each $1,000 of
the Bond Portfolio's first $50 million of average daily gross assets, $.20 for
each $1,000 of its next $50 million of average daily gross assets and $.15 for
each $1,000 of its average daily gross assets in excess of $100 million. With
respect to portfolio securities, PNC Bank receives a transaction charge of
$15.00 for each purchase, sale, maturity or delivery of a certificated security
for reissuance; $30.00 per sale, purchase, exercise or expiration of an option
contract (round trip); $50.00 per sale, purchase, exercise or expiration of a
futures contract (round trip); and $15.00 for each repurchase trade with an
institution other than PNC Bank (round trip). PNC Bank is also reimbursed for
the expense of foreign custody services and for certain out-of-pocket expenses.
The minimum monthly custody fee for the Bond Portfolio is $1,000 (exclusive of
out-of-pocket expenses and transaction charges).
State Street Bank and Trust Company ("State Street") and The Chase
Manhattan Bank, N.A. ("Chase") serve as sub-custodians of foreign securities
held by the Bond Portfolio. For the sub-custodial services provided by State
Street and Chase, PNC Bank pays sub-custody fees based on the amount and type
of securities maintained by such sub-custodians, account maintenance fees,
transaction charges and certain out- of-pocket expenses. State Street and
Chase receive no fees directly from PNC Fund or the Bond Portfolio with respect
to their services as sub-custodians.
PDI serves as distributor of the shares of the Bond Portfolio. No
compensation is payable by the Bond Portfolio to PDI for its distribution
services.
Under its Service Plan, PNC Fund intends to enter into servicing
agreements with institutions (including PNC Bank and its affiliates) pursuant
to which institutions will render certain support services to customers who are
the beneficial owners of Service Shares. Such services are intended to
supplement the services provided by PNC Fund's administrators and transfer
agent to PNC Fund's shareholders of record. In consideration for payment of up
to .15% (on an annualized basis) of the average daily net asset value of
Service Shares owned beneficially by their customers, institutions may provide
one or more of the following services to such customers: processing
-10-
<PAGE> 15
purchase and redemption requests from customers and placing orders with PNC
Fund's transfer agent or the distributor; processing dividend payments from PNC
Fund on behalf of customers; providing sub-accounting with respect to Service
Shares beneficially owned by customers or the information necessary for
sub-accounting; and other similar services. In consideration for payment of up
to a separate .15% (on an annualized basis) of the average daily net asset
value of Service Shares owned beneficially by their customers, institutions may
provide one or more of these additional services to such customers: responding
to customer inquiries relating to the services performed by the institution and
to customer inquiries concerning their investments in Service Shares; providing
information periodically to customers showing their positions in Service
Shares; and other similar shareholder liaison services. Institutional Shares
do not bear the expense of payments under PNC Fund's Service Plan.
Banking Laws. Banking laws and regulations currently prohibit a bank
holding company registered under the Federal Bank Holding Company Act of 1956
or any bank or non-bank affiliate thereof from sponsoring, organizing,
controlling or distributing the shares of a registered, open-end investment
company continuously engaged in the issuance of its shares, and prohibit banks
generally from underwriting securities, but such banking laws and regulations
do not prohibit such a holding company or affiliate or banks generally from
acting as investment adviser, administrator, transfer agent, or custodian to
such an investment company, or from purchasing shares of such a company as
agent for and upon the order of customers. PNC Bank, PIMC and PFPC and service
organizations that are banks or bank affiliates are subject to such banking
laws and regulations. In addition, state securities laws may differ from the
interpretations of Federal law discussed in this paragraph and banks and
financial institutions may be required to register as dealers pursuant to state
law.
Should future legislative, judicial or administrative action prohibit
or restrict the activities of such companies in connection with the provision
of services on behalf of PNC Fund and the holders of Service Shares and
Institutional Shares and on behalf of the Trust and the holders of Fixed Income
Dollar Shares and Fixed Income Shares, PNC Fund and the Trust might be required
to alter materially or discontinue their arrangements with such companies and
change their method of operations with respect to Service Shares and
Institutional Shares, and Fixed Income Dollar Shares and Fixed Income Shares,
respectively. It is not anticipated, however, that any change in the method of
operations of PNC Fund or the Trust would affect their respective net asset
values per share or result in financial loss to any investor.
-11-
<PAGE> 16
Comparative Fee Table. The following table sets forth the current
fees and expenses of the Fixed Income Fund as of June 30, 1994 and the Bond
Portfolio as of September 30, 1994, as reflected in the current Prospectuses
for the Fixed Income Fund and the Bond Portfolio. The current fees and
expenses of the Bond Portfolio are expected to remain unchanged as a result of
the Reorganization.
Comparative Fee Table
<TABLE>
<CAPTION>
Portfolios for Portfolios for PNC Fund PNC Fund
Diversified Diversified Bond Bond
Investment's Investment's Portfolio's Portfolio's
Fixed Income Fixed Income Service Institutional
Dollar Shares Shares Shares Shares
------------- ------------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES
After Fee Waivers and Expense
Reimbursements (as a percentage
of average daily net assets)
Advisory Fees 0.00%(1) 0.00%(1) 0.28%(2) 0.28%(2)
Other Operating Expenses 0.65 0.40 0.50 0.20
---- ---- ---- ----
Administration Fees 0.00(1) 0.00(1) 0.10(2) 0.10(2)
Shareholder Servicing Fee 0.25 None 0.15 None
Other Expenses 0.40(1) 0.40(1) 0.25(2) 0.10(2)
---- ---- ---- ----
Total Fund Operating Expenses 0.65% 0.40% 0.78% 0.48%
===== ===== ===== =====
</TABLE>
- -------------------------
(1) Advisory fees are net of waivers of .20% and administration fees are
net of waivers of .20%. The expenses noted above under "Other
Expenses" are estimated based on the level of such expenses for the
Trust's most recent fiscal year and reflect expense reimbursements by
PIMC, PFPC and PDI aggregating .3%.
(2) Advisory fees are net of waivers of .22% and administration fees are
net of waivers of .10% for the Bond Portfolio. PIMC and the
Administrators are under no obligation to waive or continue waiving
such fees, but have informed PNC Fund that they expect to waive or
continue waiving such fees during the current fiscal year as necessary
to maintain the Bond Portfolio's total operating expenses at the
levels set forth in the table. The expenses noted above under "Other
Expenses" are estimated based on the level of such expenses for PNC
Fund's most recent fiscal year.
Example: An investor in the Fixed Income Fund or the Bond Portfolio
would pay the following expenses on a $1,000 investment, assuming (1) 5% annual
return, and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Fixed Income Dollar Shares $7 $21 $36 $81
Fixed Income Shares 4 13 22 51
Bond Portfolio (Service Shares) 8 25 43 97
Bond Portfolio (Institutional Shares) 5 15 27 60
</TABLE>
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
FUTURE INVESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND
OPERATING EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
-12-
<PAGE> 17
The foregoing Comparative Fee Table and Example are intended to assist
investors in understanding the estimated operating expenses of the Fixed Income
Fund and the Bond Portfolio. The information in the table is based on the
advisory and administration fees and other expenses: i) for the fiscal year
ended June 30, 1994, in the case of the Fixed Income Fund; and ii) for the
fiscal year ended September 30, 1994, in the case of the Bond Portfolio, as
restated to reflect revised fee waivers.
The following table sets forth the ratios of operating expenses to
average net assets for the Fixed Income Dollar Shares and Fixed Income Shares
for the year ended June 30, 1994 (i) after fee waivers and expense
reimbursements, and (ii) absent fee waivers and expense reimbursements; and for
the six-month period ended December 31, 1994 (i) after fee waivers and expense
reimbursements, and (ii) absent fee waivers and expense reimbursements:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, 1994
-------------------------------
RATIO OF OPERATING RATIO OF OPERATING
EXPENSES TO AVERAGE EXPENSES TO AVERAGE
NET ASSETS AFTER NET ASSETS ABSENT
FEE WAIVERS AND FEE WAIVERS AND
EXPENSE EXPENSE
FIXED INCOME FUND REIMBURSEMENTS REIMBURSEMENTS
----------------- ------------------- -------------------
<S> <C> <C>
Fixed Income Shares 0.40% .96%
Fixed Income Dollar 0.65% 1.21%
Shares
</TABLE>
<TABLE>
<CAPTION>
SIX-MONTH PERIOD ENDED DECEMBER 31, 1994
----------------------------------------
RATIO OF OPERATING RATIO OF OPERATING
EXPENSES TO AVERAGE EXPENSES TO AVERAGE
NET ASSETS AFTER NET ASSETS ABSENT
FEE WAIVERS AND FEE WAIVERS AND
EXPENSE EXPENSE
FIXED INCOME FUND REIMBURSEMENTS REIMBURSEMENTS
----------------- ------------------- -------------------
<S> <C> <C>
Fixed Income Shares 0.40% 1.02%
Fixed Income Dollar 0.65% 1.27%
Shares
</TABLE>
The following table sets forth the ratios of operating expenses to
average net assets for Service Shares and Institutional Shares of the Bond
Portfolio for the fiscal year ended September 30, 1994 (i) after fee waivers;
and (ii) absent fee waivers:
-13-
<PAGE> 18
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30, 1994
------------------------------------
RATIO OF OPERATING RATIO OF OPERATING
EXPENSES TO AVERAGE EXPENSES TO AVERAGE
NET ASSETS AFTER NET ASSETS ABSENT
BOND PORTFOLIO FEE WAIVERS FEE WAIVERS
-------------- -------------------- -------------------
<S> <C> <C>
Service Shares 0.70% 1.13%
Institutional Shares 0.45% 0.88%
</TABLE>
Miscellaneous. The Trust and PNC Fund are both organized as
Massachusetts business trusts. The purchase, redemption, dividend and other
practices and procedures of the Fixed Income Fund and the Bond Portfolio are
similar as discussed further below under "Comparison of the Trust and PNC
Fund."
VOTING INFORMATION. This Combined Proxy Statement/Prospectus is being
furnished in connection with the solicitation of proxies by the Trust's Board
of Trustees in connection with the Special Meeting of Shareholders of the Fixed
Income Fund to be held at Bellevue Park Corporate Center, 400 Bellevue Parkway,
4th Floor Conference Room, Wilmington, Delaware on June 12, 1995 at 10:00 A.M.
Eastern Time. Only shareholders of record at the close of business on May 12,
1995 will be entitled to vote at the Meeting. Each share or fraction thereof
is entitled to one vote or fraction thereof. Shares represented by a properly
executed proxy will be voted in accordance with the instructions thereon, or if
the proxy is returned and executed but no specification is made, the persons
named as proxies will vote in favor of each proposal set forth in the Notice of
the Meeting. Proxies may be revoked at any time before they are exercised by
the shareholder submitting to the Secretary of the Trust a written notice of
revocation or a subsequently executed proxy or by the shareholder attending the
Meeting and voting in person. For additional information, including a
description of the shareholder vote required for approval of the Reorganization
Agreement and the transactions contemplated thereby, see "Information Relating
to Voting Matters."
RISK FACTORS. Because of the differences in the investment policies of the
Fixed Income Fund and the Bond Portfolio, there are differences between the
risk factors associated with the Fixed Income Fund and the Bond Portfolio.
The Bond Portfolio may invest in long-term debt securities rated in
the top four rating categories by Moody's or S&P, and in unrated securities
deemed by the adviser to be of comparable quality. By contrast, the Fixed
Income Fund may not invest in long-term debt instruments with the lowest of the
top four ratings by Moody's and S&P. Debt obligations rated in the lowest
-14-
<PAGE> 19
of the top four ratings (i.e., "Baa" by Moody's and "BBB" by S&P) are
considered to have some speculative characteristics and are generally more
sensitive to economic change than higher rated securities.
The Bond Portfolio may invest in certain mortgage-related securities.
The investment policies for the Fixed Income Fund do not specifically
provide for such investments. Although certain mortgage-related securities are
guaranteed by a third party or are otherwise similarly secured, the market
value of the security, which may fluctuate, is not so secured. If the Bond
Portfolio purchases a mortgage-related security at a premium, that portion may
be lost if there is a decline in the market value of the security whether
resulting from increases in interest rates or prepayment of the underlying
mortgage collateral. As with other interest-bearing securities, the prices of
such securities are inversely affected by changes in interest rates. However,
though the value of a mortgage-related security may decline when interest rates
rise, the converse is not necessarily true because in periods of declining
interest rates mortgages underlying securities are prone to prepayment. For
this and other reasons, a mortgage-related security's stated maturity may be
shortened by unscheduled prepayments on underlying mortgages and, therefore, it
is not possible to predict accurately the security's return to the Bond
Portfolio. Mortgage-related securities provide regular payments consisting of
interest and principal. No assurance can be given as to the return the Bond
Portfolio will receive when these amounts are reinvested.
Mortgage-related securities acquired by the Bond Portfolio may also
include collateralized mortgage obligations ("CMOs") issued by U.S. Government
agencies or instrumentalities, as well as by private issuers. CMOs may exhibit
more or less price volatility and interest rate risk than other types of
mortgage-related obligations.
The Bond Portfolio may invest in asset-backed securities. Investments
in asset-backed securities are not expressly permitted under the Fixed Income
Fund's investment policies. Asset-backed securities may involve certain risks
that are not presented by mortgage-backed securities arising primarily from the
nature of the underlying assets (i.e., credit card and automobile loan
receivables as opposed to real estate mortgages). For example, credit card
receivables are generally unsecured and may require the repossession of
personal property upon the default of the debtor which may be difficult or
impracticable in some cases. In addition, asset-backed securities may be
considered illiquid under certain circumstances.
-15-
<PAGE> 20
The yield characteristics of asset-backed securities differ from
traditional debt securities. A major difference is that the principal amount
of the obligations may be prepaid at any time because the underlying assets
generally may be prepaid at any time. As a result, if an asset-backed security
is purchased at a premium, a prepayment rate that is faster than expected may
reduce yield to maturity, while a prepayment rate that is slower than expected
may have the opposite effect of increasing yield to maturity. Conversely, if
an asset- backed security is purchased at a discount, faster than expected
prepayments may increase, while slower than expected prepayments may decrease,
yield to maturity. In general, the collateral supporting asset-backed
securities is of shorter maturity than mortgage-related securities. Like other
fixed-income securities, when interest rates rise, the value of an asset-backed
security generally will decline; however, when interest rates decline, the
value of an asset-backed security with prepayment features may not increase as
much as that of other fixed-income securities.
The Bond Portfolio may invest in options and futures contracts. The
Fixed Income Fund may not invest in options and futures contracts. The risks
related to the use of options and futures contracts include the following: (i)
the correlation between movements in the market price of the portfolio
investments (held or intended for purchase) being hedged and in the price of
the futures contract or option may be imperfect; (ii) possible lack of a liquid
secondary market for closing out options or futures positions; (iii) the need
for additional portfolio management skills and techniques; and (iv) losses due
to unanticipated market movements. Successful use of options and futures by
the Bond Portfolio is subject to the adviser's or sub-adviser's ability to
correctly predict movements in the direction of the market. For example, if
the Bond Portfolio uses futures contracts as a hedge against the possibility of
a decline in the market adversely affecting securities held by it and
securities prices increase instead, the Bond Portfolio will lose part or all of
the benefit of the increased value of its securities which it has hedged
because it will have approximately equal offsetting losses in its futures
positions. The risk of loss in trading futures contracts in some strategies
can be substantial, due both to the low margin deposits required and the
extremely high degree of leverage involved in futures pricing. As a result, a
relatively small price movement in a futures contract may result in immediate
and substantial loss or gain to the investor. Thus, a purchase or sale of a
futures contract may result in losses or gains in excess of the amount invested
in the contract.
Options trading is a highly specialized activity which entails greater
than ordinary investment risks. When engaging in options transactions with
broker/dealers, the Bond Portfolio
-16-
<PAGE> 21
bears the risk that the broker/dealer may fail to meet its obligations. There
is no assurance that the Bond Portfolio will be able to close an unlisted
option position. Furthermore, unlisted options are not subject to the
protections afforded purchasers of listed options by the Options Clearing
Corporation, which performs the obligations of its members who fail to do so in
connection with the purchase or sale of options.
There are several other risks associated with transactions in options
on securities and indexes. For example, restrictions may be imposed by a
national securities exchange (an "Exchange") on opening transactions or closing
transactions or both; trading halts, suspensions or other restrictions may be
imposed with respect to particular classes or series of options or underlying
securities; unusual or unforeseen circumstances may interrupt normal operations
on an Exchange; the facilities of an Exchange or the Options Clearing
Corporation may not at all times be adequate to handle current trading volume;
or one or more Exchanges could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that Exchange (or in that class or series of options) would cease to exist,
although outstanding options that had been issued by the Options Clearing
Corporation as a result of trades on that Exchange would continue to be
exercisable in accordance with their terms.
Investments in futures transactions and options thereon also entail
other risks. For example, in the event of adverse price movements, the Bond
Portfolio would continue to be required to make daily cash payments to maintain
its required margin. In such situations, the Bond Portfolio may have to sell
portfolio securities to meet daily margin requirements at a time when it may be
disadvantageous to do so if the Bond Portfolio has insufficient cash to meet
the daily margin call. In addition, utilization of futures transactions by the
Bond Portfolio involves the risk of loss of margin deposits in the event of
bankruptcy of a broker with whom the Bond Portfolio has an open position in a
futures contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have
occasionally moved to
-17-
<PAGE> 22
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 failure,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
The Bond Portfolio may also hold participation certificates in leases,
installment purchase contracts, or conditional sales contracts (collectively,
"lease obligations"). The Fixed Income Fund is not expressly authorized under
its investment policies to invest in lease obligations.
The Bond Portfolio may invest substantially in obligations of foreign
banks or foreign branches of U.S. banks where the adviser deems the instrument
to present minimal credit risks. These investments are not specifically
permitted under the investment policies of the Fixed Income Fund. Investments
in obligations issued by foreign banks and foreign branches of U.S. banks may
involve risks that are different from investments in obligations of domestic
branches of U.S. banks. These risks may include future unfavorable political
and economic developments, possible withholding taxes on interest income,
seizure or nationalization of foreign deposits, currency controls, interest
limitations, or other governmental restrictions which might affect the payment
of principal or interest on the securities held by the Bond Portfolio.
Additionally, these institutions may be subject to less stringent reserve
requirements and to different accounting, auditing, reporting and recordkeeping
requirements than those applicable to domestic branches of U.S. banks.
The Bond Portfolio's investment policies provide for investments in
floating rate instruments. The investment policies of the Fixed Income Fund do
not specifically authorize such investments. The absence of an active
secondary market with respect to particular floating rate instruments could
make it difficult for the Bond Portfolio to dispose of a floating rate
instrument if the issuer defaulted on its payment obligation or during periods
when the Bond Portfolio is not entitled to exercise its demand rights, and the
Bond Portfolio could, for these or other reasons, suffer a loss with respect to
such instruments.
-18-
<PAGE> 23
Certain other policies and investment techniques utilized by the Bond
Portfolio present noteworthy risk considerations not associated with the Fixed
Income Fund. For example, the Bond Portfolio is authorized to borrow funds and
utilize leverage (including through reverse repurchase agreements and dollar
rolls) in amounts not exceeding 33 1/3% of its total assets (including the
amount borrowed) and under current market conditions intends to borrow or
obtain equivalent leverage up to such amount. The use of leverage by the Bond
Portfolio would create an opportunity for increased net income, but, at the
same time, creates special risks. In particular, if the Bond Portfolio borrows
on a short-term basis and invests the proceeds in long-term securities, an
increase in interest rates may (i) reduce or eliminate the interest rate
differential usually available between short-term and long-term rates and (ii)
reduce the value of the Bond Portfolio's long-term securities, thereby exposing
the Bond Portfolio to lower yields and risk of loss on disposition of its
long-term securities.
To take advantage of attractive financing opportunities in the
mortgage market and to enhance current income, the Bond Portfolio may enter
into dollar roll transactions. For a description of dollar roll transactions,
see "Comparison of the Trust and PNC Fund -- Investment Policies" below. The
investment policies for the Fixed Income Fund do not include the use of dollar
roll transactions. Dollar roll transactions involve the risk that the market
value of the securities the Bond Portfolio is required to purchase may decline
below the agreed upon repurchase price of those securities. If the
broker/dealer to whom the Bond Portfolio sells securities becomes insolvent,
the Bond Portfolio's right to purchase or repurchase securities may be
restricted and the instruments which the Bond Portfolio is required to
repurchase may be worth less than an instrument which the Bond Portfolio
originally held when the Bond Portfolio is able to complete the purchase.
Successful use of mortgage dollar rolls may depend upon the investment
adviser's ability to correctly predict interest rates and prepayments. There
is no assurance that dollar rolls can be successfully employed.
The Bond Portfolio may also lend portfolio securities with an
aggregate value of up to 30% of its total assets to broker/dealers and other
institutional investors pursuant to agreements requiring that the loans be
continuously secured by collateral equal at all times in value to at least the
market value of the securities loaned. The Fixed Income Fund may not engage in
securities lending. Default by or bankruptcy of a borrower would expose the
Bond Portfolio to possible loss because of adverse market action, expenses
and/or delays in connection with the disposition of the underlying securities.
-19-
<PAGE> 24
The Bond Portfolio may purchase or sell securities on a "forward
commitment" basis. These transactions involve a commitment by the Bond
Portfolio to purchase or sell particular securities with payment and delivery
taking place at a future date (perhaps one or two months later), and permit the
Bond Portfolio to lock in a price or yield on a security it owns or intends to
purchase, regardless of future changes in interest rates. The Fixed Income
Fund may not purchase or sell securities on a forward commitment basis.
Forward commitment transactions involve the risk that the price or yield
obtained in a transaction may be less favorable than the price or yield
available in the market when the securities delivery takes place. When the
Bond Portfolio engages in forward commitment transactions, it relies on the
other party to consummate the trade. Failure of such party to do so may cause
the Bond Portfolio to incur a loss or miss an opportunity to obtain a price
considered to be advantageous. In addition, the Bond Portfolio will normally
segregate assets in the amount of its purchase commitments when it purchases
securities on a "forward commitment" basis. This may adversely affect the Bond
Portfolio's liquidity and ability to manage its investment portfolio. In order
to limit this risk, the Bond Portfolio expects that its commitments to purchase
securities on a "forward commitment" basis normally will not exceed 25% of its
total assets.
For more information on these and other differences between the
investment policies of the Fixed Income Fund and the Bond Portfolio, see
"Comparison of the Trust and PNC Fund" below.
INFORMATION RELATING TO THE PROPOSED REORGANIZATION
The terms and conditions under which the Reorganization may be
consummated are set forth in the Reorganization Agreement. Significant
provisions of the Reorganization Agreement are summarized below; however, this
summary is qualified in its entirety by reference to the Reorganization
Agreement, a copy of which is attached as Exhibit A to this Combined Proxy
Statement/ Prospectus and which is incorporated herein by reference.
DESCRIPTION OF THE REORGANIZATION AGREEMENT. As discussed above, the Fixed
Income Fund of the Trust is similar, but not identical, to the Bond Portfolio
of PNC Fund. The Reorganization Agreement provides that the Trust will declare
a dividend or dividends prior to the Effective Time of the Reorganization
which, together with all previous dividends, will have the effect of
distributing to the shareholders of the Fixed Income Fund all undistributed net
investment income earned and net capital gains realized up to and including the
Effective Time of the Reorganization. The Reorganization Agreement provides
that at the Effective Time of
-20-
<PAGE> 25
the Reorganization, the assets and known liabilities of the Fixed Income Fund
will be transferred to and assumed by the Bond Portfolio. In exchange for the
transfer of the assets of, and the assumption of the known liabilities of, the
Fixed Income Fund, PNC Fund will issue at the Effective Time of the
Reorganization full and fractional Service Shares and Institutional Shares of
the Bond Portfolio with an aggregate net asset value equal to the aggregate net
asset value of the Fixed Income Fund as determined at the Valuation Time
specified in the Reorganization Agreement.
Following the transfer of assets to, and the assumption of the known
liabilities of the Fixed Income Fund by, the Bond Portfolio, the Trust will
distribute the Service Shares and Institutional Shares of the Bond Portfolio
received from PNC Fund to the holders of Fixed Income Dollar Shares and Fixed
Income Shares, respectively, of the Trust in liquidation of the Fixed Income
Fund. Each holder of Fixed Income Dollar Shares and Fixed Income Shares of the
Trust at the Effective Time of the Reorganization will receive an amount of
Service Shares and Institutional Shares, respectively, of equal value, plus the
right to receive any dividends or distributions which were declared before the
Effective Time of the Reorganization but that remained unpaid at that time with
respect to the Fixed Income Dollar Shares and Fixed Income Shares of the Trust.
In connection with the Reorganization, the Trust will be terminated under state
law and deregistered as an investment company under the 1940 Act.
The stock transfer books of the Trust will be permanently closed at
the Effective Time of the Reorganization. If any shares of the Fixed Income
Fund are represented by a share certificate, the certificate must be
surrendered to PNC Fund's transfer agent for cancellation, or verification of
such share certificate's loss and indemnification with respect to such loss
must be established, before the Bond Portfolio shares issued to the shareholder
in the Reorganization can be redeemed.
The Reorganization with respect to the Fixed Income Fund is subject to
a number of conditions, including approval of the Reorganization Agreement and
the transactions contemplated thereby described in this Combined Proxy
Statement/Prospectus by the shareholders of the Trust; the receipt of certain
legal opinions described in Sections 9(d), 9(e), 10(c) and 10(d) of the
Reorganization Agreement (which include an opinion of Drinker Biddle & Reath
that the shares of the Bond Portfolio issued to shareholders of the Fixed
Income Fund in accordance with the terms of the Reorganization Agreement will
be validly issued, fully paid and non-assessable); the receipt of certain
certificates from the parties concerning the continuing accuracy of the
representations and warranties in the Reorganization
-21-
<PAGE> 26
Agreement and other matters; and the parties' performance in all material
respects of their respective agreements and undertakings in the Reorganization
Agreement. Assuming satisfaction of the conditions in the Reorganization
Agreement, the Effective Time of the Reorganization will be on __________, 1995
or such other date as is agreed to by the parties.
The Reorganization Agreement provides that each party thereto shall be
responsible for the payment of all expenses incurred by such party in
connection with the Reorganization and the transactions contemplated thereby.
The Reorganization Agreement and the Reorganization described herein
may be abandoned at any time prior to the Effective Time of the Reorganization
by the mutual consent of the parties to the Reorganization Agreement. The
Reorganization Agreement provides further that at any time prior to or (to the
fullest extent permitted by law) after approval of the Reorganization Agreement
by the shareholders of the Fixed Income Fund (a) the parties thereto may, by
written agreement authorized by their respective Boards of Trustees and with or
without the approval of their respective shareholders, amend any of the
provisions of the Reorganization Agreement and (b) any party may waive any
breach by the other party or the failure to satisfy any of the conditions to
its obligations (such waiver to be in writing and authorized by the Board of
Trustees of the waiving party with or without the approval of such party's
shareholders).
BOARD CONSIDERATION. Based upon its evaluations of the information presented
to it, and in light of its fiduciary duties under Federal and state law, the
Board of Trustees of the Trust has unanimously determined that the proposed
Reorganization is in the best interests of the shareholders of the Fixed Income
Fund, and recommends the approval of the Reorganization Agreement by such
shareholders at the Meeting. The following is a summary of the information
that was presented to, and considered by, the Board of Trustees in making its
determination.
Initially, the Board of Trustees, including the disinterested
Trustees, identified several areas of concern regarding the Fixed Income Fund,
which gave rise to the consideration by the Board of Trustees of several ways
to reorganize the structure and/or to alter the Trust's and the Fixed Income
Fund's relationship with the Trust's service providers. The Board of Trustees
considered the small asset size and lack of expected asset growth of the Fixed
Income Fund, including the fact that its small asset size prevented the Fixed
Income Fund from realizing any significant economies of scale in reducing its
relatively high expense ratios (absent waivers of
-22-
<PAGE> 27
fees and reimbursement of expenses by the Fixed Income Fund's adviser and
administrators). The Board of Trustees noted in particular that the Fixed
Income Fund relies upon large fee waivers and expense reimbursements by its
adviser and administrators to keep its expense ratios competitive, and that
such waivers and reimbursements are voluntary and can be terminated at any time
without Board approval upon 120 days' notice to the Trust. The Board of
Trustees also considered that there was no expectation that the expense ratios
for the Fixed Income Fund (absent fee waivers and expense reimbursements) would
decrease in the future absent a significant increase in the assets of the Fixed
Income Fund.
The Board of Trustees considered a number of alternatives to address
the Fixed Income Fund's problems. Among the alternatives considered by the
Board of Trustees were: (i) continuing the Fixed Income Fund without its
adviser's and administrators' voluntary waiver of fees and reimbursement of
expenses; (ii) the liquidation and dissolution of the Fixed Income Fund and the
Trust; and (iii) the reorganization of the Fixed Income Fund into another
investment company and the subsequent dissolution of the Trust. The Board of
Trustees carefully considered the advantages and disadvantages of each
alternative and, in particular, the likelihood that each alternative would
address the asset size and growth problem of the Fixed Income Fund.
The alternative that the Board of Trustees felt offered the greatest
likelihood of addressing the asset size and growth problem was the
reorganization of the Fixed Income Fund into a corresponding investment company
with similar but not identical investment objectives, policies and limitations.
The Board of Trustees believed that none of the other alternatives could be
reasonably expected to provide an adequate solution to the asset size and
growth problems noted above. Further, the Board of Trustees felt that with the
proper selection of a reorganization candidate, certain other advantages, as
identified below, could be realized. As a result of the Board of Trustees'
determination to pursue the reorganization alternative, the Board of Trustees
and the officers of the Trust sought to identify possible reorganization
candidates for the Fixed Income Fund. This led the Board of Trustees to
examine and evaluate the possibility of a reorganization into the Bond
Portfolio of PNC Fund.
At a regularly scheduled meeting of the Board held on January 27,
1995, the Board of Trustees of the Trust considered the proposed Reorganization
with respect to the Fixed Income Fund. During the course of their review and
deliberation, the Trustees evaluated the potential benefits and detriments to
the Fixed Income Fund and its shareholders. The Trustees received from PFPC
written materials containing relevant information about the Bond Portfolio and
the proposed Reorganization, including fee
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<PAGE> 28
structure and expense ratio information, and yield and performance data.
The Board of Trustees of the Trust considered the anticipated expenses
and charges of the Bond Portfolio that would be borne directly and indirectly
by the shareholders of the Fixed Income Fund after the Reorganization. The
Board of Trustees evaluated the current actual and contractual expense levels
of the Bond Portfolio and compared such expense levels to the current actual
and contractual expense levels of the Fixed Income Fund. The Board of Trustees
considered the fact that the current actual total operating expenses of the
Bond Portfolio are higher than those of the Fixed Income Fund. The Board of
Trustees also noted that on a contractual basis, the advisory fee payable by
the Bond Portfolio is higher than that payable by the Fixed Income Fund.
Although the maximum combined administration fees for both the Fixed Income
Fund and the Bond Portfolio are the same (.20% (annualized) of average daily
net assets), the Board of Trustees noted that the combined administration fees
for the Bond Portfolio will decrease according to a schedule of break-points if
and when specified asset levels are attained. In addition, the Board of
Trustees recognized that the other operating expenses of the Fixed Income Fund
are substantially higher than those borne by the Bond Portfolio, and that the
total operating expenses of the Fixed Income Fund would be higher than those of
the Bond Portfolio in the absence of voluntary fee waivers and expense
reimbursements (in the case of the Fixed Income Fund) by PIMC, PFPC and PDI.
The Board of Trustees of the Trust noted that the Trust and PNC Fund share the
same investment adviser, fund counsel and most of their principal service
providers. The Board of Trustees also took into consideration the fact that
the existing fee waivers with respect to the Bond Portfolio are voluntary and
can be terminated at any time without Board approval or prior notice to
shareholders. The Board of Trustees recognized that any such termination could
result in higher expense ratios for the Bond Portfolio in the future.
The Board of Trustees also considered the additional efficiencies and
benefits for shareholders that are expected to result from the Reorganization
of the Fixed Income Fund into the Bond Portfolio. These benefits include
potential access to the many other investment portfolios offered by PNC Fund;
potential asset growth with resulting economies of scale, such as lower per
share expenses (as calculated before fee waivers and expense reimbursements);
greater portfolio trading efficiencies, such as quantity discounts; and
potentially broader portfolio diversification.
The Board of Trustees considered the compatibility of the Bond
Portfolio's investment objective, policies and limitations with those of the
Fixed Income Fund. In addition, in reviewing
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<PAGE> 29
the compatibility of the investment objective and policies of the Bond
Portfolio, the Board of Trustees specifically considered the potential and
actual additional risks that shareholders of the Trust would be subject to as
shareholders of the Bond Portfolio, which has a broader range of permissible
investments than the Fixed Income Fund. The Board of Trustees also considered
those provisions of the Reorganization Agreement relating to the price of
shares to be exchanged. The Trustees also noted that the Trust would be
provided with an opinion of counsel with respect to the tax-free treatment of
the Reorganization for the Fixed Income Fund and its shareholders.
The Board of Trustees noted that the purchase and redemption services
offered by PNC Fund were comparable to those currently offered by the Trust and
that the shareholder services offered by PNC Fund to holders of Service Shares
and Institutional Shares of the Bond Portfolio were similar to those currently
offered by the Trust to the holders of Fixed Income Dollar Shares and Fixed
Income Shares, respectively, of the Fixed Income Fund. The Board of Trustees
noted further that no sales charges would be imposed on any Service Shares or
Institutional Shares of the Bond Portfolio acquired by holders of Fixed Income
Dollar Shares or Fixed Income Shares, respectively, of the Fixed Income Fund in
connection with the Reorganization, and that no sales charge is currently
imposed on purchases of Service Shares and Institutional Shares of the Bond
Portfolio.
Lastly, the Board of Trustees considered the undertaking of PIMC to
hold the Trust and PNC Fund harmless against any losses relating to liabilities
of the Bond Portfolio and the Fixed Income Fund, respectively, that are not
reflected in such respective portfolios' net asset value at the Effective Time
of the Reorganization.
Based upon their evaluation of the relevant information presented to
them, and in light of their fiduciary duties under Federal and state law, the
Trust's Board of Trustees unanimously determined that the proposed
Reorganization was in the best interests of the Trust and the Fixed Income Fund
and its shareholders and recommended the approval of the Reorganization
Agreement by the Trust's shareholders at the Meeting.
Similarly, at a meeting also held on January 27, 1995, the Board of
Trustees of PNC Fund considered the proposed Reorganization with respect to the
Bond Portfolio. Based upon its evaluation of the relevant information provided
to it, and in light of its fiduciary duties under Federal and state law, the
Board of Trustees unanimously determined that the proposed Reorganization was
in the best interests of the Bond Portfolio and its shareholders.
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<PAGE> 30
CAPITALIZATION. At March 31, 1995, the net asset value of all classes of
outstanding shares of the Bond Portfolio and the Fixed Income Fund was
$________ and $_______, respectively. Because the Trust's Fixed Income Fund
will be combined in the Reorganization with PNC Fund's Bond Portfolio, the
total capitalization of the Bond Portfolio after the Reorganization is expected
to be greater than the current capitalization of the Fixed Income Fund. The
following table sets forth as of December 31, 1994: (i) the capitalization of
each class of shares of the Fixed Income Fund; (ii) the capitalization of the
Service and Institutional Classes of shares of the Bond Portfolio; and (iii)
the pro forma capitalization of the Service and Institutional Classes of shares
of the Bond Portfolio as adjusted to give effect to the Reorganization. If
consummated, the capitalization of the Service and Institutional Classes of
Shares of the Bond Portfolio is likely to be different at the Effective Time of
the Reorganization as a result of daily share purchase and redemption activity
in the Fixed Income Fund and the Bond Portfolio.
<TABLE>
<CAPTION>
PRO FORMA
TRUST PNC FUND COMBINED
----- -------- --------
<S> <C> <C> <C>
FIXED INCOME FUND (FIXED INCOME
DOLLAR SHARES)/BOND PORTFOLIO
(SERVICE SHARES)
Total Net Assets . . . . . . . . . . . . $ 474,570 $34,363,430 $34,838,000
---------- ---------- ----------
Shares Outstanding . . . . . . . . . . . 50,634 3,859,638 3,912,960
---------- ---------- ----------
Net Asset Value
Per Share . . . . . . . . . . . . . . . . $ 9.37 $ 8.90 $ 8.90
---------- ---------- ----------
FIXED INCOME FUND (FIXED INCOME
SHARES)/BOND PORTFOLIO
(INSTITUTIONAL SHARES)
Total Net Assets . . . . . . . . . . . . $13,346,824 $74,089,569 $87,436,393
---------- ---------- ----------
Shares Outstanding . . . . . . . . . . . 1,424,033 8,322,586 9,822,229
---------- ---------- ----------
Net Asset Value
Per Share . . . . . . . . . . . . . . . . $ 9.37 $ 8.90 $ 8.90
---------- ---------- ----------
</TABLE>
FEDERAL INCOME TAX CONSEQUENCES. Consummation of the Reorganization
is subject to the condition that the Trust and PNC Fund receive an opinion from
Drinker Biddle & Reath, counsel to both the Trust and PNC Fund, that for
Federal income tax purposes
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<PAGE> 31
(i) the transfer of all of the assets and known liabilities of the Fixed Income
Fund to the Bond Portfolio in exchange for Service Shares and Institutional
Shares of the Bond Portfolio and the distribution to holders of Fixed Income
Dollar Shares and Fixed Income Shares of the Fixed Income Fund of the Service
Shares and Institutional Shares, respectively, of the Bond Portfolio so
received, as described in the Reorganization Agreement, will constitute a
reorganization within the meaning of Section 368(a)(1)(C) or Section
368(a)(1)(D) of the Internal Revenue Code of 1986, as amended; (ii) no gain or
loss will be recognized by the Fixed Income Fund as a result of such
transactions; (iii) no gain or loss will be recognized by the Bond Portfolio as
a result of such transactions; (iv) no gain or loss will be recognized by the
holders of Fixed Income Dollar Shares or Fixed Income Shares on the
distribution to them by the Fixed Income Fund of Service Shares and
Institutional Shares, respectively, of the Bond Portfolio in exchange for their
shares of the Fixed Income Fund; (v) the basis of the Bond Portfolio shares
received by a shareholder of the Fixed Income Fund will be the same as the
basis of the shareholder's Fixed Income Fund shares immediately before the
Reorganization; (vi) the basis to the Bond Portfolio of the assets of the Fixed
Income Fund received pursuant to such transactions will be the same as the
basis of the assets in the hands of the Fixed Income Fund immediately before
such transactions; (vii) a shareholder's holding period for the Bond Portfolio
shares will be determined by including the period for which the shareholder
held the Fixed Income Fund shares exchanged therefor, provided that the
shareholder held such Fixed Income Fund shares as a capital asset; and (viii)
the Bond Portfolio's holding period with respect to the assets received in the
Reorganization will include the period for which such assets were held by the
Fixed Income Fund.
PNC Fund and the Trust have not sought a tax ruling from the Internal
Revenue Service ("IRS"). The opinion of counsel is not binding on the IRS and
does not preclude the IRS from adopting a contrary position. Shareholders
should consult their own tax advisers concerning the potential tax consequences
to them, including state and local income tax consequences.
COMPARISON OF THE TRUST
AND PNC FUND
As noted above, the Fixed Income Fund and the Bond Portfolio share the
identical investment objective: to seek a high level of current income
consistent with prudent investment risk. The investment policies and
limitations of the Fixed Income Fund and the Bond Portfolio are similar, but
not identical. The following discussion summarizes some of the more
significant similarities
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<PAGE> 32
and differences in the investment policies and limitations of the Fixed Income
Fund and the Bond Portfolio.
INVESTMENT POLICIES. The Bond Portfolio may invest in mortgage-related
securities. The investment policies for the Fixed Income Portfolio do not
specifically provide for such investments. Mortgage-related securities which
may be purchased by the Bond Portfolio are represented by pools of mortgage
loans assembled for sale to investors by various governmental agencies such as
the Government National Mortgage Association ("GNMA") and government-related
organizations such as the Federal National Mortgage Association ("FNMA") and
the Federal Home Loan Mortgage Corporation ("FHLMC"), as well as by private
issuers such as commercial banks, savings and loan institutions, mortgage
bankers and private mortgage insurance companies.
Mortgage-related securities acquired by the Bond Portfolio may also
include CMOs issued by FNMA, FHLMC or other U.S. Government agencies or
instrumentalities, as well as by private issuers. CMOs provide an investor
with a specified interest in the cash flow of a pool of underlying mortgages or
other mortgage-related securities. Issuers of CMOs frequently elect to be
taxed as pass-through entities known as real estate mortgage investment
conduits ("REMICs"). CMOs are issued in multiple classes, each with a
specified fixed or floating interest rate and a final distribution date. The
relative payment rights of the various CMO classes may be structured in many
ways. Generally, payments of principal are applied to the CMO classes in the
order of their respective stated maturities, so that no principal payments will
be made on a CMO class until all other classes having an earlier stated
maturity date are paid in full. Sometimes, however, CMO classes are "parallel
pay," i.e. payments of principal are made to two or more classes concurrently.
The Bond Portfolio may invest in asset-backed securities. Investments
in asset-backed securities are not expressly permitted under the Fixed Income
Fund's investment policies. Asset-backed securities represent a participation
in, or are secured by and payable from, a stream of payments generated by
particular assets, most often a pool of assets similar to one another. Assets
generating such payments will consist of such instruments as motor vehicle
installment purchase obligations, credit card receivables and home equity
loans. The Bond Portfolio may also invest in other types of asset-backed
securities that may be available in the future. Payment of principal and
interest may be guaranteed up to certain amounts and for a certain time period
by a letter of credit issued by a financial institution unaffiliated with
entities issuing the
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<PAGE> 33
securities. The estimated life of an asset-backed security varies with the
prepayment experience with respect to the underlying debt instruments. The
rate of such prepayments, and hence the life of the asset-backed security, will
be primarily a function of current market rates, although other economic and
demographic factors will be involved.
The Bond Portfolio may write covered call options, buy put options,
buy call options and write put options. Additionally, the Bond Portfolio may
invest in futures contracts and options on futures contracts (index futures
contracts or interest rate futures contracts, as applicable) for hedging
purposes or for other purposes so long as aggregate initial margins and
premiums required for non-hedging positions do not exceed 5% of its net assets,
after taking into account any unrealized profits and losses on any such
contracts it has entered into. The investment policies for the Fixed Income
Fund do not provide for investments in options or futures.
The Bond Portfolio may also hold participation certificates in leases,
installment purchase contracts and conditional sales contracts (collectively,
"lease obligations"). The Fixed Income Fund is not expressly authorized under
its investment policies to invest in lease obligations.
The Bond Portfolio may invest substantially in obligations of foreign
banks or foreign branches of U.S. banks where the adviser deems the instrument
to present minimal credit risks. These investments are not specifically
permitted under the investment policies of the Fixed Income Fund. Investments
in obligations of foreign banks or foreign branches of U.S. banks may include
Eurodollar Certificates of Deposit ("ECDs") which are U.S. dollar-denominated
certificates of deposit issued by foreign and domestic banks located outside
the United States; Eurodollar Time Deposits ("ETDs") which are U.S.
dollar-denominated deposits in a foreign branch of a U.S. bank or a foreign
bank; Canadian Time Deposits ("CTDs") which are essentially the same as ETDs,
except they are issued by Canadian offices of major Canadian banks; and Yankee
Certificates of Deposit ("Yankee CDs") which are U.S. dollar-denominated
certificates of deposit issued by a U.S. branch of a foreign bank and held in
the United States.
The Bond Portfolio's investment policies provide for investments in
floating rate instruments. These instruments may include variable amount
master demand notes that permit the indebtedness thereunder to vary in addition
to providing for periodic adjustments in the interest rate. Issuers of
floating rate instruments must satisfy the credit quality criteria set forth
above for the Bond Portfolio and will be determined to present minimal credit
risks by the sub-adviser. The Fixed
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<PAGE> 34
Income Fund's investment policies do not specifically contemplate investments
in floating rate instruments.
Certain other policies and investment techniques utilized by the Bond
Portfolio differ from those permitted under the investment policies of the
Fixed Income Fund. For example, the Bond Portfolio may borrow funds and
utilize leverage (including through reverse repurchase agreements and dollar
rolls) in amounts not exceeding 33 1/3% of its total assets (including the
amount borrowed) and under current market conditions intends to borrow or
obtain equivalent leverage up to such amount. The Bond Portfolio may also
borrow up to an additional 5% of its total assets for temporary purposes
without regard to the foregoing limitation. By contrast, the Fixed Income Fund
may only borrow in the aggregate up to 10% of its total assets, and is not
specifically authorized to utilize leverage through the use of dollar rolls.
To take advantage of attractive financing opportunities in the
mortgage market and to enhance current income, the Bond Portfolio may enter
into dollar roll transactions. The investment policies for the Fixed Income
Fund do not include the use of dollar roll transactions. A dollar roll
transaction, which is considered a borrowing by the Bond Portfolio, involves a
sale by the Bond Portfolio of a mortgage-backed or other security to a
financial institution, such as a bank or broker/dealer, concurrently with an
agreement by the Bond Portfolio to repurchase a similar security from the
institution at a later date at an agreed upon price. The securities that are
repurchased will bear the same interest rate and stated maturity as those sold,
but pools of mortgages collateralizing such securities may have different
prepayment histories than those sold, which may affect the duration of such
securities. During the period between the sale and repurchase, the Bond
Portfolio will not be entitled to receive interest and principal payments on
the securities sold. Proceeds of the sale will be invested in additional
instruments for the Bond Portfolio, and the income from these investments will
generate income for the Bond Portfolio. If such income does not exceed the
income, capital appreciation and gain or loss that would have been realized on
the securities sold as part of the dollar roll, the use of this technique will
diminish the investment performance of the Bond Portfolio compared with what
such performance would have been without the use of dollar rolls.
To increase income on its investments, the Bond Portfolio may lend its
portfolio securities with an aggregate value of up to 30% of its total assets
to broker/dealers and other institutional investors pursuant to agreements
requiring that the loans be continuously secured by collateral equal at all
times in value to at least the market value of the securities loaned.
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<PAGE> 35
Collateral for such loans may include cash, securities of the U.S. Government
or its agencies or instrumentalities or an irrevocable letter of credit issued
by a bank which is deemed creditworthy by the adviser or sub-adviser. The
Fixed Income Fund may not engage in securities lending.
The Bond Portfolio may purchase or sell securities on a "forward
commitment" basis. These transactions involve a commitment by the Bond
Portfolio to purchase or sell particular securities with payment and delivery
taking place at a future date (perhaps one or two months later), and permit the
Bond Portfolio to lock in a price or yield on a security it owns or intends to
purchase, regardless of future changes in interest rates. By contrast, the
Fixed Income Fund may not purchase or sell securities on a forward commitment
basis. The Bond Portfolio's forward commitments are not expected to exceed 25%
of the value of its total assets absent unusual market conditions. The Bond
Portfolio does not intend to engage in forward commitments for speculative
purposes but only in furtherance of its investment objective.
There are also noteworthy differences between the quality and maturity
parameters within which the Fixed Income Fund and the Bond Portfolio must
operate. As noted above, the Bond Portfolio may invest in long-term debt
securities rated in the top four rating categories by Moody's or S&P, and may
purchase commercial paper rated "Prime-2" or better by Moody's or "A-2" and
better by S&P. By contrast, the Fixed Income Fund must limit its investments
in long-term debt to instruments rated in the top three rating categories by
Moody's and S&P, and may not purchase commercial paper rated below "Prime-1" by
Moody's or "A-1" by S&P.
Lastly, the Bond Portfolio may invest up to 15% of its net assets in
illiquid securities, whereas the Fixed Income Fund must limit such investments
to 10% of its net assets.
INVESTMENT LIMITATIONS. Neither the Bond Portfolio nor the Fixed Income Fund
may change its fundamental investment limitations without the affirmative vote
of the holders of a majority of its outstanding shares (as defined in the 1940
Act). The fundamental investment limitations of the Bond Portfolio and the
Fixed Income Fund are similar, but not identical.
The Fixed Income Fund and the Bond Portfolio are both "diversified"
investment portfolios and, therefore, have a fundamental policy limiting
investments in securities of any one issuer, other than securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities (and, with
respect
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<PAGE> 36
to the Bond Portfolio, certificates of deposit for any such securities) to 5%
of the value of their respective total assets. The Fixed Income Fund must
limit its investments in the securities of any one issuer to 10% of such
issuer's outstanding securities or outstanding voting securities. The Bond
Portfolio may not purchase securities of any one issuer if more than 10% of
such issuer's outstanding voting securities would be owned by the Bond
Portfolio and all other investment portfolios of PNC Fund in the aggregate.
However, the Fixed Income Fund and the Bond Portfolio may invest up to 25% of
the value of their respective total assets without regard to their respective
investment limitations described in this paragraph.
Neither the Fixed Income Fund nor the Bond Portfolio may purchase any
securities which would cause 25% or more of the value of its total assets at
the time of purchase to be invested in the securities of one or more issuers
conducting their principal business activities in the same industry. For the
Fixed Income Fund, this limitation does not apply to investments in U.S.
Treasury Bills or other obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities. For the Bond Portfolio, this
investment limitation does not apply to instruments issued or guaranteed by the
United States, any state, any territory or possession of the United States, the
District of Columbia or any of their authorities, agencies, instrumentalities
or political subdivisions, or to repurchase agreements secured by such
instruments.
Both the Fixed Income Fund and the Bond Portfolio are subject to
limitations on borrowing, but the Bond Portfolio may generally borrow to a
greater extent. The Fixed Income Fund may not borrow money, except from banks
for temporary purposes and then in amounts not in excess of 10% of the value of
its total assets at the time of such borrowing. The Fixed Income Fund is
prohibited from mortgaging, pledging or hypothecating any assets except in
connection with any such borrowing and in amounts not in excess of the lesser
of the dollar amounts borrowed or 10% of the value of its total assets at the
time of such borrowing. Similarly, the Bond Portfolio may not borrow money or
issue senior securities, except that it may borrow from banks and enter into
reverse repurchase agreements for temporary purposes in amounts up to one-third
of the value of its total assets at the time of such borrowing. The Bond
Portfolio also may not mortgage, pledge or hypothecate any assets except in
connection with such borrowing and then in amounts not in excess of one-third
of the value of its total assets at the time of such borrowing. The Fixed
Income Fund may not purchase securities while borrowings in excess of 5% of its
net assets are outstanding. Similarly, the Bond Portfolio may not purchase
securities while borrowings in excess of 5% of its total assets are
outstanding.
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<PAGE> 37
Both the Fixed Income Fund and the Bond Portfolio may not purchase or
sell real estate, except that both the Fixed Income Fund and the Bond Portfolio
may invest in securities of issuers which deal in real estate and may purchase
securities which are secured by interests in real estate.
Neither the Fixed Income Fund nor the Bond Portfolio may write or sell
put options, call options, straddles, spreads or any combination thereof,
except that the Bond Portfolio may engage in these investment practices for
transactions in options on securities, securities indices, futures contracts
and options on futures contracts.
Both the Fixed Income Fund and the Bond Portfolio are prohibited from
the following activities: making investments for the purpose of exercising
control or management; acting as an underwriter of securities, except insofar
as the purchase of obligations directly from the issuer thereof or the
disposition of securities may be deemed to be underwriting; and acquiring any
other investment company or investment company security except in connection
with a merger, consolidation, reorganization or acquisition of assets or where
otherwise permitted by the 1940 Act.
Neither the Fixed Income Fund nor the Bond Portfolio may make loans,
except that each may purchase or hold debt instruments and may enter into
repurchase agreements in accordance with their respective investment policies.
In addition, the Bond Portfolio is specifically authorized to engage in
securities lending.
Neither the Fixed Income Fund nor the Bond Portfolio may purchase or
sell commodity contracts (and, in the case of the Fixed Income Fund,
commodities), or invest in oil, gas or mineral exploration or development
programs, except that the Bond Portfolio may purchase securities of companies
engaging in whole or in part in such activities and may enter into futures
contracts and related options. Finally, neither the Fixed Income Fund nor the
Bond Portfolio may purchase securities on margin, make short sales of
securities or maintain a short position, except that: i) the Bond Portfolio may
invest in futures contracts and related options and may sell securities short
against the box, and ii) the Fixed Income Fund may obtain such short-term
credit as may be necessary for the clearance of purchases and sales of
portfolio shares.
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<PAGE> 38
For more information on the investment policies and limitations of the
Fixed Income Fund and the Bond Portfolio, see "Summary -- Overview of the Trust
and PNC Fund" and "Summary -- Risk Factors."
PURCHASE AND REDEMPTION INFORMATION, EXCHANGE PRIVILEGES, DISTRIBUTIONS,
PRICING AND ORGANIZATION. Fixed Income Dollar Shares and Fixed Income Shares
of the Trust are offered on a continuous basis by PDI. Shares of the Fixed
Income Fund are sold at the net asset value per share for the Fixed Income
Dollar Shares and the Fixed Income Shares, respectively, next determined after
receipt of a purchase order by PFPC, the Trust's transfer agent. Purchase
orders for shares of the Fixed Income Fund are accepted on days on which both
the New York Stock Exchange and the Federal Reserve Bank of Philadelphia are
open for business ("Business Days"). The Trust may in its discretion reject
any order for shares. Payment for Fixed Income Fund shares may be made only in
Federal funds or other funds immediately available to the Trust's custodian.
The minimum initial investment by an institution is $5,000; however,
broker-dealers and other institutional investors may set a higher minimum for
their customers. There is no minimum subsequent investment.
Fixed Income Fund Dollar Shares and Fixed Income Fund Shares of the
Trust are sold without a sales load by the Fixed Income Fund. Institutional
investors purchasing or holding Fixed Income Dollar Shares for their customer
accounts may charge customers fees for cash management and other services
provided in connection with their accounts. An institution purchasing or
redeeming Fixed Income Dollar Shares on behalf of its customers is responsible
for transmitting orders to the Trust's distributor in accordance with its
customer agreements.
Shares of the Bond Portfolio are offered on a continuous basis for PNC
Fund by PDI. Shares of the Bond Portfolio are offered at the net asset value
per share for the Service Shares and Institutional Shares, respectively, next
computed after an order is received by PFPC. Shares may be purchased on any
Business Day. PNC Fund may in its discretion reject any order for shares.
Payment for shares of the Bond Portfolio may be made only in Federal funds or
other funds immediately available to PNC Fund's custodian. The minimum initial
investment by an institution is $5,000; however, institutional investors may
set a higher minimum for their customers. There is no minimum subsequent
investment.
Service Shares and Institutional Shares of the Bond Portfolio are sold
without a sales load. Service Shares are sold to institutional investors
acting on behalf of their customers which maintain accounts with such
institutional investors. Institutional investors may receive compensation from
PNC Fund
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<PAGE> 39
for providing various shareholder services and may charge their customer
accounts for services provided in connection with the purchase or redemption of
Service Shares. An institution purchasing or redeeming Service Shares on
behalf of its customers is responsible for transmitting orders to PNC Fund's
distributor in accordance with its account procedures. Institutional Shares
are sold to institutional investors generally.
Shareholders of the Trust may redeem shares of the Fixed Income Fund
by telephone or direct computer access. Shareholders of PNC Fund may redeem
shares of the Bond Portfolio by mail or by telephone. The holders of Fixed
Income Dollar Shares of the Fixed Income Fund and Service Shares of the Bond
Portfolio must redeem their respective shares through the institutional
investors with which they maintain accounts in accordance with the applicable
account procedures.
The Fixed Income Fund's net investment income is declared daily as a
dividend to shareholders of record at the close of business on the day of
declaration. The Fixed Income Fund expects to distribute at least once each
year any net realized short- and long-term capital gains. Shareholders of the
Fixed Income Fund will automatically receive all income dividends and capital
gains distributions in cash, unless the shareholder elects to receive such
dividends and distributions in full and fractional shares of the same class.
The net investment income of the Bond Portfolio is declared monthly as
a dividend to investors who are shareholders of the Bond Portfolio at the close
of business on the day of declaration. Net realized capital gains (including
net short-term capital gains), if any, will be distributed by the Bond
Portfolio at least annually. All distributions are reinvested at net asset
value in the form of additional full and fractional shares of the same class of
the Bond Portfolio unless an Institution elects to receive such dividends and
distributions in cash.
Valuation of securities held by the Fixed Income Fund is as follows:
portfolio securities for which market quotations are readily available (other
than debt securities with remaining maturities of sixty days or less) are
valued at the mean between the most recent quoted bid and asked prices provided
by investment dealers; unlisted securities for which market quotations are
readily available will be valued at the most recent quoted bid price; other
securities and assets for which market quotations are not readily available,
including restricted securities and other debt obligations purchased in private
transactions, are valued at their fair value in the best judgment of PIMC under
procedures established by, and under the
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<PAGE> 40
supervision of, the Trust's Board of Trustees; and debt securities with
maturities of sixty days or less are valued on an amortized cost basis (unless
the Board determines that such basis does not represent fair value at the
time).
Valuation of securities held by the Bond Portfolio is as follows:
securities traded on a national securities exchange or on the NASDAQ National
Market System are valued at the last reported sale price that day; securities
traded on a national securities exchange or on the NASDAQ National Market
System for which there were no sales on that day and securities traded on other
over-the-counter markets for which market quotations are readily available are
valued at the mean of the bid and asked prices; an option or futures contract
is valued at the last sales price prior to 4:00 P.M. (Eastern Time), as quoted
on the principal exchange or board of trade on which such option or contract is
traded, or in the absence of a sale, the mean between the last bid and asked
prices prior to 4:00 P.M. (Eastern Time); and securities for which market
quotations are not readily available are valued at fair market value as
determined in good faith by or under the direction of PNC Fund's Board of
Trustees. The amortized cost method of valuation will also be used with
respect to debt obligations with sixty days or less remaining to maturity
unless the investment adviser and/or sub-adviser under the supervision of the
Board of Trustees determines such method does not represent fair value.
Valuation of securities of foreign issuers held by the Bond Portfolio
is as follows: to the extent sale prices are available, securities which are
traded on a recognized stock exchange, whether U.S. or foreign, are valued at
the latest sale price on that exchange prior to the time when assets are valued
or prior to the close of regular trading hours on the New York Stock Exchange.
In the event that there are no sales, the mean between the last available bid
and asked prices will be used. If a security is traded on more than one
exchange, the latest sale price on the exchange where the security is primarily
traded is used. An option or futures contract is valued at the last sales
price prior to 4:00 P.M. (Eastern Time), as quoted on the principal exchange or
board of trade on which such option or contract is traded, or in the absence of
a sale, the mean between the last bid and asked prices prior to 4:00 P.M.
(Eastern Time). In the event that application of these methods of valuation
results in a price for a security which is deemed not to be representative of
the market value of such security, the security will be valued by, under the
direction of or in accordance with a method specified by the Board of Trustees
as reflecting fair value. The amortized cost method of valuation will be used
with respect to debt obligations with sixty days or less remaining to maturity
unless the investment adviser and/or sub-adviser under the supervision of the
Board of Trustees determines such method
-36-
<PAGE> 41
does not represent fair value. All other assets and securities held by the
Bond Portfolio (including restricted securities) are valued at fair value as
determined in good faith by the Board of Trustees or by someone under its
direction. Any assets which are denominated in a foreign currency are
translated into U.S. dollars at the prevailing market rates.
The net asset value per share for Fixed Income Dollar Shares and Fixed
Income Shares, respectively, of the Fixed Income Fund and for Service Shares
and Institutional Shares, respectively, of the Bond Portfolio for purposes of
pricing purchase and redemption orders is determined as of 4:00 P.M., Eastern
Time, on each Business Day.
OTHER INFORMATION. PNC Fund and the Trust are registered as open-end
management investment companies under the 1940 Act. Currently, PNC Fund offers
twenty-five investment portfolios and the Trust offers one investment
portfolio.
The Trust and PNC Fund are organized as Massachusetts business trusts
and are subject to the provisions of their respective Declarations of Trust and
Codes of Regulation. The attributes of a share of common stock in PNC Fund are
comparable to those of a share of beneficial interest in the Trust. Shares of
both the Bond Portfolio and the Fixed Income Fund are entitled to one vote for
each full share held and fractional votes for fractional shares held; will vote
in the aggregate and not by class except as otherwise required by law or when
class voting is permitted by the respective Board of Trustees; and are entitled
to participate equally in the dividends and distributions that are declared
with respect to the particular investment portfolio and in the net
distributable assets of such portfolio on liquidation. Each Fixed Income
Dollar Share and Fixed Income Share of the Fixed Income Fund is without par
value, whereas each Service Share and each Institutional Share of the Bond
Portfolio has a par value of $.001. In addition, shares of the Bond Portfolio
and the Fixed Income Fund have no pre-emptive rights and only such conversion
and exchange rights as the respective Board of Trustees may grant in its
discretion. When issued for payment as described in their respective
Prospectuses, Bond Portfolio shares and Fixed Income Fund shares are fully paid
and non- assessable by such entities except as required under Massachusetts
law. Neither PNC Fund nor the Trust is required to hold annual meetings for
the election of Board members and other business unless and until such time as
less than a majority of the Board members holding office have been elected by
shareholders. Under certain circumstances, however, shareholders have the
right to call a meeting of shareholders to consider the removal of one or more
trustees. To the extent required by law, PNC Fund and the Trust will assist in
shareholder communications in such matters.
-37-
<PAGE> 42
The foregoing is only a summary of certain significant attributes of
PNC Fund, the Trust and their shares. Shareholders may obtain copies of the
Declarations of Trust and Codes of Regulation of PNC Fund and the Trust, and of
the Massachusetts General Law, upon written request at the address shown on the
cover page of this Combined Proxy Statement/Prospectus.
INFORMATION RELATING TO VOTING MATTERS
GENERAL INFORMATION: This Combined Proxy Statement/
Prospectus is being furnished in connection with the solicitation of proxies by
the Trust's Board of Trustees in connection with the Meeting. It is expected
that the solicitation of proxies will be primarily by mail. Officers and
service contractors of the Trust and PNC Fund may also solicit proxies by
telephone, telegraph or personal interview. The cost of proxy solicitation
will be borne by the Trust. Any shareholder giving a proxy may revoke it at
any time before it is exercised by submitting to the Trust a written notice of
revocation or a subsequently executed proxy or by attending the Meeting and
voting in person.
Only shareholders of record at the close of business on May 12, 1995
will be entitled to vote at the Meeting. On that date there were outstanding
and entitled to be voted _____________ Fixed Income Dollar Shares and
_____________ Fixed Income Shares of the Fixed Income Fund. Each share or
fraction thereof is entitled to one vote or fraction thereof.
If the accompanying proxy is executed and returned in time for the
Meeting, the shares covered thereby will be voted in accordance with the proxy
on all matters that may properly come before the Meeting or any adjournment
thereof. For information on adjournment of the Meeting, see "Quorum" below.
THE TRUST WILL FURNISH, WITHOUT CHARGE, A COPY OF THE TRUST'S ANNUAL REPORT TO
SHAREHOLDERS DATED JUNE 30, 1994 AND THE TRUST'S SEMI-ANNUAL REPORT TO
SHAREHOLDERS DATED DECEMBER 31, 1994 TO ANY SHAREHOLDER UPON REQUEST. THE
TRUST'S ANNUAL AND SEMI-ANNUAL REPORTS TO SHAREHOLDERS MAY BE OBTAINED FROM THE
TRUST BY CALLING (800) 821-7432.
SHAREHOLDER AND BOARD APPROVALS. The Reorganization Agreement (and the
transactions contemplated thereby) is being submitted for approval at the
Meeting by the holders of a majority of the outstanding Fixed Income Dollar
Shares and Fixed Income Shares of the Fixed Income Fund voting together as a
single class in accordance with the provisions of the Trust's Declaration of
Trust and the requirements of the 1940 Act. The term "majority of the
outstanding shares" of the Fixed Income Fund means the lesser of (a) 67% of the
shares of the Fixed Income Fund present
-38-
<PAGE> 43
at the Meeting if the holders of more than 50% of the outstanding shares of the
Fixed Income Fund are present in person or by proxy, or (b) more than 50% of
the outstanding shares of the Fixed Income Fund. In the absence of voting
instructions, shares will be voted FOR the proposal as indicated on each proxy.
If a proxy is properly executed and returned, but marked with an abstention,
the shares represented thereby will be considered to be present at the Meeting
for purposes of determining the existence of a quorum for the transaction of
business. Under Massachusetts law, abstentions will have the same effect as
casting a vote against the proposal. Broker "non-votes" (i.e., proxies from
brokers or nominees indicating that such persons have not received instructions
from the beneficial owner or other persons entitled to vote shares on a
particular matter with respect to which the brokers or nominees do not have
discretionary power) will be disregarded for all purposes.
The vote of the shareholders of the Bond Portfolio is not being
solicited, because their approval or consent is not necessary for the
Reorganization to be consummated.
The approval of the Reorganization Agreement by the Boards of the
Trust and PNC Fund is discussed above under "Information Relating to the
Proposed Reorganization -- Board Consideration."
At May 12, 1995, PNC Bank held of record approximately ___% of the
outstanding shares of PNC Fund and may be deemed a controlling person of PNC
Fund under the 1940 Act. PNC Bank is a national bank organized under the laws
of the United States. All of the capital stock of PNC Bank is owned by PNC
Bancorp, Inc., and all of the capital stock of PNC Bancorp, Inc. is owned by
PNC Bank Corp., a publicly held bank holding company.
At May 12, 1995, Cohahco First National Bank of S.W. Ohio held of
record ___% of the outstanding shares of the Fixed Income Fund. The Trust does
not know whether Cohahco First National Bank is the beneficial owner of the
shares held by it.
At May 12, 1995, the trustees and officers of PNC Fund owned less than
1% of the outstanding shares of the Bond Portfolio. At May 12, 1995, the
trustees and officers of the Trust, as a group, owned less than 1% of the
outstanding shares of the Fixed Income Fund.
APPRAISAL RIGHTS. Shareholders are not entitled to any rights of share
appraisal under the Trust's Declaration of Trust or under the laws of the
Commonwealth of Massachusetts in connection with the Reorganization. However,
shareholders have the right to redeem from the Trust their Fixed Income Fund
shares at net asset value until the Effective Time of the Reorganization, and
thereafter shareholders may redeem from PNC Fund the Bond
-39-
<PAGE> 44
Portfolio shares acquired by them in the Reorganization at net asset value
subject to the forward pricing requirements of Rule 22c-1 under the 1940 Act.
QUORUM. In the event that a quorum is not present at the Meeting, or in the
event that a quorum is present at the Meeting but sufficient votes to approve
the Reorganization Agreement and the transactions contemplated thereby are not
received, the persons named as proxies may propose one or more adjournments of
the Meeting to permit further solicitation of proxies. Any such adjournment
will require the affirmative vote of a majority of those shares affected by the
adjournment that are represented at the Meeting in person or by proxy. If a
quorum is present, the persons named as proxies will vote those proxies which
they are entitled to vote FOR the Reorganization Agreement in favor of such
adjournments, will vote those proxies required to be voted AGAINST such
proposal against any adjournments, and will abstain from voting on such
adjournments with respect to those proxies marked "ABSTAIN". Fixed Income Fund
proxies properly executed and marked with a negative vote or an abstention will
be considered to be present at the Meeting for the purposes of determining the
existence of a quorum for the transaction of business.
ANNUAL MEETINGS. PNC Fund does not presently intend to hold annual meetings of
shareholders for the election of trustees and other business unless and until
such time as less than a majority of the trustees holding office have been
elected by the shareholders, at which time the trustees then in office will
call a shareholders' meeting for the election of trustees. Shareholders have
the right to call a meeting of shareholders to consider the removal of one or
more trustees or for other matters and such meetings will be called when
requested in writing by the holders of record of 10% or more of PNC Fund's
outstanding shares of common stock. To the extent required by law, PNC Fund
will assist in shareholder communications on such matters.
ADDITIONAL INFORMATION ABOUT PNC FUND
Information about PNC Fund and the Bond Portfolio is included in the
Prospectus accompanying this Combined Proxy Statement/Prospectus, which is
incorporated by reference herein. Additional information about PNC Fund and
the Bond Portfolio is included in its Statement of Additional Information dated
January 30, 1995, which has been filed with the SEC and is incorporated by
reference herein. A copy of the Statement of Additional Information may be
obtained without charge by calling 1-800-422-6538. PNC Fund is subject to the
informational requirements of the 1940 Act, as applicable, and, in accordance
with such requirements, files proxy materials, reports and other
-40-
<PAGE> 45
information with the SEC. These materials can be inspected and copied at the
Public Reference Facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at the offices of PFPC, 400 Bellevue Parkway,
Wilmington, Delaware 19809 and at the SEC's Regional Offices at 75 Park Place,
Room 1228, New York, New York 10007 and Everett McKinley Dirksen Building, 219
S. Dearborn Street, Room 1204, Chicago, Illinois 60604. Copies of such
materials can also be obtained from the Public Reference Branch, Office of
Consumer Affairs and Information Services, Securities and Exchange Commission,
Washington, D.C. 20549, at prescribed rates.
The current trustees and officers of PNC Fund will continue as
trustees and officers of PNC Fund following the Reorganization. The name and
address of each trustee and officer as well as information concerning his
principal occupations during the last five years are as follows:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION DURING PAST FIVE YEARS
- ---------------- -------- ----------------------
<S> <C> <C>
Philip E. Coldwell Trustee Economic Consultant;
Coldwell Financial Consultants Chairman, Coldwell
3330 Southwestern Blvd. Financial Consultants;
Dallas, TX 75225 Director, Maxus Energy
Corporation (energy
products) from 1989 to
1993; Director or Trustee
of Temporary Investment
Fund, Inc., Trust for
Federal Securities,
Municipal Fund for
Temporary Investment and
Portfolios for
Diversified Investment.
Robert R. Fortune Trustee Financial consultant;
2920 Ritter Lane Chairman, President and
Allentown, PA 18104 Chief Executive Officer,
Associated Electric & Gas
Insurance Services Limited
from 1984 to 1993; Member
of the Financial Executives
Institute and American
Institute of Certified
Public Accountants;
Director, Trustee or
Managing General Partner of
a number of investment
companies advised by
</TABLE>
-41-
<PAGE> 46
<TABLE>
<S> <C>
PIMC; Director, Prudential
Utility Fund, Inc.,
Prudential Structured
Maturity Fund, Inc. and
Prudential IncomeVertible
Fund, Inc.
Rodney D. Johnson Trustee President, Fairmount
Fairmont Capital Advisors, Inc. Capital Advisors, Inc.
1435 Walnut St. (financial advisers)
Philadelphia, PA 19102 since 1987; Treasurer,
North Philadelphia Health
System (formerly Girard
Medical Center) from 1988
to 1992; Member, Board of
Education, School District
of Philadelphia, 1983 to
1988; Treasurer, Cascade
Aphasia Center, 1984 to
1988; Director or Trustee
of Temporary Investment
Fund, Inc., Trust for
Federal Securities,
Municipal Fund for
Temporary Investment,
Portfolios for Diversified
Investment, Municipal Fund
for California Investors,
Inc. and Municipal Fund for
New York Investors, Inc.
G. Willing Pepper(1) Chairman of Retired; Chairman of the
128 Springton the Board Board, Specialty
Lake Road and President Composites Corporation
Media, PA 19063 until May 1984;
Chairman of the Board, The
Institute for Cancer
Research until 1979;
Director, Philadelphia
National Bank until 1978;
President, Scott Paper
Company from 1971 to 1973;
Director, Marmon
</TABLE>
- ---------------------
(1)This trustee may be deemed an "interested person" of the Fund as defined
in the 1940 Act.
-42-
<PAGE> 47
<TABLE>
<S> <C> <C>
Group, Inc. until April
1986; Director, Trustee or
Managing General Partner of
a number of investment
companies advised by PIMC.
Anthony M. Santomero Trustee Deputy Dean from
310 Keithwood Road 1990 to 1994, Richard
Wynnewood, PA 19096 K. Mellon Professor
of Finance since April 1984,
and Dean's Advisory Council
Member since July 1984, The
Wharton School, University
of Pennsylvania; Associate
Editor, Journal of Banking
and Finance since June
1978; Associate Editor,
Journal of Economics and
Business since October
1979; Associate Editor,
Journal of Money, Credit
and Banking since January
1980; Research Associate,
New York University Center
for Japan-U.S. Business and
Economic Studies since July
1989; Editorial Advisory
Board, Open Economics
Review since November 1990;
Director, The Zweig Fund
and The Zweig Total Return
Fund; Director or Trustee
of Temporary Investment
Fund, Inc., Trust for
Federal Securities,
Municipal Fund for
Temporary Investment,
Portfolios for Diversified
Investment and Municipal
Fund for California
Investors, Inc.
David R. Wilmerding, Jr. Vice-Chairman President, Gates,
One Aldwyn Center of the Board Wilmerding, Carper &
Villanova, PA 19085 Rawlings, Inc.
(investment advisers)
</TABLE>
-43-
<PAGE> 48
<TABLE>
<S> <C> <C>
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;
Vice Chairman of the Board,
Fox Chase Cancer Center;
Trustee Emeritus,
Pennsylvania School for the
Deaf; Trustee Emeritus,
Immaculata College;
President, Vice President
and/or Treasurer of a
number of investment
companies advised by PIMC.
Morgan R. Jones Secretary Partner in the law
Philadelphia National firm of Drinker Biddle &
Bank Building Reath, Philadelphia,
1345 Chestnut Street Pennsylvania.
Philadelphia, PA
19107-3496
</TABLE>
-44-
<PAGE> 49
Information included in this Combined Proxy Statement/ Prospectus concerning
PNC Fund and the Bond Portfolio was provided by PNC Fund and PIMC.
ADDITIONAL INFORMATION ABOUT THE TRUST
Information about the Trust is incorporated herein by reference from
its Prospectus and Statement of Additional Information dated October 28, 1994,
copies of which may be obtained without charge by writing or calling the Trust
at the address and telephone number shown on the cover page of this Combined
Proxy Statement/Prospectus. The Fixed Income Fund is subject to the
informational requirements of the 1940 Act, as applicable, and, in accordance
with such requirements, files proxy materials, reports and other information
with the SEC. These materials can be inspected and copied at the Public
Reference Facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at the offices of PFPC, 400 Bellevue Parkway,
Wilmington, Delaware 19809 and at the SEC's Regional Offices at 75 Park Place,
Room 1228, New York, New York 10007 and Everett McKinley Dirksen Building, 219
S. Dearborn Street, Room 1204, Chicago, Illinois 60604. Copies of such
materials can also be obtained from the Public Reference Branch, Office of
Consumer Affairs and Information Services, Securities and Exchange Commission,
Washington, D.C. 20549, at prescribed rates.
With the exception of the Secretary of the Trust, the current trustees
and officers of the Trust are the same as those listed above for PNC Fund. The
name and address of the Secretary of the Trust, as well as information
concerning his principal occupation during the last five years, are as follows:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH TRUST DURING PAST FIVE YEARS
- ---------------- ------------------- ----------------------
<S> <C> <C>
W. Bruce McConnel, III Secretary Partner in the law firm
Philadelphia National of Drinker Biddle &
Bank Building Reath, Philadelphia,
1345 Chestnut Street Pennsylvania.
Philadelphia,
PA 19107-3496
</TABLE>
The Trust has an Executive Committee comprised of Messrs. Fortune,
Pepper and Wilmerding. During intervals between Board meetings, the Executive
Committee may exercise the authority of
-45-
<PAGE> 50
the Board of Trustees in the management of the Trust's business to the extent
permitted by law.
Below is financial information about the Fixed Income Fund for the
six-month period ended December 31, 1994. The financial information is based on
a single Fixed Income Dollar Share and a single Fixed Income Share outstanding
throughout such period. This information is derived from the Fixed Income
Fund's unaudited financial statements for such period. This data should be
read in conjunction with the financial statements and related notes which are
included in the Statement of Additional Information related to this Combined
Proxy Statement/Prospectus.
FIXED INCOME FUND
Fixed Income Shares
PORTFOLIOS FOR DIVERSIFIED INVESTMENT
Financial Highlights
The table below sets forth selected financial data for a share of capital stock
outstanding throughout the period presented.
<TABLE>
<CAPTION>
Six Months
Ended
December 31,
1994
(Unaudited)
-------------
<S> <C>
Net asset value, beginning . . . . . $ 9.57
----------
Income from investment operations:
Net investment income . . . . . . . . 0.28
Net gain (loss) on securities
(realized and unrealized) . . . . . (0.20)
----------
Total income (loss) from
investment operations . . . . . 0.08
----------
Less distributions:
Dividends from net investment
income . . . . . . . . . . . . . . (0.28)
Distributions from capital gains . . 0.00
Distributions in excess of
capital gains . . . . . . . . . . . 0.00
---------
Total distributions . . . . . . . (0.28)
---------
Net asset value, end of period . . . $ 9.37
=========
Total return . . . . . . . . . . . . (3.52%)(a)
Ratios/supplemental data:
Net assets, end of period
(in 000's) . . . . . . . . . . . . $ 13,347
Ratio of expenses to average daily
net assets . . . . . . . . . . . . 0.40%(a)(b)
Ratio of net investment income to
average daily net assets . . . . . 5.82%(a)
Portfolio turnover rate . . . . . . . 65%(a)
</TABLE>
- ---------------------------------
(a) Annualized.
(b) Without the waiver of administrative fees, advisory fees,
trustees' fees and officer's salary and expense reimbursements,
the ratios of expenses to average daily net assets would have been
1.02% (annualized), .96%, .93%, 1.00%, 1.34% and 1.22% for the
period ended December 31, 1994 and the years ended June 30, 1994,
1993, 1992, 1991 and 1990, respectively.
See Notes to Financial Statements.
FIXED INCOME FUND
Fixed Income Dollar Shares
PORTFOLIOS FOR DIVERSIFIED INVESTMENT
Financial Highlights
The table below sets forth selected financial data for a share of capital stock
outstanding throughout the period presented.
<TABLE>
<CAPTION>
Six Months
Ended
December 31,
1994
(Unaudited)
-------------
<S> <C>
Net asset value, beginning
of period . . . . . . . . . . . $ 9.57
---------
Income from investment operations:
Net investment income . . . . . . 0.27
Net gain(loss) on securities
(realized and unrealized) . . . (0.20)
---------
Total income from investment
operations . . . . . . . . . . 0.07
---------
Less distributions:
Dividends from net investment income (0.27)
Distributions from capital
gains . . . . . . . . . . . . 0.00
Distributions in excess of
capital gains . . . . . . . . . 0.00
---------
Total distributions . . . . . . (0.27)
---------
Net asset value, end of
period . . . . . . . . . . . . $ 9.37
=========
Total return . . . . . . . . . . (3.77%)(a)
Ratios/supplemental data:
Net assets, end of period (in 000's) $ 474
Ratio of expenses to average daily
net assets . . . . . . . . . . 0.65%(a)(b)
Ratios of net investment income to
average daily net assets . . . 5.57%(a)
Portfolio turnover rate . . . . . 65%(a)
</TABLE>
- ----------------------
(a) Annualized.
(b) Without the waiver of administrative fees, advisory fees, trustees' fees
and officer's salary and expense reimbursements, the ratios of expenses to
average daily net assets would have been 1.27%(annualized), 1.21%, 1.18%,
1.25%, 1.59%(annualized), and 1.48% for the period ended December 31, 1994
and the years ended June 30, 1994, 1993 and 1992, the period ended June 30,
1991 and the year ended June 30, 1990, respectively.
See Notes to Financial Statements.
Information included in this Combined Proxy Statement/ Prospectus
concerning the Trust and the Fixed Income Fund was provided by the Trust and
PIMC.
FINANCIAL STATEMENTS
The financial statements and financial highlights of the Bond
Portfolio for the fiscal year ended September 30, 1994 that are included in its
Prospectuses and Statement of Additional Information have been audited by
Coopers & Lybrand, L.L.P., independent accountants, and the financial
statements and financial highlights of the Fixed Income Fund for the fiscal
year ended June 30, 1994 that are included in the Statement of Additional
Information related to this Combined Proxy Statement/Prospectus (and with
respect to the financial highlights, that are included in this Combined Proxy
Statement/Prospectus) have been audited by Coopers & Lybrand, L.L.P.,
independent accountants, to the extent indicated in their reports thereon,
incorporated by reference or included in such Prospectuses and Statements of
Additional Information. The financial statements and financial highlights
audited by Coopers & Lybrand, L.L.P. and included in such Prospectuses and
Statements of Additional Information have been included in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing. The financial statements and financial highlights for the Fixed
Income Fund for the six-month period ended December 31, 1994 that are included
in the Statement of Additional Information related to this Combined Proxy
Statement/Prospectus (and with respect to the financial highlights, that are
included in this Combined Proxy Statement/Prospectus) are unaudited.
-46-
<PAGE> 51
OTHER BUSINESS
The Board of Trustees of the Trust knows of no other business to be
brought before the Meeting. However, if any other matters come before the
Meeting, it is the intention that proxies which do not contain specific
restrictions to the contrary will be voted on such matters in accordance with
the judgment of the persons named in the enclosed form of proxy.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Trust in writing at the
address on the cover page of this Combined Proxy Statement/Prospectus or by
telephoning 1-800-821-7432.
* * *
SHAREHOLDERS WHO DO NOT EXPECT TO BE PRESENT AT THE MEETING ARE URGED TO DATE
AND SIGN THE ENCLOSED PROXY AND PROMPTLY RETURN IT IN THE ENCLOSED ENVELOPE
WHICH IS ADDRESSED FOR YOUR CONVENIENCE AND NEEDS NO POSTAGE IF MAILED IN THE
UNITED STATES. IN ORDER TO AVOID THE EXPENSE OF FURTHER SOLICITATION, WE ASK
YOUR COOPERATION IN COMPLETING AND RETURNING YOUR PROXY PROMPTLY.
-47-
<PAGE> 52
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary
Proposed Reorganization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reasons for Reorganization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overview of the Trust and PNC Fund . . . . . . . . . . . . . . . . . . . . . . . . . . .
Voting Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Information Relating to the Proposed Reorganization . . . . . . . . . . . . . . . . . . . .
Description of the Reorganization Agreement . . . . . . . . . . . . . . . . . . . . . .
Board Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comparison of the Trust and PNC Fund . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase and Redemption Information, Exchange
Privileges, Distributions, Pricing and Organization . . . . . . . . . . . . . . . . . .
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Information Relating to Voting Matters . . . . . . . . . . . . . . . . . . . . . . . . . .
General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholder and Board Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Appraisal Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Annual Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Information About PNC Fund . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Information About the Trust . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholder Inquiries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exhibit A: Agreement and Plan of Reorganization . . . . . . . . . . . . . . . . . . . A-1
Exhibit B: Adviser's Investment Review . . . . . . . . . . . . . . . . . . . . . . . . B-1
</TABLE>
-48-
<PAGE> 53
EXHIBIT A
AGREEMENT AND PLAN OF
REORGANIZATION
BY AND BETWEEN
PORTFOLIOS FOR DIVERSIFIED INVESTMENT
AND
THE PNC(R) FUND
DATED ______________, 1995
<PAGE> 54
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Transfer of Assets of PDI Portfolio . . . . . . . . . . . . . . . . . . . . . . .
Liquidating Distributions and Termination of PDI . . . . . . . . . . . . . . . .
Valuation Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Representations, Warranties and Agreements of PDI . . . . . . . . . . . .
Certain Representations, Warranties and Agreements of PNC . . . . . . . . . . . . .
Shareholder Action on Behalf of the PDI Portfolio . . . . . . . . . . . . . . . . .
N-14 Registration Statement and Proxy Solicitation Materials . . . . . . . . . . .
Effective Time of the Reorganization . . . . . . . . . . . . . . . . . . . . . . .
PNC Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PDI Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Termination of Representations and Warranties . . . . . . . . . . . . . . . . . . .
Termination of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amendment and Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PNC Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PDI Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Index of Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
<PAGE> 55
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as
of this _____________ of _____________, 1995 between Portfolios for Diversified
Investment ("PDI"), a Massachusetts business trust consisting of one investment
portfolio, the Fixed Income Portfolio (the "PDI Portfolio"), and The PNC(R)
Fund ("PNC"), a Massachusetts business trust consisting of 25 investment
portfolios, including the Intermediate-Term Bond Portfolio (the "PNC
Portfolio").
WHEREAS, each of PNC and PDI is an open-end management investment
company registered with the Securities and Exchange Commission (the "SEC")
under the Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the parties desire that all of the assets and known
liabilities of the PDI Portfolio be transferred to, and be acquired and assumed
by, the PNC Portfolio, as stated herein, in exchange for Service Class shares
and Institutional Class shares of the PNC Portfolio which shall thereafter be
distributed by PDI to the holders of Fixed Income Dollar Shares and Fixed
Income Shares, respectively, of the PDI Portfolio in connection with the
liquidation and termination of PDI as described in this Agreement (the
"Reorganization"); and
<PAGE> 56
WHEREAS, the parties intend that, in connection with the
Reorganization, PDI shall be terminated and deregistered as described in this
Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter set forth and subject to the terms and conditions
thereof, the parties hereto, intending to be legally bound, agree as follows:
1. TRANSFER OF ASSETS OF PDI PORTFOLIO. At the Effective Time of
the Reorganization, all property of every description, and all interests,
rights, privileges and powers of the PDI Portfolio (such assets are herein
referred to as the "Fund Assets") shall be transferred and conveyed by the PDI
Portfolio to the PNC Portfolio and shall be accepted by the PNC Portfolio, and
the PNC Portfolio shall assume all known liabilities of the PDI Portfolio
reflected as such in the calculation of the PDI Portfolio's net asset value
(such liabilities are herein referred to as the "Fund Liabilities") as more
particularly set forth in the following paragraph, such that at and after the
Effective Time of the Reorganization: (a) all assets of the PDI Portfolio
shall become and be the assets of the PNC Portfolio; and (b) all known
liabilities of the PDI Portfolio reflected as such in the calculation of the
PDI Portfolio's net asset value shall attach to the PNC Portfolio as aforesaid
and may thenceforth be enforced against the PNC Portfolio to the extent as if
the same had been incurred by it. Without limiting the generality of the
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<PAGE> 57
foregoing, it is understood that the Fund Assets shall include all property and
assets of any nature whatsoever, including, without limitation, all cash, cash
equivalents, securities, claims and receivables (including dividend and
interest receivables) owned by the PDI Portfolio, and any deferred or prepaid
expenses shown as an asset on the PDI Portfolio's books, at the Effective Time
of the Reorganization, and all good will, all other intangible property and all
books and records belonging to the PDI Portfolio. It is further understood
that recourse for the Fund Liabilities assumed by the PNC Portfolio shall, at
and after the Effective Time of the Reorganization, be limited to the PNC
Portfolio.
In exchange for the transfer of the Fund Assets and the assumption of
the Fund Liabilities, PNC shall simultaneously issue at the Effective Time of
the Reorganization to the PDI Portfolio a number of full and fractional shares
of beneficial interest in the PNC Portfolio (to the third decimal place), of
the Service and Institutional Classes ("Service Shares" and "Institutional
Shares," respectively), having an aggregate net asset value equal to the
aggregate net asset value of the PDI Portfolio, all determined and adjusted as
provided in this Section 1. The portion of the aggregate net asset value of
the PDI Portfolio allocated to Service Shares and Institutional Shares of the
PNC Portfolio, respectively, shall be equal to the ratio of outstanding Fixed
Income Dollar Shares to outstanding Fixed Income Shares of the PDI Portfolio at
the Effective Time of
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<PAGE> 58
the Reorganization. Service Shares and Institutional Shares of the PNC
Portfolio shall be issued at their respective net asset values pro rata to the
holders of the Fixed Income Dollar Shares and the Fixed Income Shares,
respectively, of the PDI Portfolio.
The net asset value of Service Shares and Institutional Shares of the
PNC Portfolio and the net asset value of the PDI Portfolio shall be determined
as of the Valuation Time specified in Section 3. The net asset value of
Service Shares and Institutional Shares of the PNC Portfolio shall be computed
in the manner set forth in the PNC Portfolio's then current prospectuses under
the Securities Act of 1933, as amended (the "1933 Act"). In determining the
value of the securities transferred by the PDI Portfolio to the PNC Portfolio,
each security shall be priced in accordance with the policies and procedures of
PNC as described in its then current prospectus for the Intermediate-Term Bond
Portfolio. For such purposes, price quotations and the security
characteristics relating to establishing such quotations shall be determined by
PNC, provided that such determination shall be subject to the approval of PDI.
2. LIQUIDATING DISTRIBUTIONS AND TERMINATION OF PDI. At the
Effective Time of the Reorganization, the PDI Portfolio shall distribute in
complete liquidation: (i) pro rata to the recordholders of Fixed Income Dollar
Shares at the Effective Time of the Reorganization the Service Shares of the
PNC Portfolio received by the PDI Portfolio pursuant to Section 1; and (ii) pro
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<PAGE> 59
rata to the recordholders of Fixed Income Shares at the Effective Time of the
Reorganization the Institutional Shares of the PNC Portfolio received by the
PDI Portfolio pursuant to Section 1. In addition, each shareholder of record
of the PDI Portfolio shall have the right to receive any unpaid dividends or
other distributions which were declared before the Effective Time of the
Reorganization with respect to the shares of the PDI Portfolio that are held by
the shareholder at the Effective Time of the Reorganization. In accordance
with instructions it receives from PDI, PNC shall record on its books the
ownership of the Service Shares and Institutional Shares of the PNC Portfolio
by the recordholders of the Fixed Income Dollar Shares and the Fixed Income
Shares, respectively, of the PDI Portfolio. No redemption or repurchase of any
PNC Portfolio shares credited to former PDI shareholders in respect to the PDI
Portfolio shares represented by unsurrendered share certificates shall be
permitted until such certificates have been surrendered to PNC's transfer agent
for cancellation. All of the issued and outstanding shares of the PDI
Portfolio shall be cancelled on the books of PDI at the Effective Time of the
Reorganization and shall thereafter represent only the right to receive Service
Shares or Institutional Shares of the PNC Portfolio, and the PDI Portfolio's
transfer books shall be closed permanently. As soon as practicable after the
Effective Time of the Reorganization, PDI shall make all filings and take all
other steps as shall be necessary and proper to effect its complete
dissolution, and
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<PAGE> 60
shall file an application pursuant to Section 8(f) of the 1940 Act for an order
declaring that it has ceased to be an investment company. After the Effective
Time of the Reorganization, PDI shall not conduct any business except in
connection with its liquidation, dissolution, and deregistration.
3. VALUATION TIME. The Valuation Time shall be 4:00 P.M.,
Eastern Time, on June __, 1995, or such earlier or later date and time as may
be mutually agreed by the Board of Trustees of each of the parties and set
forth in writing signed by the parties' duly authorized officers.
4. CERTAIN REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF PDI.
PDI, on behalf of itself and the PDI Portfolio, represents and warrants to, and
agrees with, PNC as follows:
(a) It is a Massachusetts business trust duly
created pursuant to its Declaration of Trust
for the purpose of acting as a management
investment company under the 1940 Act and is
validly existing under the laws of, and duly
authorized to transact business in, the
Commonwealth of Massachusetts. Its
registration with the SEC as an open-end
management investment company under the 1940
Act is in full force and effect.
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<PAGE> 61
(b) It has power to own all of its properties and
assets and, subject to the approvals of
shareholders referred to in Section 6, to
carry out and consummate the transactions
contemplated herein, and has all necessary
federal, state and local authorizations to
carry on its business as now being conducted
and to consummate the transactions
contemplated by this Agreement.
(c) This Agreement has been duly authorized,
executed and delivered by PDI, and represents
PDI's valid and binding contract, enforceable
in accordance with its terms, subject as to
enforcement to bankruptcy, insolvency,
reorganization, arrangement, moratorium, and
other similar laws of general applicability
relating to or affecting creditors' rights
and to general equity principles. The
execution and delivery of this Agreement did
not, and the consummation of the transactions
contemplated by this Agreement will not,
violate PDI's Declaration of Trust or Code of
Regulations or any agreement or arrangement
to which it is a party or by which it is
bound.
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<PAGE> 62
(d) The PDI Portfolio has elected to qualify and
has qualified as a regulated investment
company under Part I of Subchapter M of the
Internal Revenue Code of 1986, as amended
(the "Code"), as of and since its first
taxable year; has been a regulated investment
company under such Part of the Code at all
times since the end of its first taxable year
when it so qualified; and qualifies and shall
continue to qualify as a regulated investment
company for its taxable year ending upon its
liquidation.
(e) All federal, state, local and foreign income,
profits, franchise, sales, withholding,
customs, transfer and other taxes, including
interest, additions to tax and penalties
(collectively, "Taxes") relating to the Fund
Assets due or properly shown to be due on any
return filed by PDI with respect to taxable
periods ending on or prior to, and the
portion of any interim period up to, the date
hereof have been fully and timely paid; and
there are no levies, liens, or other
encumbrances relating to Taxes existing,
threatened or pending with respect to the
Fund Assets.
-8-
<PAGE> 63
(f) The financial statements for its fiscal year
ended June 30, 1994, examined by Coopers &
Lybrand, L.L.P., and its unaudited financial
statements for the six-month period ended
December 31, 1994, copies of which have been
previously furnished to PNC, present fairly
the financial position of the PDI Portfolio
as of the respective dates indicated and the
results of its operations for the periods
indicated, in conformity with generally
accepted accounting principles applied on a
consistent basis.
(g) Prior to the Valuation Time, the PDI
Portfolio shall have declared a dividend or
dividends, with a record date and ex-dividend
date prior to the Valuation Time, which,
together with all previous dividends, shall
have the effect of distributing to its
shareholders all of its net investment
company income, if any, for the taxable
periods or years ended June 30, 1994 and for
the period from said date to and including
the Effective Time of the Reorganization
(computed without regard to any deduction for
dividends paid), and all of its net capital
gain, if any, realized in taxable periods or
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<PAGE> 64
years ended June 30, 1994 and in the period
from said date to and including the Effective
Time of the Reorganization.
(h) At both the Valuation Time and the Effective
Time of the Reorganization, there shall be no
known liabilities of the PDI Portfolio,
whether accrued, absolute, contingent or
otherwise, not reflected in the aggregate net
asset value of the PDI Portfolio.
(i) There are no legal, administrative or other
proceedings pending or, to its knowledge
threatened, against PDI or the PDI Portfolio
which could result in liability on the part
of PDI or the PDI Portfolio.
(j) Subject to the approvals of shareholders
referred to in Section 6, at both the
Valuation Time and the Effective Time of the
Reorganization, it shall have full right,
power and authority to sell, assign, transfer
and deliver the Fund Assets and, upon
delivery and payment for the Fund Assets as
contemplated herein, the PNC Portfolio shall
acquire good and marketable title thereto,
free and clear of all liens and encumbrances,
and subject to no restrictions on the
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<PAGE> 65
ownership or transfer thereof (except as
imposed by federal or state securities laws).
(k) At the Effective Time of the Reorganization,
all portfolio securities and other
investments included in the Fund Assets shall
be permissible investments for the PNC
Portfolio under the investment objective,
policies and limitations set forth in the PNC
Portfolio's registration statement and under
applicable law. From the date of this
Agreement to and including the Effective Time
of the Reorganization, PDI shall confer and
cooperate fully with PNC with respect to the
management of the PDI Portfolio to ensure
that PDI's obligations under this subsection
are duly met.
(l) No consent, approval, authorization or order
of any court or governmental authority is
required for the consummation by PDI of the
transactions contemplated by this Agreement,
except such as may be required under the 1933
Act, the Securities Exchange Act of 1934, as
amended ("1934 Act"), the 1940 Act, the rules
and regulations under those Acts, or state
securities laws.
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<PAGE> 66
(m) Insofar as the following relate to PDI, (i)
the registration statement filed by PNC on
Form N-14 relating to the shares of the PNC
Portfolio that will be registered with the
SEC pursuant to this Agreement, which shall
include or incorporate by reference the proxy
statement of PDI and the prospectus of PNC
with respect to the transactions contemplated
by this Agreement, and any supplement or
amendment thereto or to the documents
contained or incorporated therein by
reference (the "N-14 Registration
Statement"), and (ii) the proxy materials of
PDI otherwise filed with the SEC pursuant to
Section 14(a) of the 1934 Act and Section
20(a) of the 1940 Act with respect to the
transactions contemplated by this Agreement,
and any supplement or amendment thereto or
the documents appended thereto (the
"Reorganization Proxy Materials"), on the
effective dates of the N-14 Registration
Statement and the Reorganization Proxy
Materials, at the time of the shareholders'
meeting referred to in Section 6 and at the
Effective Time of the Reorganization: (i)
shall comply in all material respects
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<PAGE> 67
with the provisions of the 1933 Act, the 1934
Act and the 1940 Act, the rules and
regulations thereunder, and state securities
laws, and (ii) shall not contain any untrue
statement of a material fact or omit to state
a material fact required to be stated therein
or necessary to make the statements therein
not misleading; provided, that the
representations and warranties made by PDI in
this subsection shall apply only to
statements in or omissions from the N-14
Registration Statement or the Reorganization
Proxy Materials made in reliance upon and in
conformity with information furnished by it
for use therein as provided in Section 7.
(n) All of the issued and outstanding Fixed
Income Dollar Shares and Fixed Income Shares
of the PDI Portfolio have been validly issued
and are duly paid and non-assessable, and
were offered for sale and sold in conformity
with all applicable federal and state
securities laws.
(o) It shall not sell or otherwise dispose of any
shares of the PNC Portfolio to be received in
the transactions contemplated herein, except
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<PAGE> 68
in distribution to its shareholders as
contemplated herein.
5. CERTAIN REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF PNC.
PNC, on behalf of itself and the PNC Portfolio, represents and warrants to, and
agrees with, PDI as follows:
(a) It is a Massachusetts business trust duly
created pursuant to its Declaration of Trust
for the purpose of acting as a management
investment company under the 1940 Act and is
validly existing under the laws of, and duly
authorized to transact business in, the
Commonwealth of Massachusetts. It is
registered as an investment company under the
1940 Act and its registration with the SEC as
an investment company is in full force and
effect. It has power to own all of its
properties and assets and to carry out and
consummate the transactions contemplated
herein, and has all necessary federal, state
and local authorizations to carry on its
business as now being conducted and to
consummate the transactions contemplated by
this Agreement.
(b) This Agreement has been duly authorized,
executed and delivered by PNC, and represents
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<PAGE> 69
PNC's valid and binding contract, enforceable
in accordance with its terms, subject as to
enforcement to bankruptcy, insolvency,
reorganization, arrangement, moratorium and
other similar laws of general applicability
relating to or affecting creditors' rights
and to general equity principles. The
execution and delivery of this Agreement did
not, and the consummation of the transactions
contemplated by this Agreement will not,
violate PNC's Declaration of Trust or Code of
Regulations or any agreement or arrangement
to which it is a party or by which it is
bound.
(c) The PNC Portfolio has elected to qualify and
has qualified as a regulated investment
company under Part I of Subchapter M of the
Code, as of and since its first taxable year;
has been a regulated investment company under
such Part of the Code at all times since the
end of its first taxable year when it so
qualified; and intends to continue to qualify
as a regulated investment company.
(d) The financial statements for its fiscal year
ended September 30, 1994, examined by Coopers
& Lybrand, L.L.P., copies of which have been
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<PAGE> 70
previously furnished to PDI, present fairly
the financial position of the PNC Portfolio
as of the date indicated and the results of
its operations for the period indicated, in
conformity with generally accepted accounting
principles applied on a consistent basis.
(e) At both the Valuation Time and the Effective
Time of the Reorganization, there shall be no
known liabilities of the PNC Portfolio,
whether accrued, absolute, contingent or
otherwise, not reflected in the net asset
value per share of its Service Shares and
Institutional Shares, respectively, issued
pursuant to this Agreement.
(f) There are no legal, administrative or other
proceedings pending or, to its knowledge,
threatened against PNC or the PNC Portfolio
which assert liability on the part of PNC or
the PNC Portfolio.
(g) No consent, approval, authorization or order
of any court or governmental authority is
required for the consummation by PNC of the
transactions contemplated by this Agreement,
except such as may be required under the 1933
Act, the 1934 Act, the 1940 Act, the rules
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<PAGE> 71
and regulations under those Acts, or state
securities laws.
(h) Insofar as the following relate to PNC, the
N-14 Registration Statement and the
Reorganization Proxy Materials, on their
effective dates, at the time of the
shareholders' meeting referred to in Section
6 and at the Effective Time of the
Reorganization: (i) shall comply in all
material respects with the provisions of the
1933 Act, the 1934 Act and the 1940 Act, the
rules and regulations thereunder, and state
securities laws, and (ii) shall not contain
any untrue statement of a material fact or
omit to state a material fact required to be
stated therein or necessary to make the
statements therein not misleading; provided,
that the representations and warranties made
by PNC in this subsection shall not apply to
statements in or omissions from the N-14
Registration Statement or the Reorganization
Proxy Materials made in reliance upon and in
conformity with information furnished by PDI
for use therein as provided in Section 7.
(i) The Service Shares and Institutional Shares
of the PNC Portfolio to be issued and
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<PAGE> 72
delivered to the PDI Portfolio for the
account of recordholders of Fixed Income
Dollar Shares and Fixed Income Shares,
respectively, of the PDI Portfolio, pursuant
to the terms hereof, shall have been duly
authorized as of the Effective Time of the
Reorganization and, when so issued and
delivered, shall be registered under the 1933
Act, duly and validly issued, fully paid and
non- assessable, and no shareholder of PNC
shall have any preemptive right of
subscription or purchase in respect thereto.
6. SHAREHOLDER ACTION ON BEHALF OF THE PDI PORTFOLIO. As soon as
practicable after the effective date of the N-14 Registration Statement and SEC
clearance of the proxy solicitation materials referred to in Section 7, but in
any event prior to the Effective Time of the Reorganization and as a condition
thereto, the Board of Trustees of PDI shall call, and PDI shall hold, a meeting
of the shareholders of the PDI Portfolio for the purpose of considering and
voting upon:
(a) Approval of this Agreement and the
transactions contemplated hereby, including:
(i) The transfer of the Fund Assets
belonging to the PDI Portfolio to
the PNC Portfolio, and the
assumption by the
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<PAGE> 73
PNC Portfolio of the Fund
Liabilities, in exchange for
Service Shares and Institutional
Shares of the PNC Portfolio.
(ii) The liquidation of the PDI Portfolio
through the distribution to its
recordholders of Fixed Income Dollar
Shares and Fixed Income Shares of
the Service Shares and Institutional
Shares, respectively, of the PNC
Portfolio as described in this
Agreement.
(iii) The subsequent deregistration of
PDI as an investment company
registered under the 1940 Act.
(b) Such other matters as may be determined by
the Boards of Trustees of the parties.
7. N-14 REGISTRATION STATEMENT AND PROXY SOLICITATION MATERIALS.
PNC shall file the N-14 Registration Statement, and PDI shall file the
Reorganization Proxy Materials, with the SEC relating to the matters described
in Section 6 as promptly as practicable. PNC and PDI have cooperated and shall
continue to cooperate with each other, and have furnished and shall continue to
furnish each other with the information relating to itself that is required by
the 1933 Act, the 1934 Act, the 1940 Act, the
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<PAGE> 74
rules and regulations under each of those Acts and state securities laws, to be
included in the N-14 Registration Statement and Reorganization Proxy Materials.
8. EFFECTIVE TIME OF THE REORGANIZATION. Delivery of the Fund
Assets and the shares of the PNC Portfolio to be issued pursuant to Section 1
and the liquidation and termination of PDI pursuant to Section 2 shall occur at
the opening of business on the next day following the Valuation Time, or on
such other date, and at such place and time and date, agreed to by the Board of
Trustees of each of the parties. The date and time at which such actions are
taken are referred to herein as the "Effective Time of the Reorganization." To
the extent any Fund Assets are, for any reason, not transferred at the
Effective Time of the Reorganization, PDI shall cause such Fund Assets to be
transferred in accordance with this Agreement at the earliest practicable date
thereafter.
9. PNC CONDITIONS. The obligations of PNC hereunder shall be
subject to the following conditions precedent:
(a) This Agreement and the transactions
contemplated by this Agreement shall have
been approved by the Board of Trustees of PDI
and by the shareholders of the PDI Portfolio
in the manner required by law.
(b) PDI shall have duly executed and delivered to
PNC such bills of sale, assignments,
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<PAGE> 75
certificates and other instruments of
transfer ("Transfer Documents") as PNC may
deem necessary or desirable to transfer all
of PDI Portfolio's right, title and interest
in and to the Fund Assets. The Fund Assets
shall be accompanied by all necessary state
stock transfer stamps or cash for the
appropriate purchase price therefor.
(c) All representations and warranties of PDI
made in this Agreement shall be true and
correct in all material respects as if made
at and as of the Valuation Time and the
Effective Time of the Reorganization. As of
the Valuation Time and the Effective Time of
the Reorganization there shall have been no
material adverse change in the financial
position of PDI since the dates of the
financial statements referred to in Section
4(f). No action, suit or other proceeding
shall be threatened or pending before any
court or governmental agency in which it is
sought to restrain or prohibit, or obtain
damages or other relief in connection with,
this Agreement or the transactions
contemplated herein. PNC shall have received
a certificate from the President of PDI
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<PAGE> 76
stating that each of the conditions set forth
in this Section 9(c) have been met.
(d) PNC shall have received an opinion of Drinker
Biddle & Reath, addressed to PNC and PDI in
the form reasonably satisfactory to them and
dated the Effective Time of the
Reorganization, substantially to the effect
that: (i) PDI and PNC are Massachusetts
business trusts duly organized and validly
existing under the laws of the Commonwealth
of Massachusetts; (ii) the shares of the PDI
Portfolio outstanding at the Effective Time
of the Reorganization are duly authorized,
validly issued, fully paid and non-assessable
by the PDI Portfolio, and the shares of the
PNC Portfolio to be delivered to the PDI
Portfolio as provided for by this Agreement
are duly authorized and upon delivery will be
validly issued, fully paid and non-assessable
by the PNC Portfolio; (iii) this Agreement
and the Transfer Documents have been duly
authorized, executed and delivered by PDI and
represent legal, valid and binding contracts,
enforceable in accordance with their terms,
subject to the effect of bankruptcy,
insolvency, moratorium, fraudulent conveyance
-22-
<PAGE> 77
and similar laws relating to or affecting
creditors' rights generally and court
decisions with respect thereto, and such
counsel shall express no opinion with respect
to the application of equitable principles in
any proceeding, whether at law or in equity;
(iv) the execution and delivery of this
Agreement did not, and the consummation of
the transactions contemplated by this
Agreement will not, violate the Declaration
of Trust or Code of Regulations of PDI or
PNC, respectively, or any material agreement
known to such counsel to which PDI or PNC is
a party or by which PDI or PNC is bound; and
(v) no consent, approval, authorization or
order of any court or governmental authority
is required for the consummation by PDI of
the transactions contemplated by this
Agreement, except such as have been obtained
under the 1933 Act, the 1934 Act, the 1940
Act, the rules and regulations under those
Acts and such as may be required under the
state securities laws. Such opinion may rely
on the opinion of other counsel to the extent
set forth in such opinion, provided such
-23-
<PAGE> 78
other counsel is reasonably acceptable to PNC.
(e) PNC shall have received an opinion of Drinker
Biddle & Reath, addressed to PNC and PDI in
the form reasonably satisfactory to them and
dated the Effective Time of the
Reorganization, substantially to the effect
that for federal income tax purposes (i) the
transfer of all of the Fund Assets to the PNC
Portfolio, and the assumption by the PNC
Portfolio of the Fund Liabilities, in
exchange for shares of the PNC Portfolio, and
the distribution of said shares to the
shareholders of the PDI Portfolio, as
provided in this Agreement, will constitute a
reorganization within the meaning of Section
368(a)(1)(C) or Section 368(a)(1)(D) of the
Code; (ii) in accordance with Sections
361(a), 361(c)(1) and 357(a) of the Code, no
gain or loss will be recognized to PDI as a
result of such transactions; (iii) in
accordance with Section 1032 of the Code, no
gain or loss will be recognized to the PNC
Portfolio as a result of such transactions;
(iv) in accordance with Section 354(a)(1) of
the Code, no gain or loss will be recognized
-24-
<PAGE> 79
to the shareholders of the PDI Portfolio on
the distribution to them by the PDI Portfolio
of shares of the PNC Portfolio in exchange
for their shares of the PDI Portfolio; (v) in
accordance with Section 358(a)(1) of the
Code, the basis of the PNC Portfolio shares
received by a shareholder of the PDI
Portfolio will be the same as the basis of
the shareholder's PDI Portfolio shares
immediately prior to the transactions; (vi)
in accordance with Section 362(b) of the
Code, the basis to the PNC Portfolio of the
Fund Assets of the PDI Portfolio will be the
same as the basis of such Fund Assets in the
hands of the PDI Portfolio immediately prior
to the exchange; (vii) in accordance with
Section 1223 of the Code, a shareholder's
holding period for PNC Portfolio shares will
be determined by including the period for
which the shareholder held the shares of the
PDI Portfolio exchanged therefor, provided
that the shareholder held such shares of the
PDI Portfolio as a capital asset; and (viii)
in accordance with Section 1223 of the Code,
the holding period of the PNC Portfolio with
respect to the Fund Assets will include the
-25-
<PAGE> 80
period for which such Fund Assets were held
by the PDI Portfolio.
(f) The N-14 Registration Statement shall have
become effective under the 1933 Act and no
stop order suspending such effectiveness
shall have been instituted or, to the
knowledge of PNC, contemplated by the SEC and
the parties shall have received all permits
and other authorizations necessary under
state securities laws to consummate the
transactions contemplated by this Agreement.
(g) The President of PDI shall have certified
that PDI has performed and complied in all
material respects with each of its agreements
and covenants required by this Agreement to
be performed or complied with by it prior to
or at the Valuation Time and the Effective
Time of the Reorganization.
10. PDI CONDITIONS. The obligations of PDI hereunder shall be
subject to the following conditions precedent:
(a) This Agreement shall have been adopted and
the transactions contemplated by this
Agreement shall have been approved by the
Board of Trustees of PNC and by the
-26-
<PAGE> 81
shareholders of PDI in the manner required by
law.
(b) All representations and warranties of PNC
made in this Agreement shall be true and
correct in all material respects as if made
at and as of the Valuation Time and the
Effective Time of the Reorganization. As of
the Valuation Time and the Effective Time of
the Reorganization there shall have been no
material adverse change in the financial
position of the PNC Portfolio since the date
of the financial statements referred to in
Section 5(d). No action, suit or other
proceeding shall be threatened or pending
before any court or governmental agency in
which it is sought to restrain or prohibit,
or obtain damages or other relief in
connection with, this Agreement or the
transactions contemplated herein. PDI shall
have received a certificate from the
President of PNC stating that each of the
conditions set forth in this Section 10(b)
have been met.
(c) PDI shall have received an opinion of Drinker
Biddle & Reath, addressed to PNC and PDI in
the form reasonably satisfactory to them and
-27-
<PAGE> 82
dated the Effective Time of the
Reorganization, relating to the matters set
forth in Section 9(d).
(d) PDI shall have received an opinion of Drinker
Biddle & Reath, addressed to PNC and PDI in
the form reasonably satisfactory to them and
dated the Effective Time of the
Reorganization, with respect to the matters
specified in Section 9(e).
(e) The N-14 Registration Statement shall have
become effective under the 1933 Act and no
stop order suspending such effectiveness
shall have been instituted, or to the
knowledge of PNC, contemplated by the SEC and
the parties shall have received all permits
and other authorizations necessary under
state securities laws to consummate the
transactions contemplated by this Agreement.
(f) The President of PNC shall have certified
that PNC has performed and complied in all
material respects with each of its agreements
and covenants required by this Agreement to
be performed or complied with by it prior to
or at the Valuation Time and the Effective
Time of the Reorganization.
-28-
<PAGE> 83
11. TAX DOCUMENTS. PDI shall deliver to PNC at the Effective Time
of the Reorganization confirmations or other adequate evidence as to the
adjusted tax basis of the Fund Assets delivered to the PNC Portfolio in
accordance with the terms of this Agreement.
12. FURTHER ASSURANCES. Subject to the terms and conditions
herein provided, each of the parties hereto shall use its best efforts to take,
or cause to be taken, such action, to execute and deliver, or cause to be
executed and delivered, such additional documents and instruments and to do, or
cause to be done, all things necessary, proper or advisable under the
provisions of this Agreement and under applicable law to consummate and make
effective the transactions contemplated by this Agreement, including without
limitation, delivering and/or causing to be delivered to PNC, each account,
book, record or other document of PDI required to be maintained by Section
31(a) of the 1940 Act and Rules 31a-1 to 31a-3 thereunder (regardless of whose
possession they are in).
13. TERMINATION OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties of the parties set forth in this Agreement shall
terminate upon the delivery of the Fund Assets to the PNC Portfolio and the
issuance of the shares of the PNC Portfolio at the Effective Time of the
Reorganization.
-29-
<PAGE> 84
14. TERMINATION OF AGREEMENT. This Agreement may be terminated by
a party at any time at or prior to the Effective Time of the Reorganization by
a vote of a majority of its Board of Trustees as provided below:
(a) By PNC if the conditions set forth in Section
9 are not satisfied as specified in said
Section;
(b) By PDI if the conditions set forth in Section
10 are not satisfied as specified in said
Section;
(c) By mutual consent of both parties.
This Agreement shall terminate automatically on September 1, 1995 in the event
that the Reorganization has not been consummated by such date.
15. AMENDMENT AND WAIVER. At any time prior to or (to the fullest
extent permitted by law) after approval of this Agreement by the shareholders
of PDI (a) the parties hereto may, by written agreement authorized by their
respective Boards of Trustees and with or without the approval of their
shareholders, amend any of the provisions of this Agreement, and (b) any party
may waive any breach by any other party or the failure to satisfy any of the
conditions to its obligations (such waiver to be in writing and authorized by
the Board of Trustees of the waiving party with or without the approval of such
party's shareholders).
-30-
<PAGE> 85
16. GOVERNING LAW. This Agreement and the transactions
contemplated hereby shall be governed, construed and enforced in accordance
with the laws of the Commonwealth of Pennsylvania, without giving effect to the
conflicts of law principles otherwise applicable therein.
17. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
the respective successors and permitted assigns of the parties hereto. This
Agreement and the rights, obligations and liabilities hereunder may not be
assigned by any party without the consent of all other parties.
18. BENEFICIARIES. Nothing contained in this Agreement shall be
deemed to create rights in persons not parties hereto, other than the
successors and permitted assigns of the parties.
19. PNC LIABILITY.
(a) The names "The PNC Fund" and "Trustees of The PNC
Fund" refer respectively to the trust created and the
trustees, as trustees but not individually or
personally, acting from time to time under a
Declaration of Trust dated December 22, 1988, which
is hereby referred to and a copy of which is on file
at the office of the State Secretary of the
Commonwealth of Massachusetts and at the principal
office of PNC. The obligations of PNC entered into
in the name or on behalf thereof by
-31-
<PAGE> 86
any of the trustees, officers, representatives or
agents are made not individually, but in such
capacities, and are not binding upon any of the
trustees, shareholders, officers, representatives or
agents of PNC personally, but bind only the trust
property, and all persons dealing with any class of
shares of PNC must look solely to the trust property
belonging to such class for the enforcement of any
claims against PNC.
(b) Each party specifically acknowledges and agrees that
all obligations of PNC under this Agreement are
binding only with respect to the PNC Portfolio; that
any liability of PNC under this Agreement with
respect to the PNC Portfolio, or in connection with
the transactions contemplated herein with respect to
the PNC Portfolio, shall be discharged only out of
the assets of the PNC Portfolio; and that no other
portfolio of PNC shall be liable with respect to this
Agreement or in connection with the transactions
contemplated herein.
20. PDI LIABILITY.
(a) The names "Portfolios for Diversified Investment" and
"Trustees of Portfolios for Diversified
-32-
<PAGE> 87
Investment" refer respectively to the trust created
and the trustees, as trustees but not individually or
personally, acting from time to time under a
Declaration of Trust dated June 11, 1985, which is
hereby referred to and a copy of which is on file at
the office of the State Secretary of the Commonwealth
of Massachusetts and at the principal office of PDI.
The obligations of PDI entered into in the name or on
behalf thereof by any of the trustees,
representatives or agents are made not individually,
but in such capacities, and are not binding upon any
of the trustees, shareholders or representatives of
PDI personally, but bind only the trust property, and
all persons dealing with any class of shares of PDI
must look solely to the trust property belonging to
such class for the enforcement of any claims against
PDI.
(b) Each party specifically acknowledges and agrees that
all obligations of PDI under this Agreement are
binding only with respect to the PDI Portfolio; and
that any liability of PDI under this Agreement with
respect to the PDI Portfolio, or in connection with
the transactions contemplated herein with respect to
the PDI
-33-
<PAGE> 88
Portfolio, shall be discharged only out of the assets
of the PDI Portfolio.
21. NOTICES. All notices required or permitted herein shall be in
writing and shall be deemed to be properly given when delivered personally or
by telecopier to the party entitled to receive the notice or when sent by
certified or registered mail, postage prepaid, or delivered to an
internationally recognized overnight courier service, in each case properly
addressed to the party entitled to receive such notice at the address or
telecopier number stated below or to such other address or telecopier number as
may hereafter be furnished in writing by notice similarly given by one party to
the other party hereto:
If to PNC:
The PNC Fund
Bellevue Park Corporate Center
400 Bellevue Parkway
Wilmington, Delaware 19809
With copies to:
Vernon Stanton, Jr., Esq.
Drinker Biddle & Reath
1345 Chestnut Street
Philadelphia, PA 19107
Telecopier Number: (215) 988-2757
-34-
<PAGE> 89
If to PDI:
Portfolios for Diversified Investment
Bellevue Park Corporate Center
400 Bellevue Parkway
Wilmington, Delaware 19809
With copies to:
W. Bruce McConnel, III, Esq.
Drinker Biddle & Reath
1345 Chestnut Street
Philadelphia, PA 19107
Telecopier Number: (215) 988-2757
22. EXPENSES. Each party shall be responsible for the payment of
all expenses incurred by such party in connection with this Agreement and the
transactions contemplated hereby.
23. ENTIRE AGREEMENT. This Agreement embodies the entire
agreement and understanding of the parties hereto and supersedes any and all
prior agreements, arrangements and understandings relating to matters provided
for herein.
24. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which, when executed and delivered shall be deemed to be
an original, but all of which together shall constitute one and the same
instrument.
-35-
<PAGE> 90
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their duly authorized officers designated below as of the date
first written above.
THE PNC(R) FUND
ATTEST:
By:
- ----------------------- ------------------------------
Secretary Vice President and Treasurer
PORTFOLIOS FOR DIVERSIFIED INVESTMENT
ATTEST:
By:
- ----------------------- ------------------------------
Secretary President
-36-
<PAGE> 91
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
Page Where
Defined Term Defined
- ------------ ----------
<S> <C>
1934 Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1940 Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PDI Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PDI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PNC Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PNC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective Time of the Reorganization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fund Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fund Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
N-14 Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reorganization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reorganization Proxy Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfer Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
-37-
<PAGE> 92
EXHIBIT B
THE PNC FUND
ANNUAL INVESTMENT ADVISER'S REPORT (Continued)
INTERMEDIATE-TERM BOND PORTFOLIO
The fixed income markets plummeted from October '93 highs over the last
twelve months as a stronger-than-expected economy prompted several Federal
Reserve Bank tightenings totaling 175 basis points in short rates. Inflation
fears were sparked early into 1994 as signs of strength in production,
employment and consumer confidence jittered the markets.
Accordingly, interest rates rose over 200 basis points on average during
this period. The Treasury long bond yield rose from 6.03% to 7.82% while the
two-year Treasury note rose from 3.86% to 6.59% during the same twelve month
period ending September 30, 1994. As a result, the Treasury yield curve
flattened 94 basis points during that period.
Substantial cash outflows from domestic fixed income funds along with
weakness in the U.S. dollar (primarily versus the Yen and DM) placed additional
pressure on fixed income security prices. In this environment, shorter duration
portfolios performed the best.
The Intermediate-Term Bond Portfolio, after being long in duration for the
first four months of 1994, shortened its duration from a high of 4.6 years to
its current 3.3 duration. The Portfolio's longer duration for the majority of
the year led to the underperformance of the Portfolio versus the Lehman
Intermediate Government/Corporate Index over the last twelve months ended
September 30, 1994.
Comparison of Change in Value of $10,000 investment in the Intermediate
Bond Portfolio and the Lehman Intermediate Government/Corporate Index from
inception and at each Fiscal Year End:
Average Annual Total Return
Total Return One Year (3.52)%
From Inception (3.30)%
<TABLE>
<CAPTION>
PNC INTERMEDIATE* LEHMAN INTERMEDIATE
TERM BOND GOVERNMENT/CORP. INDEX
<S> <C> <C>
"9/17/93" 10,000 10,000
"9/30/93" 10,010 10,017
"9/30/94" 9,658 9,851
</TABLE>
Past performance is not predictive of future performance.
Institutional Class
Average Annual Total Return
Total Return One Year (3.80)%
From Inception (3.53)%
<TABLE>
<CAPTION>
PNC INTERMEDIATE* LEHMAN INTERMEDIATE
TERM BOND GOVERNMENT/CORP. INDEX
<S> <C> <C>
"9/23/93" 10,000 10,000
"9/30/93" 10,010 10,017
"9/30/94" 9,639 9,851
</TABLE>
Past performance is not predictive of future performance.
Service Class
Total Return
From Inception (4.15)%
<TABLE>
<CAPTION>
PNC INTERMEDIATE* LEHMAN INTERMEDIATE
TERM BOND GOVERNMENT/CORP. INDEX
<S> <C> <C>
"5/17/94" 9,550 10,000
"9/30/94" 9,585 10,080
</TABLE>
Past performance is not predictive of future performance.
Investor Class
10
<PAGE> 93
THE PNC(R) FUND
BELLEVUE CORPORATE CENTER
400 BELLEVUE PARKWAY
WILMINGTON, DELAWARE 19809
STATEMENT OF ADDITIONAL INFORMATION
(1995 SPECIAL MEETING OF SHAREHOLDERS OF
PORTFOLIOS FOR DIVERSIFIED INVESTMENT)
This Statement of Additional Information is not a prospectus but
should be read in conjunction with the Combined Proxy Statement/Prospectus
dated _______ __, 1995 for the Special Meeting of Shareholders of Portfolios
for Diversified Investment to be held on June 12, 1995. Copies of the Combined
Proxy Statement/Prospectus may be obtained at no charge from The PNC Fund's
distributor by calling toll-free (800) 441-7379.
Unless otherwise indicated, capitalized terms used herein and not
otherwise defined have the same meanings as are given to them in the Combined
Proxy Statement/Prospectus.
Further information about The PNC Fund is contained in and
incorporated by reference to its Statement of Additional Information dated
January 30, 1995, copies of which are included herewith.
Further information about Portfolios for Diversified Investment is
contained in and incorporated by reference to its Statement of Additional
Information dated October 28, 1994, a copy of which is included herewith.
The date of this Statement of Additional Information is
_____________ __, 1995.
<PAGE> 94
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General Information . . . . . . . . . . . . . . . . . . . . . 3
Financial Statements for
The PNC Fund's Intermediate-Term
Bond Portfolio dated September 30, 1994 . . . . . . . . . FS-
Financial Statements for
Portfolios for Diversified Investment's
Fixed Income Fund dated December 31, 1994 . . . . . . . . . FS-
Pro Forma Financial
Statements for The PNC Fund
(as of December 31, 1994) . . . . . . . . . . . . . . . . FS-
</TABLE>
<PAGE> 95
GENERAL INFORMATION
The shareholders of Portfolios for Diversified Investment ("the
Trust") are being asked to approve or disapprove an Agreement and Plan of
Reorganization (the "Reorganization Agreement") dated as of ____________, 1995
by and between the Trust and The PNC Fund ("PNC Fund") and the transactions
contemplated thereby. The Reorganization Agreement contemplates the transfer
of all of the assets and known liabilities of the Fixed Income Fund of the
Trust in exchange for Service Shares and Institutional Shares of the
Intermediate-Term Bond Portfolio of PNC Fund. Following the exchange, the
Trust will make a liquidating distribution of the Service Shares and
Institutional Shares received by the Trust to the holders of Fixed Income
Dollar Shares and Fixed Income Shares, respectively, of the Fixed Income Fund,
such that a holder of shares in the Fixed Income Fund at the Effective Time of
the Reorganization will receive full and fractional shares of the
Intermediate-Term Bond Portfolio having an aggregate net asset value equal to
the aggregate net asset value of the shareholder's shares in the Fixed Income
Fund. In connection with the Reorganization, the Trust will be terminated
under state law and deregistered as an investment company under the Investment
Company Act of 1940.
A Special Meeting of Shareholders of the Fixed Income Fund to
consider the Reorganization Agreement and the transactions contemplated thereby
will be held at the Bellevue Park Corporate Center, 400 Bellevue Parkway, 4th
Floor Conference Room, Wilmington, Delaware on June 12, 1995 at 10:00 A.M.
Eastern Time. For further information about the Reorganization, see the
Combined Proxy Statement/Prospectus.
3
<PAGE> 96
THE PNC(R) FUND
INTERMEDIATE-TERM BOND PORTFOLIO
STATEMENT OF NET ASSETS
SEPTEMBER 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------- ------------
<S> <C> <C> <C>
AGENCY
OBLIGATIONS -- 43.4%
FEDERAL HOME LOAN BANK
BONDS -- 6.0%
5.07% 11/17/94 $ 2,000 $ 1,996,000
6.99% 04/25/97 2,500 2,506,175
7.04% 05/24/99 2,000 1,969,580
------------
6,471,755
------------
FEDERAL HOME LOAN
MORTGAGE
CORPORATION -- 22.6%
4.75% 10/03/94 7,550 7,548,008
4.75% 05/15/96 2,000 1,928,482
4.75% 03/15/97 3,000 2,839,300
5.50% 06/15/97 5,000 4,722,693
9.50% 08/15/97 313 323,877
9.00% 09/15/97 304 310,736
8.50% 08/15/98 218 220,758
8.50% 09/15/98 69 69,895
9.00% 09/15/98 38 38,906
8.50% 10/15/98 68 69,247
7.00% 07/15/00 716 687,071
7.00% 08/15/00 1,318 1,264,345
9.00% 12/01/01 85 87,278
9.50% 07/01/03 175 180,786
7.05% 03/24/04 1,500 1,378,125
7.74% 06/01/04 2,000 1,942,940
9.50% 11/01/04 309 319,211
8.50% 01/01/05 67 68,172
9.50% 01/01/05 328 339,642
9.00% 12/01/16 34 34,465
------------
24,373,937
------------
FEDERAL NATIONAL
MORTGAGE
ASSOCIATION -- 10.6%
7.60% 01/10/97 2,500 2,543,100
5.75% 06/25/98 3,304 3,114,020
7.85% 09/10/98 500 509,735
8.70% 06/10/99 1,000 1,049,300
6.35% 08/10/99 1,000 955,370
8.25% 12/18/00 2,000 2,063,020
9.00% 08/01/02 153 158,205
6.95% 09/10/02 1,000 936,870
9.50% 03/01/05 45 47,080
------------
11,376,700
------------
GOVERNMENT NATIONAL
MORTGAGE
ASSOCIATION -- 3.4%
8.00% 05/15/99 355 356,321
7.50% 04/15/07 53 52,223
7.50% 06/15/07 42 40,684
7.50% 07/15/07 59 57,462
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------- ------------
<S> <C> <C> <C>
GOVERNMENT NATIONAL
MORTGAGE
ASSOCIATION (CONTINUED)
7.50% 08/15/07 $ 40 $ 39,269
7.50% 10/15/07 82 80,795
7.50% 12/15/07 3,012 2,952,993
9.50% 08/15/18 29 30,306
9.50% 04/15/19 59 62,302
------------
3,672,355
------------
TENNESSEE VALLEY
AUTHORITY -- 0.8%
6.125% 07/15/03 1,000 888,750
------------
TOTAL AGENCY OBLIGATIONS
(Cost $47,601,953) 46,783,497
------------
ASSET BACKED
SECURITIES -- 3.3%
AUTOMOTIVE -- 2.9%
Capital Auto
Receivables
Asset Trust
4.90% 02/16/98 2,000 1,987,600
Union Federal
Master Trust
4.875% 11/15/95 1,126 1,101,458
------------
3,089,058
------------
FINANCE -- 0.4%
First Chicago Master
Trust II,
Series 1991 D
8.40% 12/15/96 500 512,050
------------
TOTAL ASSET BACKED
SECURITIES
(Cost $3,610,333) 3,601,108
------------
CORPORATE BONDS -- 17.4%
AUTOMOTIVE -- 1.7%
Ford Motor Credit Co.
5.625% 12/15/98 1,000 926,250
5.625% 01/15/99 1,000 923,750
------------
1,850,000
------------
BANKS -- 4.0%
Bank of New York, Inc.
6.50% 12/01/03 1,000 885,000
BankAmerica Corp.
6.00% 07/15/97 1,100 1,062,875
National Westminster
Bank
9.45% 05/01/01 1,250 1,340,625
Westpac Banking Corp.
9.125% 08/15/01 1,000 1,051,250
------------
4,339,750
------------
</TABLE>
See accompanying notes to financial statements.
27
<PAGE> 97
INTERMEDIATE-TERM BOND PORTFOLIO
STATEMENT OF NET ASSETS (Continued)
SEPTEMBER 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------- ------------
<S> <C> <C> <C>
CORPORATE BONDS
(CONTINUED)
BROKERAGE -- 0.9%
Lehman Brothers Holdings, Inc.
5.50% 06/15/96 $ 1,000 $ 975,000
------------
FINANCE -- 3.8%
Associates Corp. of North
America
9.70% 05/01/97 1,000 1,057,500
Fleet Financial Group
7.25% 09/01/99 1,000 978,750
Grand Metropolitan
Investment
Corp.
7.125% 09/15/04 1,000 955,000
Great Western
Financial Corp.
6.375% 07/01/00 1,150 1,058,518
------------
4,049,768
------------
RETAIL DEPARTMENT STORES -- 0.9%
J.C. Penney Co.
5.375% 11/15/98 1,000 927,500
------------
TELECOMMUNICATIONS -- 2.6%
GTE Southwest, Inc.
5.82% 12/01/99 2,000 1,837,500
Southwestern Bell
Telephone Co.
6.375% 04/01/01 1,000 930,000
------------
2,767,500
------------
UTILITIES (ELECTRIC) -- 0.8%
Public Service Colorado
6.00% 01/01/01 1,000 905,000
------------
YANKEE -- 2.7%
Bell Telephone, Canada
7.75% 04/01/06 1,000 975,000
National Bank of Canada
8.125% 08/15/04 1,000 980,000
Noranda, Inc.
8.00% 06/01/03 1,000 965,490
------------
2,920,490
------------
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------- ------------
<S> <C> <C> <C>
TOTAL CORPORATE BONDS
(Cost $20,030,227) $ 18,735,008
------------
MEDIUM TERM NOTES -- 5.5%
AUTOMOTIVE
Chrysler Financial Corp.
5.08% 01/27/97 $ 3,500 3,351,250
General Motors
Acceptance Corp.
7.75% 01/24/97 2,500 2,525,000
------------
TOTAL MEDIUM TERM NOTES
(Cost $6,123,788) 5,876,250
------------
U.S. TREASURY
OBLIGATIONS -- 29.1%
U.S. TREASURY NOTES
8.625% 10/15/95 1,000 1,025,980
4.25% 05/15/96 4,000 3,869,040
6.75% 05/31/97 1,700 1,697,739
6.375% 06/30/97 1,100 1,089,682
7.875% 01/15/98 3,000 3,076,200
7.875% 04/15/98 100 102,536
5.25% 07/31/98 10,000 9,385,100
7.125% 10/15/98 1,000 1,001,170
6.375% 01/15/99 3,000 2,912,940
6.375% 01/15/00 1,000 960,320
7.75% 02/15/01 2,300 2,342,297
6.25% 02/15/03 1,000 919,160
7.25% 05/15/04 3,000 2,924,910
------------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $32,448,209) 31,307,074
------------
</TABLE>
See accompanying notes to financial statements.
28
<PAGE> 98
INTERMEDIATE-TERM BOND PORTFOLIO
STATEMENT OF NET ASSETS (Continued)
SEPTEMBER 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
------------
<S> <C> <C>
TOTAL INVESTMENTS IN SECURITIES
(Cost $109,814,510*) 98.7% $106,302,937
OTHER ASSETS IN EXCESS OF
LIABILITIES 1.3% 1,444,091
------ ------------
NET ASSETS (Applicable to
7,946,735 Institutional shares,
3,952,897 Service shares and
9,630 Series A Investor shares
outstanding) 100.0% $107,747,028
====== ============
NET ASSET VALUE AND REDEMPTION
PRICE PER INSTITUTIONAL, SERVICE
AND SERIES A INVESTOR SHARE
($107,747,028 / 11,909,262) $9.05
=====
OFFERING PRICE PER INSTITUTIONAL AND
SERVICE SHARE $9.05
=====
MAXIMUM OFFERING PRICE PER SERIES A
INVESTOR SHARE ($9.05 / .955) $9.48
=====
</TABLE>
- -------------
* Also cost for Federal income tax purposes. The gross unrealized appreciation
(depreciation) on a tax basis is as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation $ 107,264
Gross unrealized depreciation (3,618,837)
-----------
$(3,511,573)
===========
</TABLE>
See accompanying notes to financial statements.
29
<PAGE> 99
THE PNC(R) FUND
STATEMENTS OF OPERATIONS (Continued)
FOR THE YEAR ENDED SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
OHIO PENNSYLVANIA
TAX-FREE TAX-FREE SHORT-TERM INTERMEDIATE
INCOME INCOME BOND TERM BOND
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Investment Income:
Interest.................................. $ 380,143 $ 3,032,628 $ 1,634,723 $ 4,028,542
--------- ------------ ----------- ------------
Expenses:
Investment advisory fee................... 35,709 276,649 174,589 337,365
Administration fee........................ 14,284 109,878 69,836 134,946
Custodian fee............................. 13,706 14,992 17,095 22,453
Transfer agent fee........................ 23,124 40,804 27,286 25,286
Service fees.............................. 5,089 24,652 13,458 69,088
Distribution fees......................... -- 53,423 316 34
Legal and audit........................... 3,466 7,498 4,893 9,337
Printing.................................. 1,581 7,393 5,759 8,730
Registration fees and expenses............ 1,673 16,808 25,996 43,079
Organization.............................. 2,471 2,697 4,369 4,569
Trustees' fees and officer's salary....... 146 1,128 715 1,522
Other..................................... 10,669 14,494 1,908 4,840
--------- ------------ ----------- ------------
111,918 570,416 346,220 661,249
Less fees voluntarily waived
and expenses reimbursed................ (99,688) (330,526) (192,774) (288,499)
--------- ------------ ----------- ------------
Total expenses....................... 12,230 239,890 153,446 372,750
--------- ------------ ----------- ------------
Net investment income....................... 367,913 2,792,738 1,481,277 3,655,792
--------- ------------ ----------- ------------
Realized and unrealized gain (loss) on
investments:
Net realized loss from investment
transactions........................... (96,503) (285,131) (1,064,511) (972,851)
Change in unrealized depreciation of
investments............................ (589,748) (4,507,643) (557,603) (4,627,426)
--------- ------------ ----------- ------------
Net loss on investments................... (686,251) (4,792,774) (1,622,114) (5,600,277)
--------- ------------ ----------- ------------
Net decrease in net assets resulting from
operations............................. $(318,338) $ (2,000,036) $ (140,837) $ (1,944,485)
========== ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
31
<PAGE> 100
THE PNC(R) FUND
STATEMENTS OF CHANGES IN NET ASSETS (Continued)
<TABLE>
<CAPTION>
INTERMEDIATE-TERM BOND
SHORT-TERM BOND PORTFOLIO PORTFOLIO
-------------------------- ----------------------------
FOR THE FOR THE
FOR THE PERIOD FOR THE PERIOD
YEAR 9/1/93(1) YEAR 9/17/93(1)
ENDED THROUGH ENDED THROUGH
9/30/94 9/30/93 9/30/94 9/30/93
----------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations
Net investment income.................................... $ 1,481,277 $ 11,296 $ 3,655,792 $ 102,572
Net gain (loss) on investments........................... (1,622,114) (2,937) (5,600,277) (53,408)
----------- ---------- ------------ -----------
Net increase (decrease) in net assets resulting from
operations............................................. (140,837) 8,359 (1,944,485) 49,164
----------- ---------- ------------ -----------
Distributions to shareholders from
Net investment income
Institutional Shares..................................... (1,256,883) (4,908) (2,313,063) --
Service Shares........................................... (219,277) (6,388) (1,431,162) --
Series A Investor Shares................................. (5,117) -- (531) --
Net realized gains
Institutional Shares..................................... -- -- (166,177) --
Service Shares........................................... -- -- (34,163) --
Series A Investor Shares................................. -- -- -- --
----------- ---------- ------------ -----------
Total distributions to shareholders.................. (1,481,277) (11,296) (3,945,096) --
----------- ---------- ------------ -----------
Capital share transactions................................... 19,189,531 6,561,900 56,832,649 56,754,796
----------- ---------- ------------ -----------
Total increase in net assets......................... 17,567,417 6,558,963 50,943,068 56,803,960
Net assets:
Beginning of period...................................... 6,558,963 -- 56,803,960 --
----------- ---------- ------------ -----------
End of period............................................ $24,126,380 $6,558,963 $107,747,028 $56,803,960
=========== ========== ============= ===========
</TABLE>
- -------------
(1) Commencement of operations.
See accompanying notes to financial statements.
34
<PAGE> 101
THE PNC(R) FUND
FINANCIAL HIGHLIGHTS (Continued)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
INTERMEDIATE-TERM BOND PORTFOLIO
------------------------------------------------------------------------
SERIES A
INSTITUTIONAL CLASS SERVICE CLASS INVESTOR CLASS
---------------------- ---------------------- --------------
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
YEAR 9/17/93(1) YEAR 9/23/93(1) 5/20/94(1)
ENDED THROUGH ENDED THROUGH THROUGH
9/30/94 9/30/93 9/30/94 9/30/93 9/30/94
-------- ------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period........... $ 10.01 $ 10.00 $ 10.01 $ 9.99 $ 9.23
-------- ------- -------- ------ ------
Income from investment operations
Net investment income........................ 0.54 0.02 0.54 -- 0.20
Net gain (loss) on investments (both realized
and unrealized)............................ (0.88) (0.01) (0.91) 0.02 (0.17)
-------- ------- -------- ------ ------
Total from investment operations......... (0.34) 0.01 (0.37) 0.02 0.03
-------- ------- -------- ------ ------
Less distributions
Distributions from net investment income..... (0.56) -- (0.53) -- (0.21)
Distributions from net realized capital
gains...................................... (0.06) -- (0.06) -- --
-------- ------- -------- ------ ------
Total distributions...................... (0.62) -- (0.59) -- (0.21)
-------- ------- -------- ------ ------
Net asset value at end of period................. $ 9.05 $ 10.01 $ 9.05 $10.01 $ 9.05
======== ======= ======== ====== ======
Total return..................................... (3.52)% 0.10% (3.80)% 0.20% 0.31%(3)
Ratios/Supplemental data
Net assets at end of period (in thousands)... $ 71,896 $56,713 $ 35,764 $ 91 $ 87
Ratios of expenses to average net assets
After advisory/administration fee
waivers.................................. 0.45% 0.45%(2) 0.70% 0.70%(2) 0.85%(2)
Before advisory/administration fee
waivers.................................. 0.88% 0.84%(2) 1.13% 1.09%(2) 1.28%(2)
Ratios of net investment income to average
net assets
After advisory/administration fee
waivers.................................. 5.54% 4.72%(2) 5.33% 4.35%(2) 5.35%(2)
Before advisory/administration fee
waivers.................................. 5.11% 4.33%(2) 4.90% 3.96%(2) 4.92%(2)
Portfolio turnover rate.......................... 92% 4% 92% 4% 92%
</TABLE>
- -------------
(1) Commencement of operations.
(2) Annualized.
(3) Sales load not reflected in total return.
See accompanying notes to financial statements.
44
<PAGE> 102
THE PNC(R) FUND
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1994
The PNC Fund (the "Fund") was organized on December 22, 1988 as a
Massachusetts business trust and is registered under the Investment Company Act
of 1940, as amended, as an open-end management investment company. The Fund
consists of twenty-five separate Portfolios: Money Market Portfolio, Municipal
Money Market Portfolio, Government Money Market Portfolio, Ohio Municipal Money
Market Portfolio, Pennsylvania Municipal Money Market Portfolio, North Carolina
Municipal Money Market Portfolio, Virginia Municipal Money Market Portfolio,
Value Equity Portfolio, Growth Equity Portfolio, Small Cap Growth Equity
Portfolio, Core Equity Portfolio, Index Equity Portfolio, Small Cap Value Equity
Portfolio, International Equity Portfolio, International Emerging Markets
Portfolio, Balanced Portfolio, Managed Income Portfolio, Tax-Free Income
Portfolio, Intermediate Government Portfolio, Ohio Tax-Free Income Portfolio,
Pennsylvania Tax-Free Income Portfolio, Short-Term Bond Portfolio,
Intermediate-Term Bond Portfolio, International Fixed Income Portfolio and
Government Income Portfolio. As of September 30, 1994, the International Fixed
Income Portfolio and Government Income Portfolio had not commenced operations.
This report relates solely to Managed Income Portfolio, Tax-Free Income
Portfolio, Intermediate Government Portfolio, Ohio Tax-Free Income Portfolio,
Pennsylvania Tax-Free Income Portfolio, Short-Term Bond Portfolio and
Intermediate-Term Bond Portfolio (the "Portfolios").
Each Portfolio has four classes of shares, one class being referred to as
the Service shares, one class being referred to as the Institutional shares, one
class being referred to as the Series A Investor shares and one class being
referred to as the Series B Investor shares. No Series B Investor shares had
been issued for any of these Portfolios through September 30, 1994. Series A
Investor, Series B Investor, Institutional and Service shares in a Portfolio
represent equal pro rata interests in such Portfolio, except that they bear
different expenses which reflect the difference in the range of services
provided to them. Series A Investor shares bear the expense of the Distribution
and Service Plan at an annual rate not to exceed .55% of the average daily net
asset value of each Portfolio's outstanding Series A Investor shares. Series B
Investor shares bear the expense of the Series B Distribution Plan at an annual
rate not to exceed .75% of the average daily net asset value of each Portfolio's
outstanding Series B Investor shares. Series B Investor shares also bear the
expense of the Series B Service Plan at an annual rate not to exceed .25% of the
average daily net asset value of each Portfolio's outstanding Series B Investor
shares. Under the Fund's Service Plan, Service shares bear the expense of fees
at an annual rate not to exceed .15% of the average daily net asset value of
each Portfolio's outstanding Service shares. Service shares also bear the
expense of a service fee at an annual rate not to exceed .15% of the average
daily net asset value of each Portfolio's outstanding Service shares for other
shareholder support activities provided by service organizations. Institutional
shares do not bear the expenses of the Distribution and Service Plan, the
Service Plan, the Series B Distribution Plan or the Series B Service Plan. The
Series A Investor and Service classes are currently bearing such respective
expenses at annual rates of 0% to .50% of the average daily net asset value of
Series A Investor shares and at rates aggregating .25% of the average daily net
asset value of Service shares.
(A) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Security Valuation -- Portfolio securities for which market quotations are
readily available are valued at market value, which is currently determined
using the last reported sales price. If no sales are reported, as in the case of
some securities traded over-the-counter, portfolio securities are valued at the
mean
45
<PAGE> 103
THE PNC(R) FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 1994
between the last reported bid and asked prices. Corporate bonds and tax-exempt
bonds are valued on the basis of quotations provided by a pricing service which
uses information with respect to transactions on bonds, quotations from bond
dealers, market transactions in comparable securities and various relationships
between securities in determining value. Short-term obligations with maturities
of 60 days or less are valued at amortized cost which approximates market value.
Discounts and premiums on debt securities are amortized for book and tax
purposes using the effective yield-to-maturity method over the term of the
instrument with the exception of Managed Income Portfolio which does not
amortize discount or premium for tax purposes.
Dividends to Shareholders -- Dividends from net investment income are
declared and paid monthly for each of the Managed Income, Tax-Free Income,
Intermediate Government and Intermediate-Term Bond Portfolios. The net
investment income of each of the Pennsylvania Tax-Free Income, Ohio Tax-Free
Income and Short-Term Bond Portfolios is declared daily as a dividend to
investors who are shareholders of such Portfolio at, and whose payment for share
purchases are available to the particular Portfolio, in Federal funds by, the
close of business on the day of declaration. Net realized capital gains, if any,
will be distributed at least annually.
Federal Taxes -- No provision is made for Federal taxes as it is the Fund's
intention to have each Portfolio continue to qualify as a regulated investment
company and to make the requisite distributions to its shareholders which will
be sufficient to relieve it from Federal income and excise taxes.
Security Transactions and Investment Income -- Investment transactions are
accounted for on the trade date. The cost of investments sold is determined by
use of the specific identification method for both financial reporting and
Federal income tax purposes. Interest income is recorded on the accrual basis.
Certain expenses, principally Service and Distribution fees, are class specific
expenses. Expenses not directly attributable to a specific Portfolio or class
are allocated among all of the Portfolios or classes of the Fund based on their
relative net assets.
Repurchase Agreements -- Money market instruments may be purchased from
banks and non-bank dealers subject to the seller's agreement to repurchase them
at an agreed upon date and price. Collateral for repurchase agreements may have
longer maturities than the maximum permissible remaining maturity of portfolio
investments. The seller will be required on a daily basis to maintain the value
of the securities subject to the agreement at not less than the repurchase
price. The agreements are conditioned upon the collateral being deposited under
the Federal Reserve book-entry system or held in a separate account by the
Fund's custodian or an authorized securities depository.
Organization Costs -- Costs incurred by each Portfolio in connection with
its organization, registration and initial public offering have been deferred
and are being amortized using the straight-line method over a five-year period
beginning on the date on which each Portfolio commenced its investment
activities.
Implementation of AICPA Statement of Position 93-2: -- As of October 1,
1993, the Fund implemented AICPA Statement of Position 93-2 -- Determination,
Disclosure and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. Adoption of this
standard results in the reclassification to paid-in capital of permanent
differences between tax and financial reporting of net investment income and net
realized gain (loss). The change has had no material
46
<PAGE> 104
THE PNC(R) FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 1994
effect on paid-in capital or other components of the net assets of any of the
Portfolios at October 1, 1993. Distributions to shareholders and net asset
values were not affected by this change.
(B) TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Pursuant to an Investment Advisory Agreement, PNC Institutional Management
Corporation ("PIMC"), a wholly-owned subsidiary of PNC Bank, National
Association ("PNC Bank"), serves as adviser for each of the Fund's Portfolios.
PNC Bank serves as sub-adviser for the Managed Income Portfolio, Tax-Free Income
Portfolio, Intermediate Government Portfolio, Short-Term Bond Portfolio and
Intermediate-Term Bond Portfolio. PNC Bank, Ohio, National Association ("PNC
Bank Ohio"), serves as the sub-adviser for the Ohio Tax-Free Income Portfolio.
PNC Bank and PNC Bank Ohio are indirect wholly-owned subsidiaries of PNC Bank
Corp.
For its advisory services, PIMC is entitled to receive fees at the
following annual rates, computed daily and payable monthly, based on each
Portfolio's average daily net assets: .50% of the first $1 billion, .45% of the
next $1 billion, .425% of the next $1 billion and .40% of net assets in excess
of $3 billion.
PIMC may, at its discretion, voluntarily waive all or any portion of its
advisory fee for any Portfolio. For the year ended September 30, 1994, advisory
fees and waivers and reimbursement for each Portfolio were as follows:
<TABLE>
<CAPTION>
GROSS ADVISORY NET ADVISORY
FEE WAIVER FEE
-------------- -------- --------------
<S> <C> <C> <C>
Managed Income Portfolio.................. $1,997,633 $599,290 $1,398,343
Tax-Free Income Portfolio................. 47,655 47,655 --
Intermediate Government Portfolio......... 921,365 552,819 368,546
Ohio Tax-Free Income Portfolio............ 35,709 35,709 --
Pennsylvania Tax-Free Income Portfolio.... 276,649 227,003 49,646
Short-Term Bond Portfolio................. 174,589 137,696 36,893
Intermediate-Term Bond Portfolio.......... 337,365 206,071 131,294
</TABLE>
PIMC pays PNC Bank and PNC Bank Ohio fees for their sub-advisory services.
PFPC Inc. ("PFPC"), an indirect wholly-owned subsidiary of PNC Bank Corp.,
and Provident Distributors, Inc. ("PDI") act as co-administrators for the Fund.
The combined administration fee is computed daily and payable monthly, based on
a percentage of the average daily net assets of each Portfolio, at the following
annual rates: .20% of the first $500 million, .18% of the next $500 million,
.16% of the next $1 billion and .15% of net assets in excess of $2 billion.
47
<PAGE> 105
THE PNC(R) FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 1994
PFPC and PDI may, at their discretion, voluntarily waive all or any portion
of their administration fees for any Portfolio. For the year ended September 30,
1994, administration fees and waivers for each Portfolio were as follows:
<TABLE>
<CAPTION>
GROSS NET
ADMINISTRATION ADMINISTRATION
FEE WAIVER FEE
-------------- -------- --------------
<S> <C> <C> <C>
Managed Income Portfolio.................. $799,053 $277,849 $521,204
Tax-Free Income Portfolio................. 19,062 19,062 --
Intermediate Government Portfolio......... 368,546 181,804 186,742
Ohio Tax-Free Income Portfolio............ 14,284 14,284 --
Pennsylvania Tax-Free Income Portfolio.... 109,878 90,020 19,858
Short-Term Bond Portfolio................. 69,836 55,078 14,758
Intermediate-Term Bond Portfolio.......... 134,946 82,428 52,518
</TABLE>
In addition, PNC Bank serves as custodian for each of the Fund's
Portfolios. PFPC serves as transfer and dividend disbursing agent.
PIMC, PFPC and PDI have also voluntarily agreed to reimburse for expenses
in the amount of $50,257 with respect to the Tax-Free Income Portfolio, $49,695
with respect to the Ohio Tax-Free Income Portfolio and $13,503 with respect to
the Pennsylvania Tax-Free Income Portfolio for the year ended September 30,
1994.
PIMC, PFPC and PDI have also agreed to reimburse each Portfolio for the
amount, if any, by which the total operating and management expenses of such
Portfolio for any fiscal year exceed the most restrictive state blue sky expense
limitation in effect from time to time, to the extent required by such
limitation. No such reimbursements were necessary for the year ended September
30, 1994.
(C) PURCHASES AND SALES OF SECURITIES
For the year ended September 30, 1994, purchases and sales of securities,
other than short-term and government securities, were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
------------ -------------
<S> <C> <C>
Managed Income Portfolio................................ $239,730,336 $ 179,162,722
Tax-Free Income Portfolio............................... 4,861,671 3,624,546
Intermediate Government Portfolio....................... 83,492,343 2,186,302
Ohio Tax-Free Income Portfolio.......................... 8,601,801 4,236,805
Pennsylvania Tax-Free Income Portfolio.................. 40,026,196 17,022,412
Short-Term Bond Portfolio............................... 40,258,016 20,671,871
Intermediate-Term Bond Portfolio........................ 87,171,760 39,944,186
</TABLE>
48
<PAGE> 106
THE PNC(R) FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 1994
For the year ended September 30, 1994, purchases and sales of government
securities were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
------------ ------------
<S> <C> <C>
Managed Income Portfolio................................. $141,530,574 $51,423,328
Intermediate Government Portfolio........................ 31,121,094 13,793,086
Short-Term Bond Portfolio................................ 21,885,416 14,158,000
Intermediate-Term Bond Portfolio......................... 29,163,774 21,188,688
</TABLE>
(D) CAPITAL SHARES
Transactions in capital shares for each period were as follows:
<TABLE>
<CAPTION>
MANAGED INCOME PORTFOLIO
------------------------------------------------------
FOR THE YEAR ENDED FOR THE YEAR ENDED
SEPTEMBER 30, 1994 SEPTEMBER 30, 1993
------------------------- -------------------------
SHARES VALUE SHARES VALUE
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Shares sold:
Institutional Class...................... 12,186,561 $124,468,452 7,421,047 $ 80,336,982
Service Class............................ 8,352,936 87,090,065 1,389,371 15,338,120
Series A Investor Class.................. 628,230 6,631,737 542,927 5,898,085
Shares issued in acquisition:
Institutional Class...................... 3,649,044 36,599,918 290,838 3,274,839
Service Class............................ -- -- -- --
Series A Investor Class.................. -- -- -- --
Shares issued in reinvestment of dividends:
Institutional Class...................... 2,074,139 21,617,113 2,035,683 21,790,311
Service Class............................ 205,275 2,116,342 8,978 99,979
Series A Investor Class.................. 59,113 615,438 18,592 201,580
Shares redeemed:
Institutional Class...................... (8,140,174) (85,121,512) (8,404,154) (90,821,836)
Service Class............................ (3,017,544) (31,450,922) (27,163) (302,078)
Series A Investor Class.................. (220,470) (2,266,512) (44,567) (487,214)
---------- ------------ ---------- ------------
Net increase............................... 15,777,110 $160,300,119 3,231,552 $ 35,328,768
========== ============ ========== ============
</TABLE>
49
<PAGE> 107
THE PNC(R) FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
SHORT-TERM BOND PORTFOLIO
----------------------------------------------------
FOR THE PERIOD
SEPTEMBER 1, 1993(1)
FOR THE YEAR ENDED THROUGH
SEPTEMBER 30, 1994 SEPTEMBER 30, 1993
------------------------- -----------------------
SHARES VALUE SHARES VALUE
---------- ------------ --------- -----------
<S> <C> <C> <C> <C>
Shares sold:
Institutional Class........................ 3,720,716 $ 37,120,901 375,000 $ 3,750,000
Service Class.............................. 755,330 7,473,735 316,515 3,165,152
Series A Investor Class.................... 29,976 294,033 -- --
Shares issued in reinvestment of dividends:
Institutional Class........................ 21,968 214,759 -- --
Service Class.............................. 14,450 141,147 -- --
Series A Investor Class.................... 532 5,175 -- --
Shares redeemed:
Institutional Class........................ (2,277,873) (22,096,796) -- --
Service Class.............................. (400,419) (3,947,645) (35,313) (353,252)
Series A Investor Class.................... (1,632) (15,778) -- --
---------- ------------ --------- -----------
Net increase................................. 1,863,048 $ 19,189,531 656,202 $ 6,561,900
========== ============ ========= ===========
</TABLE>
<TABLE>
<CAPTION>
INTERMEDIATE-TERM BOND PORTFOLIO
----------------------------------------------------
FOR THE PERIOD
SEPTEMBER 17, 1993(1)
FOR THE YEAR ENDED THROUGH
SEPTEMBER 30, 1994 SEPTEMBER 30, 1993
------------------------- -----------------------
SHARES VALUE SHARES VALUE
---------- ------------ --------- -----------
<S> <C> <C> <C> <C>
Shares sold:
Institutional Class........................ 2,440,016 $ 22,611,998 34,087 $ 341,383
Service Class.............................. 2,720,032 25,860,499 9,096 91,284
Series A Investor Class.................... 9,574 87,478 -- --
Shares issued in acquisition:
Institutional Class........................ 3,673,356 33,684,821 5,662,188 56,621,877
Service Class.............................. 3,055,695 29,793,024 -- --
Series A Investor Class.................... -- -- -- --
Shares issued in reinvestment of dividends:
Institutional Class........................ 84,197 768,975 -- --
Service Class.............................. 101,940 943,961 -- --
Series A Investor Class.................... 58 531 -- --
Shares redeemed:
Institutional Class........................ (3,917,113) (38,816,847) (29,996) (299,748)
Service Class.............................. (1,933,866) (18,101,776) -- --
Series A Investor Class.................... (2) (15) -- --
---------- ------------ --------- -----------
Net increase................................. 6,233,887 $ 56,832,649 5,675,375 $56,754,796
========== ============ ========= ===========
</TABLE>
- -------------
(1) Commencement of operations.
52
<PAGE> 108
THE PNC(R) FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 1994
(E) AT SEPTEMBER 30, 1994, NET ASSETS CONSISTED OF:
<TABLE>
<CAPTION>
MANAGED TAX-FREE INTERMEDIATE
INCOME INCOME GOVERNMENT
PORTFOLIO PORTFOLIO PORTFOLIO
--------------- ----------- -------------
<S> <C> <C> <C>
Capital paid-in......................................... $ 495,845,612 $ 9,455,902 $ 209,322,348
Undistributed net investment income..................... -- 1,074 17,575
Distributions in excess of net investment income........ (1,274,878) -- --
Distributions in excess of net realized gains........... (371,881) -- --
Accumulated net realized gain (loss)
on investment transactions............................ (3,617,069) 24,640 (521,807)
Net unrealized depreciation on investments.............. (16,945,429) (268,262) (10,524,169)
------------- ----------- -------------
$ 473,636,355 $ 9,213,354 $ 198,293,947
============= =========== =============
</TABLE>
<TABLE>
<CAPTION>
OHIO PENNSYLVANIA SHORT-TERM INTERMEDIATE-
TAX-FREE INCOME TAX-FREE INCOME BOND TERM BOND
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------------- --------------- ----------- -------------
<S> <C> <C> <C> <C>
Capital paid-in........................ $ 8,951,866 $ 62,414,861 $25,751,431 $ 112,414,132
Undistributed net investment income.... -- -- -- 13,608
Distributions in excess of net
investment income.................... -- (3,258) -- --
Accumulated net realized loss on
investment transactions.............. (100,370) (288,051) (1,064,515) (1,169,139)
Net unrealized depreciation on
investments.......................... (471,272) (3,404,461) (560,536) (3,511,573)*
------------- ------------- ----------- -------------
$ 8,380,224 $ 58,719,091 $24,126,380 $ 107,747,028
============= ============= =========== =============
</TABLE>
- -------------
* Includes $1,173,313 of unrealized appreciation, at time of acquisition.
(F) CAPITAL LOSS CARRYOVERS
At September 30, 1994, capital loss carryovers were available to offset
possible future realized capital gains as follows: $3,617,069 in the Managed
Income Portfolio which expire in the year 2002, $521,807 in the Intermediate
Government Portfolio which expire in the year 2002, and $1,064,515 in the
Short-Term Bond Portfolio which expire in the year 2002. At September 30, 1994,
the deferred post-October losses were as follows: $371,881 for the Managed
Income Portfolio, $100,370 for the Ohio Tax-Free Income Portfolio, $285,131 for
the Pennsylvania Tax-Free Income Portfolio, and $1,155,530 for the
Intermediate-Term Bond Portfolio.
(G) ACQUISITION OF PNC COLLECTIVE FUNDS
On September 16, 1993, The PNC Fund acquired all the assets of the Citizens
Fidelity Institutional Active Fixed Income Fund from the participants of such
fund. The acquisition was accomplished by a taxable exchange of assets with a
value of $3,274,839 for 290,838 Institutional shares of the Managed Income
Portfolio at $11.26 per share.
53
<PAGE> 109
THE PNC(R) FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 1994
On September 16, 1993, The PNC Fund acquired all the assets of the Citizens
Fidelity Institutional Bond Fund from participants of such fund. The acquisition
was accomplished by a taxable exchange of assets with a value of $56,621,877 for
5,662,188 Institutional shares of the Intermediate-Term Bond Portfolio at $10.00
per share.
On December 28, 1993, The PNC Fund acquired all the assets of the PNC
Financial Common Trust for Retirement Assets Fixed Income Portfolio from
participants of such fund. The acquisition was accomplished by a tax-free
exchange of assets with a value of $29,793,024 for 3,055,695 Service shares of
the Intermediate-Term Bond Portfolio at $9.75 per share. The Fixed Income
Portfolio's net assets on that date included $1,173,313 in unrealized
appreciation of securities.
On May 26, 1994, The PNC Fund acquired all the assets of the PNC Pension
Plan Assets Fixed Income Portfolio from participants of such fund. The
acquisition was accomplished by a tax-free exchange of assets with a value of
$22,388,535 for 2,444,163 Institutional shares of the Intermediate-Term Bond
Portfolio at $9.16 per share and a value of $24,915,125 for 2,484,060
Institutional shares of the Managed Income Portfolio at $10.03 per share.
On June 21, 1994, The PNC Fund acquired all the assets of the PNC Incentive
Savings Plan Assets Fixed Income Portfolio from participants of such fund. The
acquisition was accomplished by a tax-free exchange of assets with a value of
$11,296,286 for 1,229,193 Institutional shares of the Intermediate-Term Bond
Portfolio at $9.19 per share and a value of $11,684,793 for 1,164,984
Institutional shares of the Managed Income Portfolio at $10.03 per share.
54
<PAGE> 110
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF THE PNC FUND:
We have audited the accompanying statements of net assets of The PNC Fund
(Managed Income, Tax-Free Income, Intermediate Government, Ohio Tax-Free Income,
Pennsylvania Tax-Free Income, Short-Term Bond, and the Intermediate Term-Bond
Portfolios), as of September 30, 1994, and the related statements of operations
for the year (or period) then ended, the statements of changes in net assets for
each of the two years (or periods) in the period then ended, and the financial
highlights for each of the periods presented. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments held by the
custodian as of September 30, 1994. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of The
PNC Fund (Managed Income, Tax-Free Income, Intermediate Government, Ohio
Tax-Free Income, Pennsylvania Tax-Free Income, Short-Term Bond, and the
Intermediate Term-Bond Portfolios), as of September 30, 1994, and the results of
their operations for the year (or period) then ended, the changes in their net
assets for each of the two years (or periods) in the period then ended, and the
financial highlights for each of the periods presented, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND, L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
November 23, 1994
55
<PAGE> 111
FIXED INCOME FUND
SEMI-ANNUAL INVESTMENT ADVISER'S REPORT
DECEMBER 31, 1994
The first half of the Fund's fiscal year ended with the economy continuing on
its improving trend. Continued strong economic growth in the second half of
1994 and the anticipation of future inflation caused the Federal Reserve to
raise the Fed Funds rate by a total of 125 basis points during the period.
Volatility in the foreign exchange markets caused foreign investors to limit
investments in dollar denominated securities.
The yield on the 30 year Treasury started the second half of 1994 at 7.61% and
increased 27 basis points to end 1994 at 7.88%. Yield on the 10 year Treasury
increased from 7.32% to 7.83%, a 51 basis point increase. During the period,
the yield curve from 3 month bills to the 30 year bond shifted from 332 basis
points in early July to 220 basis points at the end of December, a flattening
of 112 basis points. Corporates underperformed Treasuries due to rising
concerns about credit and event risk. The banking and brokerage industries
came under the most pressure due to the unexpected rapid rise in rates
experienced during 1994.
The Fixed Income Fund reduced its holding in corporates and eliminated its
holdings of mortgage securities to increase liquidity. During this
restructuring the Portfolio's duration was shortened which helped performance.
The Portfolio's total return for the last six months was 0.88% compared to the
Lipper Intermediate Investment Grade average return of 0.57% and the Lehman
Intermediate Government Corporate Index of 0.71%
PNC Institutional Management Corporation
January 31, 1995
<PAGE> 112
FIXED INCOME FUND
PORTFOLIOS FOR DIVERSIFIED INVESTMENT
Statement of Net Assets
December 31, 1994
(Unaudited)
<TABLE>
<CAPTION>
Par
Maturity (000) Value
-------- ------- -----------
<S> <C> <C> <C>
UNITED STATES TREASURY AND AGENCY
OBLIGATIONS - 80.2%
FEDERAL FARM CREDIT BANK - 7.1%
5.85% . . . . . . . . . . . . . . . . . . . . . 04/29/96 $1,000 $ 979,340
FEDERAL HOME LOAN BANK
NOTES - 28.6%
5.45% . . . . . . . . . . . . . . . . . . . . . 01/25/95 1,000 999,550
5.70% . . . . . . . . . . . . . . . . . . . . . 05/26/95 1,000 995,940
5.82% . . . . . . . . . . . . . . . . . . . . . 05/17/96 1,000 991,250
7.04% . . . . . . . . . . . . . . . . . . . . . 05/24/99 1,000 959,930
-----------
3,946,670
-----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
DISCOUNT NOTES - 9.0%
5.92% . . . . . . . . . . . . . . . . . . . . . 01/04/95 300 299,951
7.30% . . . . . . . . . . . . . . . . . . . . . 07/10/02 1,000 941,670
-----------
1,241,621
-----------
U.S. TREASURY BONDS - 7.3%
8.125% . . . . . . . . . . . . . . . . . . . . 08/15/19 1,000 1,014,290
-----------
U.S. TREASURY NOTES - 28.2%
7.625% . . . . . . . . . . . . . . . . . . . . 12/31/94 900 900,000
5.875% . . . . . . . . . . . . . . . . . . . . 05/15/95 1,000 998,040
7.875% . . . . . . . . . . . . . . . . . . . . 02/15/00 1,000 1,003,000
7.875% . . . . . . . . . . . . . . . . . . . . 11/15/04 1,000 1,003,580
-----------
3,904,620
-----------
TOTAL UNITED STATES TREASURY
AND AGENCY OBLIGATIONS
(Cost $11,302,134) 11,086,541
-----------
CORPORATE BONDS -11.0%
BANKS - 7.3%
North Carolina National Bank (A3,A)
8.50% . . . . . . . . . . . . . . . . . . . . . 11/01/96 1,000 1,005,000
-----------
PETROLEUM REFINING - 3.7%
Texaco Capital Co. (A1,A+)
9.00% . . . . . . . . . . . . . . . . . . . . . 12/15/99 500 516,250
-----------
TOTAL CORPORATE BONDS
(Cost $1,525,941) 1,521,250
-----------
</TABLE>
See Notes to Financial Statements.
2
<PAGE> 113
FIXED INCOME FUND
PORTFOLIOS FOR DIVERSIFIED INVESTMENT
Statement of Net Assets (Concluded)
December 31, 1994
(Unaudited)
<TABLE>
<CAPTION>
Par
Maturity (000) Value
-------- ------- -----------
<S> <C> <C> <C>
VARIABLE RATE OBLIGATIONS - 7.3%
BROKERAGE SERVICES - 7.3%
Morgan Stanley Group, Inc.(A1,A+)
7.36%+
(Cost $1,000,000) . . . . . . . . . . . . . . . . 03/09/95 $1,000 $ 1,000,000
-----------
TOTAL INVESTMENT IN SECURITIES - 98.5%
(Cost $13,828,075*) 13,607,791
OTHER ASSETS IN EXCESS OF
LIABILITIES - 1.5% . . . . . . . . . . . . . . . . . 213,603
-----------
NET ASSETS (100.0%) (Equivalent to
$9.37 per share based on 1,424,033
Fixed Income shares and 50,634
Fixed Income Dollar shares of
beneficial interest outstanding) . . . . . . . . . . $13,821,394
===========
NET ASSET VALUE,
offering and redemption price per
Fixed Income and Fixed Income Dollar
share
($13,821,394/1,474,667) . . . . . . . . . . . . . . $ 9.37
===========
</TABLE>
- -----------------------
* Aggregate cost for federal income tax purposes. The aggregate
gross unrealized appreciation (depreciation) for all
securities is as follows: Excess of value over tax cost
$7,170, excess of tax cost over value ($227,454).
+ Floating Rate Note - The rate shown is the rate as of December
31, 1994, and the maturity shown is the next interest
readjustment date.
Average Weighted Maturity of the Portfolio - 3.9 years.
The Moody's Investors Service, Inc. and Standard and Poor's
Ratings Group, Division of McGraw Hill ratings indicated are
the most recent ratings available at December 31, 1994.
See Notes to Financial Statements.
3
<PAGE> 114
FIXED INCOME FUND
PORTFOLIOS FOR DIVERSIFIED INVESTMENT
Statement of Operations
Six Months Ended December 31, 1994
(Unaudited)
<TABLE>
<S> <C>
Investment income:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 710,274
---------
Expenses:
Investment advisory fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,855
Administrative fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,855
Trustees' fees and officer's salary . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,729
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,672
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,484
Registration fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,242
Custodian fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,573
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,614
Printing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,861
Service Organization fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 599
Transfer agent fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,484
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 975
---------
116,943
Less fees waived and expenses reimbursed . . . . . . . . . . . . . . . . . . . . . . . . . (70,637)
---------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,306
---------
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 663,968
---------
Realized and unrealized gain (loss) from investment activities:
Net realized loss from securities transactions . . . . . . . . . . . . . . . . . . . . . . (704,021)
Change in unrealized appreciation of investments . . . . . . . . . . . . . . . . . . . . . 349,614
---------
Net loss on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (354,407)
---------
Net increase in net assets resulting from operations . . . . . . . . . . . . . . . . . . . . . . . $ 309,561
=========
</TABLE>
See Notes to Financial Statements.
4
<PAGE> 115
FIXED INCOME FUND
PORTFOLIOS FOR DIVERSIFIED INVESTMENT
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Six Months
Ended Year
December 31, 1994 Ended
(Unaudited) June 30, 1994
----------------- -----------------
<S> <C> <C>
Decrease in net assets:
Operations:
Net investment income . . . . . . . . . . . . . . . . . . . . . $ 663,968 $ 2,028,531
Net realized gain (loss) from securities
transactions . . . . . . . . . . . . . . . . . . . . . . . . (704,021) 62,893
Change in unrealized appreciation (depreciation)
on investments . . . . . . . . . . . . . . . . . . . . . . . 349,614 (2,540,325)
----------- ------------
Net increase (decrease) in net assets
resulting from operations . . . . . . . . . . . . . . . . . 309,561 (448,901)
----------- ------------
Dividends to shareholders from:
Net investment income:
Fixed Income shares . . . . . . . . . . . . . . . . . . . . . (650,589) (1,997,498)
Fixed Income Dollar shares . . . . . . . . . . . . . . . . . (13,379) (31,047)
Distributions to shareholders from:
Net capital gain:
Fixed Income shares . . . . . . . . . . . . . . . . . . . . . 0 (129,153)
Fixed Income Dollar shares . . . . . . . . . . . . . . . . . 0 (2,054)
In excess of net capital gain:
Fixed Income shares . . . . . . . . . . . . . . . . . . . . . 0 (145,828)
Fixed Income Dollar shares . . . . . . . . . . . . . . . . . 0 (2,320)
----------- -------------
Total dividends and distributions
to shareholders . . . . . . . . . . . . . . . . . . . . . . (663,968) (2,307,900)
----------- ------------
Capital share transactions:
Sales of shares . . . . . . . . . . . . . . . . . . . . . . . . 1,674,074 12,284,599
Shares issued in reinvestment of dividends . . . . . . . . . . . 232,844 976,863
Shares repurchased . . . . . . . . . . . . . . . . . . . . . . . (19,625,913) (18,027,816)
------------ ------------
Net decrease in net assets derived
from capital share transactions . . . . . . . . . . . . . . (17,718,995) (4,766,354)
------------ ------------
Total decrease in net assets . . . . . . . . . . . . . . . . (18,073,402) (7,523,155)
Net Assets:
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . 31,894,796 39,417,951
----------- ------------
End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,821,394 $ 31,894,796
=========== ===========
</TABLE>
See Notes to Financial Statements.
5
<PAGE> 116
FIXED INCOME FUND
Fixed Income Shares
PORTFOLIOS FOR DIVERSIFIED INVESTMENT
Financial Highlights
The table below sets forth selected financial data for a share of capital stock
outstanding throughout each period presented.
<TABLE>
<CAPTION>
Six Months
Ended
December 31, Year Ended Year Ended Year Ended Year Ended Year Ended
1994 June 30, June 30, June 30, June 30, June 30,
(Unaudited) 1994 1993 1992 1991 1990
------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning . . . . . $ 9.57 $ 10.41 $ 9.88 $ 9.32 $ 9.25 $ 9.47
---------- --------- -------- -------- -------- --------
Income from investment operations:
Net investment income . . . . . . . . 0.28 0.61 0.66 0.71 0.76 0.77
Net gain (loss) on securities
(realized and unrealized) . . . . . (0.20) (0.75) 0.53 0.56 0.07 (0.22)
---------- --------- -------- -------- -------- --------
Total income (loss) from
investment operations . . . . . 0.08 (0.14) 1.19 1.27 0.83 0.55
---------- --------- -------- -------- -------- --------
Less distributions:
Dividends from net investment
income . . . . . . . . . . . . . . (0.28) (0.62) (0.66) (0.71) (0.76) (0.77)
Distributions from capital gains . . 0.00 (0.04) 0.00 0.00 0.00 0.00
Distributions in excess of
capital gains . . . . . . . . . . . 0.00 (0.04) 0.00 0.00 0.00 0.00
--------- --------- -------- -------- -------- --------
Total distributions . . . . . . . (0.28) (0.70) (0.66) (0.71) (0.76) (0.77)
--------- --------- -------- -------- -------- --------
Net asset value, end of period . . . $ 9.37 $ 9.57 $ 10.41 $ 9.88 $ 9.32 $ 9.25
========= ========= ======== ======== ======== ========
Total return . . . . . . . . . . . . (3.52%)(a) (1.54%) 12.41% 14.07% 9.43% 6.09%
Ratios/supplemental data:
Net assets, end of period
(in 000's) . . . . . . . . . . . . $ 13,347 $ 31,392 $ 38,963 $ 29,739 $ 13,896 $ 12,599
Ratio of expenses to average daily
net assets . . . . . . . . . . . . 0.40%(a)(b) 0.40%(b) 0.40%(b) 0.40%(b) 0.40%(b) 0.40%(b)
Ratio of net investment income to
average daily net assets . . . . . 5.82%(a) 6.04% 6.48% 7.34% 8.29% 8.27%
Portfolio turnover rate . . . . . . . 65%(a) 85% 103% 94% 52% 38%
</TABLE>
- ---------------------------------
(a) Annualized.
(b) Without the waiver of administrative fees, advisory fees,
trustees' fees and officer's salary and expense reimbursements,
the ratios of expenses to average daily net assets would have been
1.02% (annualized), .96%, .93%, 1.00%, 1.34% and 1.22% for the
period ended December 31, 1994 and the years ended June 30, 1994,
1993, 1992, 1991 and 1990, respectively.
See Notes to Financial Statements.
6
<PAGE> 117
FIXED INCOME FUND
Fixed Income Dollar Shares
PORTFOLIOS FOR DIVERSIFIED INVESTMENT
Financial Highlights
The table below sets forth selected financial data for a share of capital stock
outstanding throughout each period presented.
<TABLE>
<CAPTION>
Six Months
Ended June 28,(d)
December 31, Year Ended Year Ended Year Ended through Year Ended
1994 June 30, June 30, June 30, June 30, June 30,
(Unaudited) 1994 1993 1992 1991 1990(c)
------------- ---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period . . . . . . . . . . . $ 9.57 $ 10.41 $ 9.88 $ 9.32 $ 9.30 $ 9.47
--------- --------- -------- --------- --------- ---------
Income from investment operations:
Net investment income . . . . . . 0.27 0.58 0.64 0.69 0.01 0.74
Net gain(loss) on securities
(realized and unrealized) . . . (0.20) (0.75) 0.53 0.56 0.02 (0.22)
--------- --------- -------- --------- --------- ---------
Total income from investment
operations . . . . . . . . . . 0.07 (0.17) 1.17 1.25 0.03 0.52
--------- --------- -------- --------- --------- ---------
Less distributions:
Dividends from net investment income (0.27) (0.59) (0.64) (0.69) (0.01) (0.74)
Distributions from capital
gains . . . . . . . . . . . . 0.00 (0.04) 0.00 0.00 0.00 0.00
Distributions in excess of
capital gains . . . . . . . . . 0.00 (0.04) 0.00 0.00 0.00 0.00
--------- --------- -------- --------- --------- ---------
Total distributions . . . . . . (0.27) (0.67) (0.64) (0.69) (0.01) (0.74)
--------- --------- -------- --------- --------- ---------
Net asset value, end of
period . . . . . . . . . . . . $ 9.37 $ 9.57 $ 10.41 $ 9.88 $ 9.32 $ 9.25
========= ========= ======== ========= ========= =========
Total return . . . . . . . . . . (3.77%)(a) (1.79%) 12.13% 13.75% 0.28% 5.75%
Ratios/supplemental data:
Net assets, end of period (in 000's) $ 474 $ 503 $ 455 $ 417 $ 214 $ 0
Ratio of expenses to average daily
net assets . . . . . . . . . . 0.65%(a)(b) 0.65%(b) 0.65%(b) 0.65%(b) 0.65%(a)(b) 0.65%(b)
Ratios of net investment income to
average daily net assets . . . 5.57%(a) 5.79% 6.25% 6.98% 7.69%(a) 8.11%
Portfolio turnover rate . . . . . 65%(a) 85% 103% 94% 52%(a) 38%
</TABLE>
- ----------------------
(a) Annualized.
(b) Without the waiver of administrative fees, advisory fees, trustees' fees
and officer's salary and expense reimbursements, the ratios of expenses to
average daily net assets would have been 1.27%(annualized), 1.21%, 1.18%,
1.25%, 1.59%(annualized), and 1.48% for the period ended December 31, 1994
and the years ended June 30, 1994, 1993 and 1992, the period ended June 30,
1991 and the year ended June 30, 1990, respectively.
(c) No shares were outstanding June 30, 1990.
(d) Reissuance of shares.
See Notes to Financial Statements.
7
<PAGE> 118
NOTES TO FINANCIAL STATEMENTS
A. Portfolios for Diversified Investment (the Company) was incorporated in
Maryland on January 18, 1984 and was reorganized as a Massachusetts business
trust on October 31, 1985. The Company is registered under the Investment
Company Act of 1940, as amended, as diversified, open-end management investment
company. The Company consists of one portfolio, Fixed Income Fund ("Income
Fund").
The Company's Declaration of Trust authorizes the Board of Trustees to
issue an unlimited number of shares of beneficial interest in the Company and
to classify or reclassify any uninsured shares into one or more classes of
shares. The Declaration of Trust further authorizes the trustees to classify
or reclassify any class of shares into one or more subclasses.
Income Fund has two classes of shares, one class being referred to as
Dollar shares. Dollar shares and the other class of shares are identical in
all respects, except that Dollar shares are sold to institutions (Service
Organizations) which provide support services to their customers who
beneficially own such shares, in consideration of Income Fund's payment of
O.25% (on an annualized basis) of the average daily net asset value of the
Dollar shares held by the institutions for the benefit of their customers. The
Service Organization fee is applicable only to the Dollar shares.
B. Significant accounting policies relating to the Company are as follows:
Security Valuation -- Portfolio securities which are listed on an exchange
are valued at the last quoted sales price on that exchange, or, if there has
been no such reported sale on that day, at the mean between the closing bid and
asked price. If a security is traded on more than one exchange, the security
is valued at the last quoted sales price on the exchange where the security is
primarily traded. Unlisted securities for which market quotations are not
readily available are valued at the most recent quoted bid price. Short-term
investments having a maturity of sixty days or less are valued on the basis of
amortized cost.
Securities Transactions and Investment Income -- Securities transactions
are accounted for on the trade date. The cost of investments sold is
determined by the use of the specific identification method for both financial
reporting and income tax purposes. Interest income is recorded on an accrual
basis.
Dividends and Distributions to Shareholders -- Substantially all of the net
investment income of Income Fund will be distributed as dividends monthly to
shareholders. Net realized capital gains, if any, will be distributed at least
annually for purposes of relieving Income Fund of federal income and excise
taxes. Distributions necessary to relieve Income Fund of federal excise taxes
are based upon a twelve month period ended October 31 of each year and, because
of subsequently realized capital losses in the fiscal year, may exceed the net
realized capital gains.
Federal Taxes -- No provision is made for federal taxes as it is the
Company's intention to have Income Fund continue to qualify as a regulated
investment company and to make the requisite distributions to its shareholders
which will be sufficient to relieve the portfolio from all or substantially all
federal income and excise taxes.
Repurchase Agreements--Income Fund may engage in repurchase agreements of
obligations issued or guaranteed as to principal and interest by the United
States Government, its agencies or instrumentalities and other securities in
which the Fund is authorized to invest. With respect to any repurchase
-8-
<PAGE> 119
agreement transaction engaged in by the Fund, Income Fund's investment adviser
will require the seller of the securities subject to the repurchase agreement
to maintain, on a daily basis, the value of such securities at not less than
the repurchase price (including accrued interest). The agreements are
conditioned upon the collateral being deposited under the Federal
Reserve/Treasury book-entry system or by another authorized securities
depository.
C. PNC Institutional Management Corporation ("PIMC") (formerly Provident
Institutional Management Corporation) is adviser for Income Fund and maintains
the Company's financial accounts. PNC Bank, National Association ("PNC Bank"),
serves as sub-adviser and custodian for Income Fund. PIMC is a subsidiary of
PNC Bank. PFPC Inc. ("PFPC"), an indirect wholly owned subsidiary of PNC Bank
Corp., is the Company's transfer agent. PNC Bank is a wholly owned subsidiary
of PNC Bank Corp. Provident Distributors Inc. ("PDI") serves as the Company's
distributor. No compensation is payable by the Company to PDI for its
distribution services. The Company has entered into an Administration
agreement with PFPC and PDI for certain administrative services.
In return for their advisory and administration services, PIMC and the
administrators are each entitled to receive a fee from the Company, computed
daily and payable monthly, at the annual rate of .20 %. In addition, PIMC and
the administrators each has agreed to reduce the advisory and administrative
fees otherwise payable to them and to reimburse the Company for certain of its
operating expenses to the extent necessary to ensure that the operating
expenses ratios (excluding fees paid to Service Organizations pursuant to
Servicing Agreements) do not exceed .40% of the average net assets of Income
Fund.
If expenses borne by Income Fund in any fiscal year exceed the applicable
expense limitation imposed by state securities regulation, PIMC and the
administrators have each agreed to reimburse Income Fund for one-half of any
excess expense up to the amount of fees payable to them by Income Fund (except
where such regulations require reimbursement regardless of the fees payable to
them).
During the period ended December 31, 1994 PIMC, PFPC and the Company's
trustees and officer voluntarily waived fees or salary as shown below:
<TABLE>
<S> <C>
Advisory and Administration
fees waived $ 45,711
Trustees' fees and
officer's salary waived 24,926
</TABLE>
Expenses of Income Fund include legal fees paid to Drinker Biddle & Reath.
A partner of that firm is Secretary of the Company.
D. Purchases and sales of securities, other than short-term obligations for
the period ended December 31, 1994 were as follows:
<TABLE>
<CAPTION>
Purchases Sales
--------- -----
<S> <C> <C>
Corporate Obligations $ 0 $ 7,197,799
Government Obligations 6,983,945 15,586,023
</TABLE>
-9-
<PAGE> 120
E. At December 31, 1994 net assets consisted of:
<TABLE>
<S> <C>
Capital paid-in $14,893,856
Undistributed net
investment income 0
Accumulated net
realized loss on investments (852,178)
Net unrealized depreciation of
investments (220,284)
-------
$13,821,394
===========
</TABLE>
F. Transactions in Fixed Income shares and Fixed Income Dollar shares are
summarized as follows:
<TABLE>
<CAPTION>
INCOME SHARES INCOME DOLLAR SHARES
---------------------------------- ----------------------------------
Six Months Six Months
Ended Ended
December 31, December 31,
1994 Year Ended 1994 Year Ended
(Unaudited) June 30, 1994 (Unaudited) June 30, 1994
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Shares sold . . . . . . . . . . . . . . . . . . 170,782 1,173,487 4,629 26,640
Shares issued in reinvestment
of dividends . . . . . . . . . . . . . . . . 24,365 79,414 0 0
Shares issued in reinvestment
of capital gains . . . . . . . . . . . . . . 0 15,817 0 0
Shares repurchased . . . . . . . . . . . . . . (2,051,692) (1,731,327) (6,611) (17,714)
----------- ----------- -------- --------
Net increase
(decrease) in shares . . . . . . . . . . . . (1,856,545) (462,609) (1,982) 8,926
Shares outstanding:
Beginning of period . . . . . . . . . . . . . 3,280,578 3,743,187 52,616 43,690
----------- ----------- -------- --------
End of period . . . . . . . . . . . . . . . . 1,424,033 3,280,578 50,634 52,616
=========== =========== ======== ========
</TABLE>
-10-
<PAGE> 121
The PNC Fund ("PNC Fund") Intermediate-Term Bond Portfolio Portfolios for
Diversified Investment (the "Trust"), Fixed Income Fund
Introduction to Proposed Merger
May 14, 1995
The accompanying unaudited Pro Forma Combined Schedule of Portfolio Investments
and Statement of Assets and Liabilities reflect the accounts of the
Intermediate-Term Bond Portfolio of PNC Fund and the Fixed Income Fund of the
Trust as of the year ended December 31, 1994, and the Pro Forma Statement of
Operations reflects the accounts for the twelve months ended September 30,
1994. These statements have been derived from the books and records of PNC
Fund and the Trust utilized in calculating daily net asset value at December
31, 1994.
<PAGE> 122
THE PNC FUND
INTERMEDIATE-TERM BOND PORTFOLIO
INTERMEDIATE-TERM BOND PORTFOLIO OF PNC FUND
FIXED INCOME FUND OF THE TRUST
PRO-FORMA COMBINED PORTFOLIO OF INVESTMENTS
December 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
PAR (000) VALUE AT DECEMBER 31, 1994
------------------------------ --------------------------------------
PDI PNC PDI PNC
FIXED INTERMEDIATE FIXED INTERMEDIATE
INCOME TERM BOND PRO-FORMA INCOME TERM BOND PRO-FORMA
FUND PORTFOLIO COMBINED MATURITY FUND PORTFOLIO COMBINED
---- --------- -------- -------- ---- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
AGENCY OBLIGATIONS:
Federal Home Loan Bank Bonds:
$2,660 $2,660 5.60% 01/03/95 $2,659,172 $2,659,172
$1,000 $1,000 5.45% 01/25/95 $999,550 $999,550
$2,000 $2,000 5.82% 05/17/95 $1,982,500 $1,982,500
$1,000 $1,000 5.70% 05/26/95 $995,940 $995,940
$1,000 $1,000 5.82% 05/17/96 $991,250 $991,250
$2,500 $2,500 6.99% 04/25/97 $2,454,425 $2,454,425
$1,000 $2,000 $3,000 7.04% 05/24/99 $959,930 $1,919,860 $2,879,790
Federal Farm Credit Bank Notes:
$1,000 $1,000 5.85% 04/29/96 $979,340 $979,340
Federal Home Loan Mortgage Corp:
$2,000 $2,000 4.75% 05/15/96 $1,908,996 $1,908,996
$3,000 $3,000 4.75% 03/15/97 $2,781,279 $2,781,279
$5,000 $5,000 5.50% 06/15/97 $4,617,097 $4,617,097
$291 $291 9.50% 08/15/97 $302,283 $302,283
$270 $270 9.00% 09/15/97 $290,054 $290,054
$193 $193 8.50% 08/15/98 $202,184 $202,184
$67 $67 8.50% 09/15/98 $67,425 $67,425
$35 $35 9.00% 09/15/98 $35,739 $35,739
$66 $66 8.50% 10/15/98 $67,061 $67,061
$667 $667 7.00% 07/15/00 $641,667 $641,667
$1,248 $1,248 7.00% 08/15/00 $1,193,697 $1,193,697
$72 $72 9.00% 12/01/01 $76,619 $76,619
$157 $157 9.50% 07/01/03 $168,761 $168,761
$1,500 $1,500 7.05% 03/24/04 $1,379,531 $1,379,531
$2,000 $2,000 7.74% 06/01/04 $1,907,580 $1,907,580
$282 $282 9.50% 11/01/04 $292,585 $292,585
$64 $64 8.50% 01/01/05 $65,055 $65,055
$303 $303 9.50% 01/01/05 $318,855 $318,855
$31 $31 9.00% 12/01/16 $31,741 $31,741
Federal National Mortgage Assoc:
$300 $300 5.92% 01/04/95 $299,951 $299,951
$2,500 $2,500 7.60% 01/10/97 $2,487,550 $2,487,550
$3,304 $3,304 5.75% 06/25/98 $3,039,680 $3,039,680
$500 $500 7.85% 09/10/98 $497,395 $497,395
$1,000 $1,000 8.70% 06/10/99 $1,024,500 $1,024,500
$1,000 $1,000 6.35% 08/10/99 $936,300 $936,300
$2,000 $2,000 8.25% 12/18/00 $2,016,640 $2,016,640
$1,000 $1,000 7.30% 07/10/02 $941,670 $941,670
$145 $145 9.00% 08/01/02 $147,665 $147,665
$1,000 $1,000 6.95% 09/10/02 $923,700 $923,700
$42 $42 9.50% 03/01/05 $43,081 $43,081
Government National Mortgage
Association:
$348 $348 8.00% 05/15/99 $341,774 $341,774
$51 $51 7.50% 04/15/07 $48,662 $48,662
$41 $41 7.50% 06/15/07 $39,283 $39,283
$58 $58 7.50% 07/15/07 $55,492 $55,492
$40 $40 7.50% 08/15/07 $37,932 $37,932
$81 $81 7.50% 10/15/07 $78,053 $78,053
$2,829 $2,829 7.50% 12/15/07 $2,712,366 $2,712,366
$29 $29 9.50% 08/15/18 $29,706 $29,706
$59 $59 9.50% 04/15/19 $61,075 $61,075
Tennessee Valley Authority:
$1,000 $1,000 6.125% 07/15/03 $875,000 $875,000
$6,300 $42,433 $48,733 TOTAL AGENCY OBLIGATIONS: $6,167,631 $40,760,020 $46,927,651
------ ------- ------- ------------------------- ---------- ----------- -----------
</TABLE>
<PAGE> 123
INTERMEDIATE-TERM BOND PORTFOLIO OF PNC FUND
FIXED INCOME FUND OF THE TRUST
PRO-FORMA COMBINED PORTFOLIO OF INVESTMENTS
December 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
PAR (000) VALUE AT DECEMBER 31, 1994
------------------------------ --------------------------------------
PDI PNC PDI PNC
FIXED INTERMEDIATE FIXED INTERMEDIATE
INCOME TERM BOND PRO-FORMA INCOME TERM BOND PRO-FORMA
FUND PORTFOLIO COMBINED MATURITY FUND PORTFOLIO COMBINED
---- --------- -------- -------- ---- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSET BACKED SECURITIES:
Automotive:
Capital Auto Receivable Asset Trust:
$2,000 $2,000 4.90% 02/16/98 $1,981,200 $1,981,200
Merrill Lynch Asset Backed Corp. 1992-1:
$1,757 $1,757 5.50% 07/15/95 $1,728,468 $1,728,468
Union Federal Master Trust (Aaa AAA):
$1,017 $1,017 4.875% 11/15/95 $980,376 $980,376
Credit:
Discover Card Master Trust I (Aaa AAA):
$3,000 $3,000 6.3775% 01/15/95 $3,003,600 $3,003,600
Finance:
First Chicago Master Trust II:
$500 $500 8.40% 12/15/96 $503,600 $503,600
The Money Store Home Equity Trust:
$2,000 $2,000 7.625% 12/15/95 $1,990,000 $1,990,000
$10,274 $10,274 TOTAL ASSET BACKED SECURITIES: $0 $10,187,244 $10,187,244
------- ------- ------------------------------ -- ----------- -----------
CORPORATE BONDS:
Automotive:
Ford Motor Credit Co. (A2 A)
$1,000 $1,000 5.625% 12/15/98 $911,250 $911,250
$1,000 $1,000 5.625% 01/15/99 $911,250 $911,250
Banks:
Bank America Corp. (A2 A):
$1,100 $1,100 6.00% 07/15/97 $1,040,875 $1,040,875
Bank of New York, Inc. (Baal A-):
$1,000 $1,000 6.50% 12/01/03 $872,500 $872,500
National Westminster Bank (Aa3 AA-):
$1,250 $1,250 9.45% 05/01/01 $1,312,500 $1,312,500
North Carolina National Bank (A3 A)
$1,000 $1,000 8.50% 11/01/96 $1,005,000 $1,005,000
Westpac Banking Corp. (A3 A):
$1,000 $1,000 9.125% 08/15/01 $1,025,000 $1,025,000
Brokerage:
Lehman Brothers Holdings, Inc. (A3 A):
$1,000 $1,000 5.50% 06/15/96 $963,750 $963,750
Finance:
Associates Corp. of North America
(A1, AA-):
$1,000 $1,000 9.70% 05/01/97 $1,033,750 $1,033,750
Fleet Financial Group (A2 A-)
$1,000 $1,000 7.25% 09/01/99 $960,000 $960,000
Grand Metropolitan Investment Corp.
(A2, A+):
$1,000 $1,000 7.125% 09/15/04 $920,000 $920,000
</TABLE>
<PAGE> 124
INTERMEDIATE-TERM BOND PORTFOLIO OF PNC FUND
FIXED INCOME FUND OF THE TRUST
PRO-FORMA COMBINED PORTFOLIO OF INVESTMENTS
December 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
PAR (000) VALUE AT DECEMBER 31, 1994
---------------------------- --------------------------------------
PDI PNC PDI PNC
FIXED INTERMEDIATE FIXED INTERMEDIATE
INCOME TERM BOND PRO-FORMA INCOME TERM BOND PRO-FORMA
FUND PORTFOLIO COMBINED MATURITY FUND PORTFOLIO COMBINED
---- --------- -------- -------- ---- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Great Western Financial Corp.
(Baa2 BBB+):
$1,150 $1,150 6.375% 07/01/00 $1,037,156 $1,037,156
Petroleum Refining:
Texaco Capital (A1 A+):
$500 $500 9.00% 12/15/99 $516,250 $516,250
Retail Department Stores:
J. C. Penney, Co., (A2, A+):
$1,000 $1,000 5.375% 11/15/98 $913,750 $913,750
Telecommunications:
GTE Southwest, Inc. (A3 A)
$2,000 $2,000 5.82% 12/01/99 $1,805,000 $1,805,000
Southwestern Bell Telephone (A1 A+)
$1,000 $1,000 6.375% 04/01/01 $913,750 $913,750
Utilities (Electric)
Public Service Colorado (Baa1 BBB+)
$1,000 $1,000 6.00% 01/01/01 $887,500 $887,500
Yankee:
Bell Telphone, Canada (Aa2 AA-):
$1,000 $1,000 7.75% 04/01/06 $961,250 $961,250
National Bank of Canada (A2 BBB+):
$1,000 $1,000 8.125% 08/15/04 $965,000 $965,000
Noranda, Inc. (Baa2 BBB-):
$1,000 $1,000 8.00% 06/01/03 $958,750 $958,750
$1,500 $19,500 $21,000 TOTAL CORPORATE BONDS: $1,521,250 $18,393,031 $19,914,281
------ ------- ------- ---------------------- ---------- ----------- -----------
MEDIUM TERM NOTES:
Automotive:
Chrysler Financial Corp. (Baa2 BBB)
$3,500 $3,500 5.08% 01/27/97 $3,316,250 $3,316,250
General Motors Acceptance Corp.
(Baal BBB+)
$2,500 $2,500 7.75% 01/24/97 $2,475,000 $2,475,000
Telecommunications:
NYNEX Capital Funding:
$1,400 $1,400 8.75% 12/01/04 $1,415,750 $1,415,750
$0 $7,400 $7,400 TOTAL MEDIUM TERM NOTES: $0 $7,207,000 $7,207,000
-- ------ ------ ------------------------ --- ---------- ----------
U.S. TREASURY OBLIGATIONS:
U.S. Treasury Notes:
$900 $900 7.625% 12/31/94 $900,000 $900,000
$1,000 $1,000 5.875% 05/15/95 $998,040 $998,040
$1,000 $1,000 8.625% 10/15/95 $1,010,700 $1,010,700
$4,000 $4,000 4.25% 05/15/95 $3,834,240 $3,834,240
$1,700 $1,700 6.75% 05/31/95 $1,662,362 $1,662,362
$1,100 $1,100 6.375% 06/30/97 $1,066,065 $1,066,065
$3,000 $3,000 7.875% 01/15/98 $3,005,818 $3,005,818
$100 $100 7.875% 04/15/98 $100,138 $100,138
$10,000 $10,000 5.25% 07/31/98 $9,204,700 $9,204,700
$1,000 $1,000 7.125% 10/15/98 $979,990 $979,990
$3,000 $3,000 6.375% 01/15/99 $2,849,370 $2,849,370
</TABLE>
<PAGE> 125
INTERMEDIATE-TERM BOND PORTFOLIO OF PNC FUND
FIXED INCOME FUND OF THE TRUST
PRO-FORMA COMBINED PORTFOLIO OF INVESTMENTS
December 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
PAR (000) VALUE AT DECEMBER 31, 1994
---------------------------- --------------------------------------
PDI PNC PDI PNC
FIXED INTERMEDIATE FIXED INTERMEDIATE
INCOME TERM BOND PRO-FORMA INCOME TERM BOND PRO-FORMA
FUND PORTFOLIO COMBINED MATURITY FUND PORTFOLIO COMBINED
---- --------- -------- -------- ---- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
$1,000 $1,000 6.375% 01/15/00 $941,170 $941,170
$1,000 $1,000 7.875% 02/15/00 $1,003,000 $1,003,000
$2,300 $2,300 7.75% 02/15/01 $2,291,972 $2,291,972
$1,000 $1,000 6.25% 02/15/03 $905,170 $905,170
$3,000 $3,000 7.25% 05/15/04 $2,881,740 $2,881,740
$1,000 $1,000 7.875% 11/15/04 $1,003,580 $1,003,580
U.S. Treasury Bonds:
$1,000 $1,000 8.125% 08/15/19 $1,014,290 $1,014,290
$4,900 $32,200 $37,100 TOTAL U.S. TREASURY OBLIGATIONS: $4,918,910 $30,733,435 $35,652,345
------ ------- ------- -------------------------------- ---------- ----------- -----------
VARIABLE RATE OBLIGATIONS:
Brokerage Services
Morgan Stanley Group, Inc. (A1 A+)
$1,000 $1,000 7.36% 03/09/95 $1,000,000 $1,000,000
$1,000 $0 $1,000 TOTAL VARIABLE RATE OBLIGATIONS: $1,000,000 $0 $1,000,000
------ --- ------ -------------------------------- ---------- --- ----------
$13,700 $114,681 $128,381 TOTAL INVESTMENTS: $13,607,791 $107,280,730 $120,888,521
- ------- -------- -------- ------------------ ----------- ------------ ------------
</TABLE>
<PAGE> 126
Intermediate-Term Bond Portfolio of PNC Fund
Fixed Income Fund of the Trust
Pro-Forma Combined Statement of Assets and Liabilities
(Unaudited)
<TABLE>
<CAPTION>
Dec. 31, 1994
--------------------------------------------
PDI PNC Pro-Forma
Fixed Income Inter. Term Bd. Combined
------------ --------------- ---------
<S> <C> <C>
ASSETS
Investments, @ value (Cost $13,827,976,
$112,515,252 and $126,343,228,
respectively) $13,607,791 $107,280,730 $120,888,521
Cash 69,738 5,484 75,222
Interest receivable 222,398 1,611,765 1,834,163
Capital shares sold receivable 0 3,322 3,322
Prepaid expenses 10,537 25,510 36,047
------------ ------------- -------------
TOTAL ASSETS 13,910,464 108,926,811 122,837,275
------------ ------------- -------------
LIABILITIES
Capital shares redeemed payable 15,000 266 15,266
Dividends payable 73,116 0 73,116
Accrued expenses payable 954 63,001 63,955
------------ ------------- -------------
TOTAL LIABILITES 89,070 63,267 152,337
------------ ------------- -------------
TOTAL NET ASSETS $13,821,394 $108,863,544 $122,684,938
============ ============= =============
TOTAL NET ASSETS BY CLASS OF SHARES
Institutional Class (1) $13,346,824 $74,089,569 $87,436,393
Service Class (2) $474,570 34,363,430 34,838,000
Series A Investor Class $0 410,545 410,545
------------ ------------- -------------
$13,821,394 $108,863,544 $122,684,938
============ ============= =============
SHARES OUTSTANDING
Institutional Class (1)
Pre-merger 1,424,033 8,322,586
Post-merger (3) 1,499,643 8,322,586 9,822,229
Service Class (2)
Pre-merger 50,634 3,859,638
Post-merger (4) 53,322 3,859,638 3,912,960
Series A Investor Class 0 46,128 46,128
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE (1)
(total net assets / shares outstanding)
Institutional Class (1)
Pre-merger $9.37 $8.90 $8.90
Post-merger (3) $8.90 $8.90 $8.90
Service Class (2)
Pre-merger $9.37 $8.90 $8.90
Post-merger (4) $8.90 $8.90 $8.90
Series A Investor Class $8.90 $8.90
Offering price per Series A Investor Class $9.32 $9.32
</TABLE>
(1) Pre-merger information for the Fixed Income Fund relates to its Fixed
Income Shares
(2) Pre-merger information for the Fixed Income Fund relates to its Fixed
Income Dollar Shares
(3) Post-merger information for the Fixed Income Fund relates to the
Institutional Shares of the Intermediate-Term Bond Portfolio received by
the Trust in the Reorganization.
(4) Post-merger information for the Fixed Income Fund relates to the Service
Shares of the Intermediate-Term Bond Portfolio received by the Trust in the
Reorganization.
<PAGE> 127
Intermediate-Term Bond Portfolio of PNC Fund
Fixed Income Fund of the Trust
Pro-Forma Combined Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Sept. 30, 1994 Sept. 30, 1994
PDI PNC Pro-Forma Pro-Forma
Fixed Income Inter. Term Bd. Adjustments Combined
-------------- ----------------- ------------- -----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Interest Income $477,127 $4,350,354 $4,827,481
Amort. Market Discount 2,230 91,874 $94,104
Amort. Market Premium (27,922) (413,686) ($441,608)
----------- ------------ -------------- ------------
TOTAL INVESTMENT INCOME 451,435 4,028,542 $4,479,977
----------- ------------ -------------- ------------
EXPENSES
Investment Advisory Fees 14,514 337,365 21,770 (1) 373,649
Administration Fees 14,514 134,946 149,460
Custodian Fees 2,455 22,453 24,908
Transfer Agent Fees 1,437 25,286 2,160 (2) 28,883
Service Fees 303 69,088 69,391
Distribution Fees 0 34 34
Legal 12,855 4,156 (11,570) (3) 5,441
Audit 10,586 5,181 (9,530) (3) 6,237
Printing 2,571 8,730 (2,310) (3) 8,991
Registration Fees - SEC 0 29,760 4,135 (5) 33,895
Registration Fees - Blue Sky 4,613 13,319 17,932
Organization 0 4,569 4,569
Trustees' Fees and Officers' Salaries 13,864 1,522 (13,864) (3) 1,522
Insurance 807 1,307 (807) (3) 1,307
Miscellaneous 499 3,533 (499) (3) 3,533
----------- ------------ -------------- ------------
79,018 661,249 (10,515) 729,752
Less: Fees waived & Expenses Reimbursed (49,693) (288,499) 25,743 (4) (312,449)
----------- ------------ -------------- ------------
TOTAL EXPENSES 29,325 372,750 15,228 417,303
----------- ------------ -------------- ------------
NET INVESTMENT INCOME 422,110 3,655,792 (15,228) 4,062,674
----------- ------------ -------------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS TRANSACTIONS
Net realized loss on investment
transactions (429,931) (972,851) (1,402,782)
Change in unrealized appreciation
(depreciation) 267,522 (4,627,426) (4,359,904)
----------- ------------ -------------- ------------
NET REALIZED AND UNREALIZED
LOSS ON INVESTMENT TRANSACTIONS (162,409) (5,600,277) (5,762,686)
----------- ------------ -------------- ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $259,701 ($1,944,485) ($15,228) ($1,700,012)
=========== ============ ============== ============
</TABLE>
(1) Based on PNC Fund advisory contract.
(2) Based on PNC Fund transfer agent contract.
(3) Adjustments reflect expected savings when the two funds combine.
(4) Reflects the anticipated change in the waiver of the investment advisory
and administration fees based on expected expense ratios due to the economies
of scale realized with the additional assets after the merger.
(5) Adjustment reflects expected increase in expense when the two funds
combine.
<PAGE> 128
NOTES TO PRO FORMA FINANCIAL STATEMENTS OF
THE INTERMEDIATE-TERM BOND PORTFOLIO OF PNC FUND AND
THE FIXED INCOME FUND OF THE TRUST
(UNAUDITED)
1. BASIS OF COMBINATION
The Pro Forma Combined Portfolio of Investments and Pro Forma Combined
Statement of Assets and Liabilities reflect the accounts of the Intermediate-
Term Bond Portfolio of PNC Fund and the Fixed Income Fund of the Trust at
December 31, 1994. The Pro Forma Combined Statement of Operations reflects
the accounts of the Intermediate-Term Bond Portfolio and the Fixed Income Fund
for the twelve months ended September 30, 1994. These statements have been
derived from the annual report of PNC Fund dated September 30, 1994, and
from the books and records of PNC Fund and the Trust utilized in calculating
daily net asset value at December 31, 1994.
The pro forma statements give effect to the proposed transfer of the assets and
stated liabilities of the Fixed Income Fund in exchange for Service and
Institutional Shares of the Intermediate-Term Bond Portfolio under generally
accepted accounting principles. The historical cost of investment securities
will be carried forward to the surviving entity and the results of operations
of the Intermediate-Term Bond Portfolio for pre-combining periods will not be
restated. The pro forma statements do not reflect the expenses of either PNC
Fund or the Trust in carrying out their obligations under the Agreement and
Plan of Reorganization. The actual fiscal year end of the combined fund will be
September 30, the fiscal year end of PNC Fund.
The Agreement and Plan of Reorganization calls for the transfer of the Fixed
Income Fund assets and known Fixed Income Fund liabilities to PNC Fund in
exchange for Service Shares and Institutional Shares of the Intermediate-Term
Bond Portfolio of PNC Fund. At the Effective Time of the Reorganization, the
Trust will make a liquidating distribution of the Intermediate-Term Bond
Portfolio Service Shares and Institutional Shares received in such exchange pro
rata to the holders of Fixed Income Dollar Shares and Fixed Income Shares,
respectively, of the Fixed Income Fund.
The investment adviser of PNC Fund will be retained as the investment adviser
of the combined fund. The expense structure of the Intermediate-Term Bond
Portfolio will apply to the combined fund subsequent to the merger. Following
the merger, the Trust will be terminated under state law and deregistered as an
investment company under the Investment Company Act of 1940. PNC Fund will be
the surviving entity.
The Pro Forma Combined Portfolio of Investments, the Pro Forma Combined
Statement of Assets and Liabilities and the Pro Forma Combined Statement of
Operations should be read in conjunction with the historical financial
statements of PNC Fund and the Trust included or incorporated by reference in
the Statement of Additional Information.
2. SHARES OF BENEFICIAL INTEREST
The pro forma net asset value per share assumes the issuance of additional
shares of Service Shares and Institutional Shares of the Intermediate-Term Bond
Portfolio to the holders of Fixed Income Dollar Shares and Fixed Income
Shares, respectively, of the Fixed Income Fund which would have been issued at
December 31, 1994 in conjunction with the proposed Reorganization.
3. PRO FORMA OPERATIONS
The Pro Forma Statement of Operations assumes similar rates of gross investment
income for the investments of the Intermediate-Term Bond Portfolio and the
Fixed Income Fund. Accordingly, the combined gross investment income is equal
to the sum of each such fund's gross investment income. Certain expenses have
been adjusted to reflect the expected expenses of the combined fund. Pro forma
operating expenses include the actual expenses of the Intermediate-Term Bond
Portfolio and the Fixed Income Fund and of the combined fund adjusted for
certain items.
<PAGE> 129
FORM N-14
PART C. OTHER INFORMATION
Item 15. Indemnification
Indemnification of Registrant's principal underwriter against
certain losses is provided for in Section 7 of the Distribution Agreement filed
herein as Exhibit (7)(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 13(a).
Indemnification of Registrant's Custodian and Transfer Agent is provided for,
respectively, in Section 22 of the Custodian Agreement filed herein as Exhibit
9(a) and Section 17 of the Transfer Agency Agreement filed herein as Exhibit
13(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:
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
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<PAGE> 130
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
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
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<PAGE> 131
any Shareholder for any act or obligations of the Trust and satisfy any
judgment thereon from such assets.
Item 16. Exhibits
(1) (a) Declaration of Trust of the Registrant dated
December 22, 1988. (1)
(b) Amendment No. 1 to the Declaration of Trust
dated December 22, 1988. (2)
(c) Amendment No. 2 to the Declaration of Trust
dated December 23, 1993. (12)
(2) Registrant's Code of Regulations. (1)
(3) None.
(4) Agreement and Plan of Reorganization, filed
herewith as Exhibit A to the Combined Proxy
Statement/Prospectus.
(5) (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. (7)
(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. (9)
(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,
C-3
<PAGE> 132
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. (10)
(6) (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. (3)
(b) Letter Agreement between Registrant and PNC
Institutional Management Corporation relating to
advisory services for the Tax-Free Income
Portfolio. (4)
(c) Sub-Advisory Agreement between PNC Institutional
Management Corporation and PNC Bank, National
Association with respect to the Money Market and
Government Money Market Portfolios. (3)
(d) Sub-Advisory Agreement between PNC Institutional
Management Corporation and PNC Bank, National
Association with respect to the Tax-Free Income
Portfolio. (4)
(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.
(10)
(f) Investment Advisory Agreement dated February 3,
1992 between Registrant and PNC Institutional
Management Corporation relating to the
Intermediate Government, Value Equity, Index
Equity, Small Cap Value Equity, Pennsylvania
Tax-Free Income, Ohio Tax-Free Income,
Pennsylvania Municipal Money Market and Ohio
Municipal Money Market Portfolios. (10)
(g) Investment Advisory Agreement dated December 17,
1993 between the Registrant and PNC
Institutional Management Corporation relating to
the Virginia Municipal Money Market, Government
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<PAGE> 133
Income, International Fixed Income and
International Emerging Markets Portfolios. (11)
(h) Sub-Advisory Agreement dated February 3, 1992
between PNC Institutional Management Corporation
and PNC Bank, National Association relating to
the Ohio Municipal Money Market Portfolio. (10)
(i) Sub-Advisory Agreement dated February 3, 1992
between PNC Institutional Management Corporation
and PNC Bank, National Association relating to
the Pennsylvania Municipal Money Market
Portfolio.(10)
(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. (10)
(k) Sub-Advisory Agreement dated February 3, 1992
between PNC Institutional Management Corporation
and Provident Capital Management, Inc. with
respect to the Small Cap Value Equity Portfolio.
(10)
(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. (10)
(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. (10)
(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. (10)
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<PAGE> 134
(o) Sub-Advisory Agreement dated December 17, 1993
between PNC Institutional Management Corporation
and PNC Bank, National Association relating to
the Virginia Municipal Money Market Portfolio.
(11)
(p) Sub-Advisory Agreement dated December 17, 1993
between PNC Institutional Management Corporation
and Provident Capital Management, Inc. relating
to the International Fixed Income Portfolio.
(11)
(q) Sub-Advisory Agreement dated December 17, 1993
between PNC Institutional Management Corporation
and Provident Capital Management, Inc. relating
to the International Emerging Markets Portfolio.
(11)
(r) Form of Sub-Advisory Agreement between PNC
Institutional Management Corporation and
BlackRock Financial Management, Inc. with
respect to the Intermediate-Term Bond Portfolio.
(7) (a) Distribution Agreement between Registrant and
Provident Distributors, Inc. dated January 31,
1994. (11)
(b) Appendix A to the Distribution Agreement between
Registrant and Provident Distributors, Inc.
dated September 23, 1994. (12)
(c) Amendment No. 2 to the Distribution Agreement
between Registrant and Provident Distributors,
Inc. dated October 18, 1994. (12)
(8) None.
(9) (a) Custodian Agreement between Registrant and PNC
Bank, National Association. (3)
(b) Amendment No. 1 to Custodian Agreement between
Registrant and PNC Bank, National
Association. (5)
(c) Amendment No. 2 dated March 1, 1993 to Custodian
Agreement between Registrant
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<PAGE> 135
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. (10)
(d) Sub-Custodian Agreement dated April 27, 1992
among the Registrant, PNC Bank, National
Association and The Chase Manhattan Bank. (10)
(e) Global Sub-Custody Agreement between Barclays
Bank PLC and PNC Bank, National Association
dated October 28, 1992. (12)
(f) Custodian Agreement between State Street Bank
and Trust Company and PNC Bank, National
Association dated June 13, 1983. (12)
(g) Amendment No. 1 to Custodian Agreement between
State Street Bank and Trust Company and PNC
Bank, National Association dated November 21,
1989. (12)
(h) Letter Agreement between Registrant and PNC
Bank, National Association relating to custodian
services with respect to the Tax-Free Income
Portfolio. (8)
(i) 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. (8)
(j) 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.
(10)
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<PAGE> 136
(10) (a) Amended and Restated Distribution and Service
Plan dated January 21, 1993 and Form of
Distribution and Servicing Agreement. (9)
(b) Series B Distribution Plan dated September 23,
1994. (12)
*(11) Opinion of counsel that shares are validly
issued, fully paid and non-assessable.
(12) Opinion of Drinker Biddle & Reath as to tax
consequences (including consent of such firm).
(13) (a) Administration Agreement between Registrant,
PFPC Inc. and Provident Distributors, Inc. dated
January 18, 1993. (9)
(b) Amendment No. 1 to the Administration Agreement
between Registrant, PFPC Inc. and Provident
Distributors, Inc. dated September 23, 1994.
(12)
(c) Appendix A to the Administration Agreement
between Registrant, PFPC Inc. and Provident
Distributors, Inc. dated September 23, 1994.
(12)
(d) Amendment No. 2 to the Administration Agreement
between Registrant, PFPC Inc. and Provident
Distributors, Inc. dated October 18, 1994. (12)
(e) Transfer Agency Agreement between Registrant and
PFPC Inc. (3)
(f) Amendment No. 1 to Transfer Agency Agreement
between Registrant and PFPC Inc. relating to the
Tax- Free Income Portfolio. (6)
(g) Amendment No. 2 to Transfer Agency Agreement
between Registrant and PFPC Inc. relating to the
Pennsylvania
- -------------------
* Filed with the SEC under Rule 24f-2 as part of Registrant's Rule 24f-2
Notice.
C-8
<PAGE> 137
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. (5)
(h) Amendment No. 3 dated March 1, 1993 to Transfer
Agency Agreement between Registrant and PFPC
Inc. relating to the Short-Term Bond,
Intermediate-Term Bond, Core Equity, Small Cap
Growth Equity and North Carolina Municipal Money
Market Portfolios. (10)
(i) Amendment No. 4 dated October 18, 1994 to
Transfer Agency Agreement 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. (12)
(j) Amended and Restated Service Plan dated January
21, 1993 for Service Shares and Form of
Servicing Agreement for Service Shares. (9)
(k) Series B Service Plan dated September 23,
1994. (12)
(l) Purchase Agreement between Registrant and
Shearson Lehman Hutton Inc. ("Shearson")
relating to Classes A-1, B-1, C-1, D-1, E-1, F-1
and G-1. (3)
(m) Purchase Agreement between Registrant and
Shearson relating to shares of Class-H-1. (4)
(n) Purchase Agreement between Registrant and
Shearson relating to shares of Class I-1, Class
I-2, Class J-1, Class J-2,
C-9
<PAGE> 138
Class K-1, Class L-1, Class M-1, Class N-1,
Class O-1 and Class P-1. (5)
(o) 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, 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. (8)
(p) 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. (10)
(q) 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. (12)
(14) Consent of Coopers & Lybrand, L.L.P.
(15) Not applicable.
(16) Powers of Attorney.
(17) (a) Declaration pursuant to Rule 24f-2 under the
Investment Act of 1940 of Registrant.
(b) Forms of Proxy.
(c) Prospectus and Statement of Additional
Information for Portfolios for Diversified
Investment dated October 28, 1994.
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<PAGE> 139
(d) Prospectuses and Statement of Additional
Information dated January 30, 1995 for Service
Shares and Institutional Shares of the
Registrant's Intermediate-Term Bond Portfolio.
(1) Incorporated herein by reference to Registrant's Registration Statement
on Form N1-A filed on December 23, 1988.
(2) Incorporated herein by reference to Registrant's Pre- Effective Amendment
No. 2 to its Registration Statement on Form N1-A filed on May 11, 1989.
(3) Incorporated herein by reference to Registrant's Post Effective Amendment
No. 1 to its Registration Statement on Form N1-A filed on December 29,
1989.
(4) Incorporated herein by reference to Registrant's Post- Effective
Amendment No. 2 to its Registration Statement on Form N1-A filed on April
30, 1990.
(5) Incorporated herein by reference to Registrant's Post- Effective
Amendment No. 4 to its Registration Statement on Form N1-A filed on
December 13, 1991.
(6) Incorporated herein by reference to Registrant's Post- Effective
Amendment No. 5 to its Registration Statement on Form N1-A filed on
February 5, 1992.
(7) Incorporated herein by reference to Registrant's Post- Effective
Amendment No. 6 to its Registration Statement on Form N1-A filed on May
8, 1992.
(8) Incorporated herein by reference to Registrant's Post- Effective
Amendment No. 7 to its Registration Statement on Form N1-A filed on
December 1, 1992.
(9) Incorporated herein by reference to Registrant's Post- Effective
Amendment No. 8 to its Registration Statement on Form N1-A filed on
January 22, 1993.
(10) Incorporated herein by reference to Registrant's Post- Effective
Amendment No. 10 to its Registration Statement on Form N1-A filed on
November 10, 1993.
(11) Incorporated herein by reference to Registrant's Post- Effective
Amendment No. 12 to its Registration Statement on Form N1-A filed on July
8, 1994.
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<PAGE> 140
(12) Incorporated herein by reference to Registrant's Post- Effective
Amendment No. 14 to its Registration Statement on Form N1-A filed on
January 18,1995.
Item 17. Undertakings
(1) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through the use of a
prospectus which is a part of this registration statement by any
person or party who is deemed to be an underwriter within the
meaning of Rule 145(c) of the Securities Act of 1933, as amended,
the reoffering prospectus will contain the information called for
by the applicable registration form for reofferings by persons
who may be deemed underwriters, in addition to the information
called for by the other items of the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is
filed under paragraph (1) above will be filed as a part of an
amendment to the registration statement and will not be used
until the amendment is effective, and that, in determining any
liability under the Securities Act of 1933, each post-effective
amendment shall be deemed to be a new registration statement for
the securities offered therein, and the offering of the
securities at that time shall be deemed to be the initial bona
fide offering of them.
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<PAGE> 141
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement
has been signed on behalf of the Registrant, in the City of Philadelphia and
Commonwealth of Pennsylvania, on this 14th day of April, 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 Securities Act of 1933, this 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 April 14, 1995
- --------------------- (Principal Executive
(G. Willing Pepper) Officer)
*David R. Wilmerding, Jr. Vice-Chairman of April 14, 1995
- -------------------------- the Board
(David R. Wilmerding, Jr.)
Vice-President
and Treasurer
(Principal
Financial and
/s/ Edward J. Roach Accounting Officer) April 14, 1995
- ------------------------
(Edward J. Roach)
*Robert R. Fortune Trustee April 14, 1995
- ------------------------
(Robert R. Fortune)
*Philip E. Coldwell Trustee April 14, 1995
- ------------------------
(Philip E. Coldwell)
*Rodney D. Johnson Trustee April 14, 1995
- ------------------------
(Rodney D. Johnson)
*Anthony M. Santomero Trustee April 14, 1995
- ------------------------
(Anthony M. Santomero)
*By:/s/ Edward J. Roach
---------------------------------
Edward J. Roach, Attorney-in-Fact
</TABLE>
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<PAGE> 142
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
- ----------- ----------- --------
<S> <C>
(4) Agreement and Plan of Reorganization, filed herewith as Exhibit A to the Combined Proxy
Statement/Prospectus.
(6) (r) Form of Sub-Advisory Agreement between PNC Institutional Management Corporation and BlackRock
Financial Management, Inc. with respect to the Intermediate-Term Bond Portfolio.
(12) Opinion of Drinker Biddle & Reath as to tax consequences (including consent of such firm).
(14) Consent of Coopers & Lybrand, L.L.P.
(16) Powers of Attorney.
(17) (a) Declaration pursuant to Rule 24f-2 under the Investment Act of 1940 of Registrant.
(b) Forms of Proxy.
(c) Prospectus and Statement of Additional Information for Portfolios for Diversified Investment
dated October 28, 1994.
(d) Prospectuses and Statement of Additional Information dated January 30, 1995 for Service
Shares and Institutional Shares of the Registrant's Intermediate-Term Bond Portfolio.
</TABLE>
-1-
<PAGE> 1
SUB-ADVISORY AGREEMENT
(Intermediate-Term Bond Portfolio)
AGREEMENT dated as of March 29, 1995 between PNC Institutional
Management Corporation, a Delaware corporation ("Advisor"), and BlackRock
Financial Management, Inc., a Delaware corporation ("Sub-Advisor").
WHEREAS, Advisor has agreed to furnish investment advisory
services to the Intermediate-Term Bond Portfolio (the "Portfolio") of The
PNC(R) Fund (the "Fund"), an open-end, management investment company registered
under the Investment Company Act of 1940 ("1940 Act"); and
WHEREAS, Advisor wishes to retain the Sub-Advisor to provide
it with investment research and statistical services in connection with
Advisor's advisory activities on behalf of the Portfolio;
WHEREAS, the advisory agreement between Advisor and the Fund
dated as of March 1, 1993 (such Agreement or the most recent successor
agreement between such parties relating to advisory services to the Portfolio
is referred to herein as the "Advisory Agreement") specifically provides that
Advisor will sub-contract investment advisory services with respect to the
Portfolio to Sub-Advisor pursuant to a sub-advisory agreement agreeable to the
Fund and approved in accordance with the provisions of the 1940 Act;
WHEREAS, the Board of Trustees of the Fund and the Fund's
shareholders have approved this Agreement, and Sub-Advisor is willing to
furnish such services upon the terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the promises and mutual
covenants herein contained, it is agreed between the parties hereto as follows:
1. Appointment. Advisor hereby appoints Sub-Advisor to
act as sub-advisor with respect to the Portfolio as provided in Section 2 of
the Advisory Agreement. Sub-Advisor accepts such appointment and agrees to
render the services herein set forth for the compensation herein provided.
2. Services of Sub-Advisor. Subject to the oversight
and supervision of Advisor and the Fund's Board of Trustees, Sub-Advisor will
supervise the day-to-day operations of the Portfolio and perform the following
services: (i) provide investment research and credit analysis concerning the
Portfolio's
<PAGE> 2
investments, (ii) conduct a continual program of investment of the Portfolio's
assets, (iii) determine what portion of the Portfolio's assets will be invested
in cash, cash equivalents and money market instruments, (iv) place orders for
all purchases and sales of the investments made for the Portfolio, and (v)
maintain the books and records as are required to support Fund operations (in
conjunction with record-keeping and accounting functions performed by Advisor).
In addition, Sub-Advisor will keep the Fund and Advisor informed of
developments materially affecting the Fund and shall, on its own initiative,
furnish to the Fund from time to time whatever information Sub-Advisor believes
appropriate for this purpose. Sub-Advisor will communicate to Advisor on each
day that a purchase or sale of an instrument is effected for the Portfolio (i)
the name of the issuer, (ii) the amount of the purchase or sale, (iii) the name
of the broker or dealer, if any, through which the purchase or sale will be
effected, (iv) the CUSIP number of the instrument, if any, and (v) such other
information as Advisor may reasonably require for purposes of fulfilling its
obligations to the Fund under the Advisory Agreement. Sub-Advisor will provide
the services rendered by it under this Agreement in accordance with the
Portfolio's investment objective, policies and restrictions as stated in the
Portfolio's Prospectus and Statement of Additional Information (as currently in
effect and as they may be amended or supplemented from time to time), and the
resolutions of the Fund's Board of Trustees.
3. Other Sub-Advisor Covenants. Sub-Advisor further
agrees that it:
(a) will comply with all applicable Rules and
Regulations of the Securities and Exchange Commission (the "SEC") and will in
addition conduct its activities under this Agreement in accordance with other
applicable law;
(b) will place orders either directly with the
issuer or with any broker or dealer. Subject to the other provisions of this
paragraph, in placing orders with brokers and dealers, Sub-Advisor will attempt
to obtain the best price and the most favorable execution of its orders. In
placing orders, Sub-Advisor will consider the experience and skill of the
firm's securities traders as well as the firm's financial responsibility and
administrative efficiency. Consistent with this obligation, Sub-Advisor may,
subject to the approval of the Fund's Board of Trustees, select brokers on the
basis of the research, statistical and pricing services they provide to the
Portfolio and other clients of Advisor or Sub-Advisor. Information and
research received from such brokers will be in addition to, and not in lieu of,
the services required to be performed by Sub-Advisor hereunder. A commission
paid to such brokers may be higher than that which another qualified broker
would have
<PAGE> 3
charged for effecting the same transaction, provided that Sub-Advisor
determines in good faith that such commission is reasonable in terms either of
the transaction or the overall responsibility of Advisor and Sub-Advisor to the
Portfolio and their other clients and that the total commissions paid by the
Portfolio will be reasonable in relation to the benefits to the Portfolio over
the long- term. In addition, Sub-Advisor is authorized to take into account
the sale of shares of the Fund in allocating purchase and sale orders for
portfolio securities to brokers or dealers (including brokers and dealers that
are affiliated with Advisor, Sub-Advisor or the Fund's distributor), provided
that Sub-Advisor believes that the quality of the transaction and the
commission are comparable to what they would be with other qualified firms. In
no instance, however, will the Portfolio's securities be purchased from or sold
to the Advisor, Sub-Advisor, the Fund's distributor or any affiliated person
thereof, except to the extent permitted by the SEC or by applicable law;
(c) will maintain or cause Advisor to maintain
books and records with respect to the Portfolio's securities transactions and
will render to Advisor and the Fund's Board of Trustees such periodic and
special reports as they may request;
(d) will maintain a policy and practice of
conducting its investment advisory services hereunder independently of the
commercial banking operations of its affiliates. When Sub-Advisor makes
investment recommendations for the Portfolio, its investment advisory personnel
will not inquire or take into consideration whether the issuer of securities
proposed for purchase or sale for the Portfolio's account are customers of the
commercial department of its affiliates; and
(e) will treat confidentially and as proprietary
information of the Fund all records and other information relative to the Fund,
the Portfolio and the Fund's prior, current or potential shareholders, and will
not use such records and information for any purpose other than performance of
its responsibilities and duties hereunder, except after prior notification to
and approval in writing by the Fund, which approval shall not be unreasonably
withheld and may not be withheld where Sub-Advisor may be exposed to civil or
criminal contempt proceedings for failure to comply, when requested to divulge
such information by duly constituted authorities, or when so requested by the
Fund.
4. Services Not Exclusive. Sub-Advisor's services
hereunder are not deemed to be exclusive, and Sub-Advisor shall be free to
render similar services to others so long as its services under this Agreement
are not impaired thereby.
<PAGE> 4
5. Books and Records. In compliance with the
requirements of Rule 31a-3 under the 1940 Act, Sub-Advisor hereby agrees that
all records which it maintains for the Portfolio are the property of the Fund
and further agrees to surrender promptly to the Fund any such records upon the
Fund's request. Sub-Advisor further agrees to preserve for the periods
prescribed by Rule 31a-2 under the 1940 Act the records required to be
maintained by Rule 31a-1 under the 1940 Act.
6. Expenses. During the term of this Agreement,
Sub-Advisor will pay all expenses incurred by it in connection with its
activities under this Agreement other than the cost of securities, commodities,
and other investments (including brokerage commissions and other transaction
charges, if any) purchased or sold for the Portfolio.
7. Compensation. For the services which the Sub-Advisor
will render to Advisor under this Agreement, Advisor will pay to Sub-Advisor a
fee, computed daily and payable monthly, at the following annual rates for the
Portfolio: .35% of its first $1 billion of average daily net assets; .30% of
its next $1 billion of average daily net assets; .275% of its next $1 billion
of average daily net assets; and .25% of its average daily net assets in excess
of $3 billion.
If the Advisor waives any or all of its advisory fee payable
under the Advisory Agreement, or reimburses the Fund pursuant to Section 8(b)
of that Agreement, with respect to the Portfolio, the Sub-Advisor will bear its
share of the amount of such waiver or reimbursement by waiving fees otherwise
payable to it hereunder on a proportionate basis to be determined by comparing
the aggregate fees otherwise payable to it hereunder with respect to the
Portfolio to the aggregate fees otherwise payable by the Fund to the Advisor
under the Advisory Agreement with respect to the Portfolio. Advisor shall
inform Sub-Advisor prior to waiving any advisory fees.
8. Limitation on Liability. Sub-Advisor will not be
liable for any error of judgment or mistake of law or for any loss suffered by
Advisor or by the Portfolio in connection with the performance of this
Agreement, except a loss resulting from a breach of fiduciary duty with respect
to the receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on its part in the performance of
its duties or from reckless disregard by it of its obligations or duties under
this Agreement.
9. Duration and Termination. This Agreement will become
effective as of the date hereof and, unless sooner terminated with respect to
the Portfolio as provided herein,
<PAGE> 5
shall continue in effect with respect to the Portfolio until March 31, 1996.
Thereafter, if not terminated, this Agreement shall continue in effect with
respect to the Portfolio for successive annual periods ending on March 31,
provided such continuance is specifically approved at least annually (a) by the
vote of a majority of those members of the Fund's Board of Trustees who are not
interested persons of any party to this Agreement, cast in person at a meeting
called for the purpose of voting on such approval, and (b) by the Fund's Board
of Trustees or by a vote of a majority of the outstanding voting securities of
the Portfolio. Notwithstanding the foregoing, this Agreement may be terminated
with respect to the Portfolio at any time, without the payment of any penalty,
by the Fund (by vote of the Fund's Board of Trustees or by vote of a majority
of the outstanding voting securities of the Portfolio), or by Advisor or
Sub-Advisor, on 60 days' written notice and will terminate automatically upon
any termination of the Advisory Agreement between the Fund and Advisor. This
Agreement will also immediately terminate in the event of its assignment. (As
used in this Agreement, the terms "majority of the outstanding voting
securities," "interested person" and "assignment" shall have the same meanings
of such terms in the 1940 Act.)
10. Amendment of this Agreement. No provision of this
Agreement may be changed, waived, discharged or terminated orally, but only by
an instrument in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought. Any amendment of this
Agreement shall be subject to the 1940 Act.
11. Miscellaneous. The captions in this Agreement are
included for convenience of reference only and in no way define or delimit any
of the provisions hereof or otherwise affect their construction or effect. If
any provision of this Agreement shall be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement shall not
be affected thereby. This Agreement shall be binding on, and shall inure to
the benefit of the parties hereto and their respective successors and shall be
governed by Delaware law.
12. Counterparts. This Agreement may be executed in
counterparts by the parties hereto, each of which shall constitute an original
counterpart, and all of which, together, shall constitute one Agreement.
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be executed by their officers designated below as of the day and
year first above written.
PNC INSTITUTIONAL
MANAGEMENT CORPORATION
By:
-----------------------------
BLACKROCK FINANCIAL MANAGEMENT, INC.
By:
------------------------------
<PAGE> 1
April 13, 1995
The PNC(R) Fund
Portfolios for Diversified Investment
400 Bellevue Parkway
Suite 100
Wilmington, DE 19809
RE: AGREEMENT AND PLAN OF REORGANIZATION BY AND BETWEEN
THE PNC(R) FUND AND PORTFOLIOS FOR DIVERSIFIED
INVESTMENT
Dear Sirs and Mesdames:
We have been asked to give our opinion as to certain Federal
income tax consequences of the transactions contemplated in the above Agreement
and Plan of Reorganization (the "Plan").
Background
Portfolios for Diversified Investment (the "Trust") is a
Massachusetts business trust consisting of one investment portfolio named the
Fixed Income Fund (the "Acquired Fund"). The PNC Fund ("PNC Fund") is a
Massachusetts business trust consisting of 25 investment portfolios, including
the Intermediate-Term Bond Portfolio (the "Acquiring Fund"). The Trust and PNC
Fund are management investment companies registered with the Securities and
Exchange Commission under the Investment Company Act of 1940, as amended.
At the Effective Time of the Reorganization (as defined in the
Plan), it is contemplated that the Acquired Fund will transfer all of its
assets and known liabilities to the Acquiring Fund in exchange for Service
Class and Institutional Class shares of the Acquiring Fund. The Trust will
then distribute the Service Class and Institutional Class shares of the
Acquiring Fund to the holders of Fixed Income Dollar Shares and Fixed Income
Shares, respectively, of the Acquired Fund in cancellation of all outstanding
Fixed Income Dollar Shares and Fixed Income Shares of the Acquired Fund, and
the separate corporate existence of the Trust will end, except as required by
operation of law (all the above steps constituting the "Reorganization").
After
<PAGE> 2
The PNC Fund
Portfolios for Diversified Investment
April 13, 1995
Page 2
the Reorganization, the Acquiring Fund will continue the investment operations
of the Acquired Fund.
Assumptions
For purposes of this opinion, we have made certain
assumptions. If you are aware of any facts inconsistent with any of these
assumptions, please notify us:
First, both the Acquired Fund and the Acquiring Fund qualified
as a "regulated investment company" under Part I of Subchapter M of Subtitle A,
Chapter 1, of the Internal Revenue Code of 1986, as amended (the "Code"), for
its most recently ended fiscal year and will continue to so qualify for its
current fiscal year.
Second, the Acquired Fund will tender for acquisition by the
Acquiring Fund assets consisting of at least 90% of the fair market value of
the net assets of the Acquired Fund and at least 70% of the fair market value
of its gross assets immediately prior to the Reorganization. For purposes of
this assumption, all of the following shall be considered as assets of the
Acquired Fund held immediately prior to the Reorganization: (a) amounts used
by the Acquired Fund to pay its expenses in connection with the transactions
contemplated hereby and (b) all amounts used to make redemptions of or
distributions on the Acquired Fund's shares (except for redemptions in the
ordinary course of its business as required by section 22(e) of the Investment
Company Act of 1940 pursuant to a demand for redemption by a shareholder of the
Acquired Fund, and distributions of net investment income and net capital
gains).
Fourth, the Acquired Fund will distribute to its shareholders
in complete liquidation of the Acquired Fund the Acquiring Fund shares that it
will receive in the Reorganization as promptly as practicable and having made
such distributions will take all necessary steps to terminate its existence.
Fifth, prior to the Reorganization, the Acquired Fund will
continue its historic business in a substantially unchanged manner within the
meaning of Treasury Regulations section 1.368-1(d) and will not dispose of or
acquire assets for the purpose of
-2-
<PAGE> 3
The PNC Fund
Portfolios for Diversified Investment
April 13, 1995
Page 3
satisfying the investment objectives of the Acquiring Fund, if any, that differ
from the existing investment objectives of the Acquired Fund.
Sixth, at the time of the Reorganization, the adjusted income
tax basis and the fair market value of the assets to be transferred by the
Acquired Fund to the Acquiring Fund will each equal or exceed the sum of the
liabilities to be assumed by the Acquiring Fund or to which such transferred
assets are subject.
Seventh, at the time of the Reorganization, there will be no
plan or intention by the shareholders of the Acquired Fund who own five percent
(5%) or more of the Acquired Fund's stock and, to the knowledge of the
management of the Trust, no plan or intention on the part of the remaining
shareholders of the Acquired Fund to sell, exchange or otherwise dispose of a
number of shares of the Acquiring Fund's stock to be received in the
Reorganization that would reduce the Acquired Fund shareholders' ownership of
Acquiring Fund stock to a number of shares having a value, as of the time of
the Reorganization, of less than fifty percent (50%) of the value of all of the
formerly outstanding stock of the Acquired Fund immediately prior to the
Reorganization. For purposes of this assumption, (a) shares of the Acquired
Fund surrendered by dissenters will be treated as outstanding Acquired Fund
stock immediately prior to the Reorganization, and (b) shares of the Acquired
Fund and the Acquiring Fund held by Acquired Fund shareholders and otherwise
sold, redeemed or disposed of in anticipation of the Reorganization, or
subsequent to the Reorganization pursuant to a plan or intention that existed
at the time of the Reorganization, also will be taken into account.
Eighth, at the time of the Reorganization, the Acquiring Fund
will not have any plan or intention to reacquire any of its shares issued in
the Reorganization, except in the ordinary course of business.
Ninth, at the time of the Reorganization, the Acquiring Fund
will not have any plan or intention to sell or otherwise to dispose of any of
the assets of the Acquired Fund acquired in the Reorganization, except for
dispositions made in the ordinary course of business.
-3-
<PAGE> 4
The PNC Fund
Portfolios for Diversified Investment
April 13, 1995
Page 4
Tenth, there is and will be no intercorporate indebtedness
between the Acquiring Fund and the Acquired Fund that was issued, acquired or
will be settled at a discount.
Eleventh, the Acquiring Fund does not and will not own,
directly or indirectly, nor has it owned during the past five years, directly
or indirectly, any stock of the Acquired Fund.
Twelfth, the Acquired Fund is not and will not be under the
jurisdiction of a court in a case under Title 11 of the United States Code or a
receivership, foreclosure or similar proceeding in any Federal or State court.
Thirteenth, the liabilities of the Acquired Fund that will be
assumed by the Acquiring Fund and the liabilities, if any, to which the
transferred assets will be subject were incurred by the Acquired Fund in the
ordinary course of its business.
Fourteenth, following the Reorganization, the Acquiring Fund
will continue the historic business of the Acquired Fund or use a significant
portion of the Acquired Fund's historic business assets in a business.
Fifteenth, the Reorganization will be accomplished for the
purposes set forth on pages one and two of the Combined Proxy
Statement/Prospectus dated ________, 1995 (the "Proxy Statement"), a draft of
which is part of the Registration Statement (the "Registration Statement")
being filed this day with the Securities and Exchange Commission.
Sixteenth, the Plan substantially in the form included as an
exhibit in the Proxy Statement will be duly authorized by the parties and
approved by the shareholders of the Acquired Fund, and the appropriate
documents will be filed with the appropriate government agencies.
Conclusions
Based upon the Code, applicable Treasury Department
regulations in effect as of the date hereof, current published administrative
positions of the Internal Revenue Service contained in revenue rulings and
procedures, and judicial
-4-
<PAGE> 5
The PNC Fund
Portfolios for Diversified Investment
April 13, 1995
Page 5
decisions, and upon the information, representations and assumptions contained
herein and in the documents provided to us by you (including the Proxy
Statement and the Plan), it is our opinion for Federal income tax purposes
that:
(i) the transfer by the Acquired Fund of all of its
assets and known liabilities to the Acquiring Fund in exchange for Service
Class and Institutional Class shares of the Acquiring Fund, and the
distribution of said Service Class and Institutional Class shares to the
holders of Fixed Income Dollar Shares and Fixed Income Shares, respectively, of
the Acquired Fund, as provided in the Plan, will constitute a reorganization
within the meaning of section 368(a)(1)(C) or 368(a)(1)(D) of the Code;
(ii) in accordance with sections 361(a), 361(c)(1) and
357(a) of the Code, no gain or loss will be recognized by the Acquired Fund as
a result of the Reorganization;
(iii) in accordance with section 1032(a) of the Code, no gain
or loss will be recognized by the Acquiring Fund as a result of the
Reorganization;
(iv) in accordance with section 354(a)(1) of the Code, no
gain or loss will be recognized by the holders of Fixed Income Dollar Shares
and Fixed Income Shares of the Acquired Fund on the distribution to them by the
Acquired Fund of Service Class and Institutional Class shares, respectively, of
the Acquiring Fund in exchange for their shares of the Acquired Fund;
(v) in accordance with section 358(a)(1) of the Code, the
aggregate basis of the Acquiring Fund shares received by each shareholder of
the Acquired Fund will be the same as the aggregate basis of the shareholder's
Acquired Fund shares immediately prior to the Reorganization;
(vi) in accordance with section 362(b) of the Code, the
basis of the assets received by the Acquiring Fund in the Reorganization will
be the same as the basis of such assets in the hands of the Acquired Fund
immediately prior to the Reorganization;
-5-
<PAGE> 6
The PNC Fund
Portfolios for Diversified Investment
April 13, 1995
Page 6
(vii) in accordance with section 1223(1) of the Code, a
shareholder's holding period for Acquiring Fund shares will be determined by
including the period for which the shareholder held the shares of the Acquired
Fund exchanged therefor, provided that the shareholder held such shares of the
Acquired Fund as a capital asset; and
(viii) in accordance with section 1223(2) of the Code, the
holding period of the Acquiring Fund with respect to the assets acquired in the
Reorganization will include the period for which such assets were held by the
Acquired Fund.
We express no opinion relating to any Federal income tax
matter except on the basis of the documents and assumptions described above.
In issuing our opinion, we have relied solely upon existing provisions of the
Code, existing and proposed regulations thereunder, and current administrative
positions and judicial decisions. Such laws, regulations, administrative
positions and judicial decisions are subject to change at any time. Any such
change could affect the validity of the opinion set forth above.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and to the references to our firm under the
captions "Summary -- Federal Income Tax Consequences" and "Information Relating
to the Proposed Reorganization -- Federal Income Tax Consequences" in the Proxy
Statement. This does not constitute a consent under section 7 of the
Securities Act of 1933, and in consenting to such references to our firm we
have not certified any part of the Registration
-6-
<PAGE> 7
The PNC Fund
Portfolios for Diversified Investment
April 13, 1995
Page 7
Statement and do not otherwise come within the categories of persons whose
consent is required under section 7 or under the rules and regulations of the
Securities and Exchange Commission issued thereunder.
Very truly yours,
DRINKER BIDDLE & REATH
SDDH:EMM:FRB
-7-
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the following with respect to the Registration
Statement on Form N-14 (File No. 33-26305) under the Securities
Act of 1933 of the PNC Fund with respect to the transfer of all
assets and liabilities of the Portfolios for Diversified
Investment Fixed Income Fund (PDI Fund) to the PNC Intermediate
Term Bond Portfolio:
1. The inclusion of our report dated November 23, 1994
accompanying the financial statements of the PNC Fund, which
is included in its Statement of Additional Information.
2. The inclusion of our report dated July 26, 1994
accompanying the financial statements of the PDI Fund, which
is included in its Statement of Additional Information.
3. The incorporation by reference of our reports dated
November 23, 1994 and July 26, 1994, accompanying the
financial statements of the PNC Fund and PDI Fund,
respectively, into the Combined Proxy Statement/Prospectus.
4. The reference to our Firm under the heading "Financial
Statements" in the aforementioned Combined Proxy
Statement/Prospectus and reference to our Firm under the
heading "Financial Highlights" in the PNC Fund prospectus
and "Miscellaneous--Independent Accountants" and "Financial
Statements" in the Statement of Additional Information of
the PNC Fund.
5. The reference to our Firm under the heading "Financial
Highlights" in the PDI Fund prospectus and "Auditors" and
"Financial Statements" in the Statement of Additional
Information of the PDI Fund.
6. The reference to our Firm under the headings "Certain
Representations, Warranties and Agreements of PDI" and
"Certain Representations, Warranties and Agreements of
PNC"in the Agreement and Plan of Reorganization By and
Between the PDI Fund and the PNC Fund.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, PA 19103
April 14, 1995
<PAGE> 1
THE PNC(R) FUND
POWER OF ATTORNEY
Philip E. Coldwell, whose signature appears below, does hereby
constitute and appoint G. Willing Pepper and Edward J. Roach, and each of
them, his true and lawful attorney to execute in his name, place and stead, in
his capacity as trustee or officer, or both, of The PNC Fund (the "Fund"), the
Registration Statement of the Fund on Form N-14, any amendments thereto, and
all instruments necessary or incidental in connection therewith, and to file
the same with the Securities and Exchange Commission; and either of said
attorneys shall have power to act with or without the other of said attorneys
and shall have full power of substitution and re-substitution; and either of
said attorneys shall have full power and authority to do and perform in the
name and on the behalf of the undersigned trustee and/or officer of the Fund,
in any and all capacities, every act whatsoever requisite or necessary to be
done in the premises, as fully and to all intents and purposes as the
undersigned trustee and/or officer of the Fund might or could do in person,
said acts of said attorney being hereby ratified and approved.
/S/ Philip E. Coldwell
-----------------------
Philip E. Coldwell
Date: April 12, 1995
<PAGE> 2
THE PNC(R) FUND
POWER OF ATTORNEY
Robert R. Fortune, whose signature appears below, does hereby
constitute and appoint G. Willing Pepper and Edward J. Roach, and each of
them, his true and lawful attorney to execute in his name, place and stead, in
his capacity as trustee or officer, or both, of The PNC Fund (the "Fund"), the
Registration Statement of the Fund on Form N-14, any amendments thereto, and
all instruments necessary or incidental in connection therewith, and to file
the same with the Securities and Exchange Commission; and said attorneys shall
have full power of substitution and re-substitution; and said attorneys shall
have full power and authority to do and perform in the name and on the behalf
of the undersigned trustee and/or officer of the Fund, in any and all
capacities, every act whatsoever requisite or necessary to be done in the
premises, as fully and to all intents and purposes as the undersigned trustee
and/or officer of the Fund might or could do in person, said acts of said
attorney being hereby ratified and approved.
/s/ Robert R. Fortune
----------------------
Robert R. Fortune
Date: April 12, 1995
<PAGE> 3
THE PNC(R) FUND
POWER OF ATTORNEY
Rodney D. Johnson, whose signature appears below, does hereby
constitute and appoint G. Willing Pepper and Edward J. Roach, and each of
them, his true and lawful attorney to execute in his name, place and stead, in
his capacity as trustee or officer, or both, of The PNC Fund (the "Fund"), the
Registration Statement of the Fund on Form N-14, any amendments thereto, and
all instruments necessary or incidental in connection therewith, and to file
the same with the Securities and Exchange Commission; and either of said
attorneys shall have power to act thereunder with or without the other of said
attorneys and shall have full power of substitution and re-substitution; and
either of said attorneys shall have full power and authority to do and perform
in the name and on the behalf of the undersigned trustee and/or officer of the
Fund, in any and all capacities, every act whatsoever requisite or necessary to
be done in the premises, as fully and to all intents and purposes as the
undersigned trustee and/or officer of the Fund might or could do in person,
said acts of said attorney being hereby ratified and approved.
/s/ Rodney D. Johnson
----------------------
Rodney D. Johnson
Date: April 12, 1995
<PAGE> 4
THE PNC(R) FUND
POWER OF ATTORNEY
Anthony M. Santomero, whose signature appears below, does hereby
constitute and appoint G. Willing Pepper and Edward J. Roach, and each of
them, his true and lawful attorney to execute in his name, place and stead, in
his capacity as trustee or officer, or both, of The PNC Fund (the "Fund"), the
Registration Statement of the Fund on Form N-14, any amendments thereto, and
all instruments necessary or incidental in connection therewith, and to file
the same with the Securities and Exchange Commission; and either of said
attorneys shall have power to act thereunder with or without the other of said
attorneys and shall have full power of substitution and re-substitution; and
either of said attorneys shall have full power and authority to do and perform
in the name and on the behalf of the undersigned trustee and/or officer of the
Fund, in any and all capacities, every act whatsoever requisite or necessary to
be done in the premises, as fully and to all intents and purposes as the
undersigned trustee and/or officer of the Fund might or could do in person,
said acts of said attorney being hereby ratified and approved.
/s/ Anthony M. Santomero
-------------------------
Anthony M. Santomero
Date: April 12, 1995
<PAGE> 5
THE PNC(R) FUND
POWER OF ATTORNEY
David R. Wilmerding, Jr., whose signature appears below, does
hereby constitute and appoint G. Willing Pepper and Edward J. Roach, and each
of them, his true and lawful attorney to execute in his name, place and stead,
in his capacity as trustee or officer, or both, of The PNC Fund (the "Fund"),
the Registration Statement of the Fund on Form N-14, any amendments thereto,
and all instruments necessary or incidental in connection therewith, and to
file the same with the Securities and Exchange Commission; and either of said
attorneys shall have power to act with or without the other of said attorneys
and shall have full power of substitution and re-substitution; and either of
said attorneys shall have full power and authority to do and perform in the
name and on the behalf of the undersigned trustee and/or officer of the Fund,
in any and all capacities, every act whatsoever requisite or necessary to be
done in the premises, as fully and to all intents and purposes as the
undersigned trustee and/or officer of the Fund might or could do in person,
said acts of said attorney being hereby ratified and approved.
/s/ David R. Wilmerding
------------------------
David R. Wilmerding
Date: April 12, 1995
<PAGE> 1
As filed with the Securities and Exchange Commission on December 23, 1988
Registration No. 33-26305
================================================================================
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. __ / /
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. __ / /
------------------------------
THE NCP FUNDS
(Exact Name of Registrant as Specified in Charter)
<TABLE>
<S> <C>
Suite 204, Webster Building Edward J. Roach
Concord Plaza Suite 204
3411 Silverside Road Webster Building
Wilmington, DE 19810 3411 Silverside Road
(Address of Principal Executive Wilmington, Delaware 19810
Offices) (Name and Address of Agent
Registrant's Telephone Number: for Service)
(302) 478-1630
</TABLE>
Copies to:
Morgan R. Jones, Esq.
DRINKER BIDDLE & REATH
1100 PNB Building
Philadelphia, PA 19107
Approximate Date of Proposed Public Offering: As soon as practicable
after the effective date of the registration statement.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
Proposed
Title of Maximum
Securities Amount Offering Amount of
<S> <C> <C> <C>
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
Being Being Price Per Registration
Registered Registered Unit Fee
---------- ---------- --------- ------------
<S> <C> <C> <C>
Shares of Indefinite Net Asset $500*
beneficial Value
interest (plus
($.001 par sales load,
value per share if any)
</TABLE>
-------------------------
* Pursuant to the provisions of Rule 24f-2 under the Investment
Company Act of 1940, Registrant hereby elects to register an indefinite number
of its shares of beneficial interest, including shares of beneficial interest
in its Money Market Portfolio, Tax-Free Money Market Portfolio, Government
Obligations Money Market Portfolio, Balanced Portfolio, Equity Portfolio, Fixed
Income Portfolio and International Portfolio.
-----------------------------
Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE> 3
As filed with the Securities and Exchange Commission on January 18, 1995
Registration No. 33-26305
================================================================================
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. 14 /X/
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 16 /X/
------------------------------
THE PNC(R) FUND
(Formerly, NCP Funds)
(Exact Name of Registrant as Specified in Charter)
<TABLE>
<S> <C>
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)
<PAGE> 4
[x] on January 30, 1995 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) 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.
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.
<PAGE> 1
PORTFOLIOS FOR DIVERSIFIED INVESTMENT
Fixed Income Fund
PROXY
THIS PROXY IS SOLICITED BY THE BOARD OF TRUSTEES of Portfolios for Diversified
Investment (the "Trust") for use at a Special Meeting of Shareholders (the
"Meeting") to be held at the Bellevue Park Corporate Center, 400 Bellevue
Parkway, 4th Floor Conference Room, Wilmington, DE 19809 on June 12, 1995 at
10:00 A.M.
The undersigned hereby appoints Edward J. Roach and G. Willing Pepper, and
either of them, with full power of substitution, as proxies of the undersigned
to vote at the above-stated Meeting, and at all adjournments or postponements
thereof, all shares of beneficial interest of the Fixed Income Fund that are
held of record by the undersigned on the record date for the Meeting, upon the
following matters AND UPON ANY OTHER MATTER WHICH MAY COME BEFORE THE MEETING,
IN THEIR DISCRETION:
PLEASE MARK BOX IN BLUE OR BLACK INK.
(1) Proposal to approve or disapprove the Agreement and Plan of
Reorganization, attached as Exhibit A to the Combined Proxy
Statement/Prospectus for the Meeting, and the transactions
contemplated thereby, including (a) the transfer of all of the
assets and known liabilities of the Fixed Income Fund to the
Intermediate-Term Bond Portfolio of The PNC Fund (the "PNC
Fund") in exchange for Service Shares and Institutional Shares
of PNC Fund; and (b) the distribution of the Service Shares
and Institutional Shares of PNC Fund so received to the
holders of Fixed Income Dollar Shares and Fixed Income Shares,
respectively, of the Fixed Income Fund.
APPROVE / / DISAPPROVE / / ABSTAIN / /
(2) In their discretion, the proxies are authorized to vote upon
such other business as may properly come before the Meeting or
any adjournment thereof.
EVERY PROPERLY SIGNED AND RETURNED PROXY WILL BE VOTED IN THE
MANNER SPECIFIED THEREON AND, IN THE ABSENCE OF SPECIFICATION,
WILL BE TREATED AS GRANTING AUTHORITY TO VOTE TO APPROVE ITEM
1 ABOVE.
<PAGE> 2
Receipt of Notice of the Meeting and the Combined Proxy
Statement/Prospectus is hereby acknowledged.
PLEASE SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE
ENCLOSED ENVELOPE.
Please sign exactly as name appears hereon. When shares are held by
joint tenants, both should sign. When signing as attorney or as
executor, administrator, trustee or guardian, please give full title
as such. If a corporation, please sign in full corporate name by
president or other authorized officer. If a partnership, please sign
in partnership name by authorized person.
Dated
-------------------------------------------------, 1995
X
------------------------------------------------------------
Signature
X
------------------------------------------------------------
Signature, if held jointly
<PAGE> 1
FIXED INCOME FUND
An Investment Portfolio Offered By
Portfolios for Diversified Investment
<TABLE>
<S> <C>
Bellevue Park Corporate Center For purchase and redemption
400 Bellevue Parkway orders only call: 800-441-7450
Suite 100 (in Delaware: 302-791-5350).
Wilmington, DE 19809 For yield information call: 800-821-6006
(Fixed Income shares code: 43; Fixed
Income Dollar shares code: 44). For
other information call: 800-821-7432.
</TABLE>
Portfolios for Diversified Investment (the "Company") is a no-load,
diversified, open-end investment company that currently offers shares in one
investment portfolio. The shares described in this Prospectus represent
interests in the Fixed Income Fund portfolio (the "Fund") which previously was
known as Long Fixed Income Fund. The Fund's investment objective is to seek a
high level of current income consistent with prudent investment risk. The Fund
invests in a portfolio of high grade fixed-income obligations that includes a
broad range of corporate, government, bank and commercial obligations of which
at least 80% have remaining maturities of 15 years or less. The Fund is
designed for banks, other institutions and their customers. Fund shares may
not be purchased by individuals directly, but institutional investors may
purchase shares for accounts maintained by individuals.
PNC Institutional Management Corporation ("PIMC") and PNC Bank,
National Association ("PNC Bank") serve as the Fund's adviser and sub-adviser,
respectively. PFPC Inc. ("PFPC") and Provident Distributors, Inc. ("PDI")
serve as the Fund's administrators. Provident Distributors, Inc. also serves
as the Fund's distributor.
--------------------
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF OR GUARANTEED,
ENDORSED, OR OTHERWISE SUPPORTED BY PNC BANK CORP. OR ITS AFFILIATES,
AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
AN INVESTMENT IN THE FUND INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
---------------------
This Prospectus briefly sets forth certain information about the Fund
that investors should know before investing. Investors are advised to read
this Prospectus and retain it for future reference. Additional information
about the Fund, contained in a Statement of Additional Information dated
October 28, 1994, has been filed with the Securities and Exchange Commission
and is available to investors without charge by calling the Fund at
800-821-7432. The Statement of Additional Information is incorporated in its
entirety by reference into this Prospectus.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
October 28, 1994
<PAGE> 2
BACKGROUND AND EXPENSE INFORMATION
Two classes of shares are offered by the Fund: Fixed Income shares
and Fixed Income Dollar shares. Shares of each class represent equal pro rata
interests in the Fund and accrue daily dividends in the same manner except that
the Dollar shares bear fees payable by the Fund (at the rate of .25% per annum)
to institutional investors for services they provide to the beneficial owners
of such shares. (See "Management of the Fund--Service Organizations.")
EXPENSE SUMMARY
<TABLE>
<CAPTION>
Fixed Fixed
Income Income
Shares Dollar Shares
------ -------------
Annual Fund Operating Expenses
- ------------------------------
(as a percentage of average net assets)
<S> <C> <C> <C> <C>
Management Fees (net of waivers) . . . . . . . . . . . . . . . . . . 0% 0%
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .40% .65%
Administration Fees (net of waivers) . . . . . . . . . . . . . . . 0% 0%
Shareholder Servicing Fees . . . . . . . . . . . . . . . . . . . . 0% .25%
Miscellaneous (net of waivers and . . . . . . . . . . . . . . . . .
expense reimbursements) . . . . . . . . . . . . . . . . . . . . . .40% .65%
Total Fund Operating Expenses (net of
waivers and expense reimbursements) . . . . . . . . . . . . . . . . .40% .65%
==== ====
</TABLE>
- ---------------
Example
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming (1) a 5% annual
return and (2) redemption at the end of each
time period with respect to the following
shares:
Fixed Income shares: . . . . . . . . . . . . . . . . . . . $4 $13 $22 $51
Fixed Income Dollar shares: . . . . . . . . . . . . . . . $7 $21 $36 $81
</TABLE>
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR RATE OF RETURN. ACTUAL EXPENSES AND RATE OF RETURN MAY BE GREATER
OR LESSER THAN THOSE SHOWN.
The purpose of the foregoing table is to assist an investor in
understanding the various costs and expenses that an investor in the Fund will
bear directly or indirectly. (For more complete descriptions of the various
costs and expenses, see "Management of the Fund" in this Prospectus and the
Statement of Additional Information and the financial statements and related
notes contained in the Statement of Additional Information.) For the fiscal
year ended June 30, 1994, absent voluntary fee and salary waivers and expense
reimbursements, management and administration fees would each have been .40% of
the Fund's average net assets, and miscellaneous expenses would have been .57%
of the Fund's average net assets. The investment adviser and administrators
have agreed to waive the advisory and administration fees
-2-
<PAGE> 3
otherwise payable to them and to reimburse the Fund for its operating expenses
to the extent necessary to ensure that the operating expense ratio for the Fund
(excluding fees paid to Service Organizations pursuant to Servicing
Agreements) does not exceed .40% of the Fund's average net assets for the
one-year period beginning January 18, 1994. Absent such fee waivers and expense
reimbursements for such period, the estimated "Total Fund Operating Expenses"
for Fixed Income Fund shares and Fixed Income Fund Dollar shares would be .96%
and 1.21%, respectively, of the average net assets of the Fixed Income Fund
portfolio. The foregoing table has not been audited by the Fund's independent
accountants.
-3-
<PAGE> 4
FINANCIAL HIGHLIGHTS
The following financial highlights have been derived from the
financial statements of the Fund for the fiscal years ended June 30, 1994,
1993, 1992, 1991, 1990, 1989, 1988, and the fiscal period ended December 16,
1986 to June 30, 1987 (commencement of operations). The financial highlights
for the fiscal years ended June 30, 1994, 1993, 1992, 1991 and 1990 have been
audited by Coopers & Lybrand L.L.P., independent accountants whose report on
the financial statements of the Fund is included in the Statement of Additional
Information. The table should be read in conjunction with the financial
statements and related notes included in the Statement of Additional
Information. Further information about the performance of the Fund is
available in the annual report to shareholders, which may be obtained free of
charge.
FIXED INCOME FUND - FIXED INCOME SHARES
The table below sets forth selected financial data for a share of
capital stock outstanding throughout each period presented.
<TABLE>
<CAPTION>
December 16,
Year Ended June 30, 1986(1) to
--------------------------------------------------------------- June 30,
1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period . . . . $10.41 $ 9.88 $ 9.32 $ 9.25 $ 9.47 $ 9.21 $ 9.47 $10.00
------ ------ ------ ------ ------ ------ ------ ------
Income from investment operations:
Net investment income . . . . . . . . . . . . .61 .66 .71 .76 .77 .76 .77 .39
Net gains (losses) on securities
(realized and unrealized) . . . . . . . . . (0.75) .53 .56 .07 (.22) .26 (.26) (.53)
------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations . . . . . (0.14) 1.19 1.27 .83 .55 1.02 .51 (.14)
------ ------ ------ ------ ------ ------ ------ ------
Less distributions:
Dividends from net
investment income . . . . . . . . . . . . . (0.62) (.66) (.71) (.76) (.77) (.76) (.77) (.39)
------ ------ ------ ------ ------ ------ ------ ------
Distributions from capital gains . . . . . . (0.04) 0.00 0.00 0.00 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------ ------ ------ ------
Distributions in excess of
capital gains . . . . . . . . . . . . . . (0.04) 0.00 0.00 0.00 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------ ------ ------ ------
Total distributions . . . . . . . . . . . . (0.70) (.66) (.71) (.76) (.77) (.76) (.77) (.39)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period . . . . . . . $ 9.57 10.41 9.88 9.32 9.25 9.47 9.21 9.47
======= ====== ====== ====== ====== ====== ====== ======
Total return . . . . . . . . . . . . . . . . (1.54)% 12.41% 14.07% 9.43% 6.09% 11.77% 5.71% (1.44%)
Ratios/supplemental data:
Net assets, end of period (in 000's) . . . . $31,392 $38,963 $29,739 $13,896 $12,599 $12,397 $13,679 $16,256
Ratio of expenses to average daily
Net assets . . . . . . . . . . . . . . . . 0.40%(3) .40%(3) .40%(3) .40%(3) .40%(3) .42%(3) .50%(3) .50%(2,3)
Ratio of net investment income to
average daily net assets . . . . . . . . . 6.04% 6.48% 7.34% 8.29% 8.27% 8.33% 8.19% 7.60%(2)
Portfolio turnover rate . . . . . . . . . . . 85% 103% 94% 52% 38% 41% 28% 99%
</TABLE>
- -------------------------
(1) Commencement of Operations.
(2) Annualized.
(3) Without waivers of administration fees, advisory fees, trustees' fees
and officer's salary, and expense reimbursements, from inception
through June 30, 1994, and the waiver of custodian fees through June
30, 1987, the ratios of expenses to average daily net assets for Fixed
Income Shares would have been .96% .93%, 1.00%, 1.34%, 1.22%, 1.45%,
1.60% and 1.53% (annualized) for the fiscal years ended June 30, 1994,
1993, 1992, 1991, 1990, 1989 and 1988 and for the period ended June
30, 1987, respectively.
-4-
<PAGE> 5
FIXED INCOME FUND - DOLLAR SHARES
The table below sets forth selected financial data for a share
of capital stock outstanding throughout each period presented.
<TABLE>
<CAPTION>
Year Year Year June 28, Year December 1,
Ended Ended Ended 1991(5) to Ended 1988(1) to
June 30, June 30, June 30, June 30, June 30, June 30,
1994 1993 1992 1991 1990(4) 1989
-------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period . . . . . . $ 10.41 $ 9.88 $ 9.32 $ 9.30 $ 9.47 $ 9.04
-------- ------- ------- ------- ------- -------
Income (loss) from investment operations:
Net investment income . . . . . . . . . . . . . . 0.58 .64 .69 .01 .74 .43
Net gains (losses) on securities
(realized and unrealized) . . . . . . . . . . . (0.75) .53 .56 .02 (.22) .43
-------- ------ ------ ------ ------- -------
Total income (loss) from investment
operations . . . . . . . . . . . . . . . . . (0.17) 1.17 1.25 .03 .52 .86
-------- ------ ------ ------ ------- -------
Less distributions:
Dividends from net investment income . . . . . . (0.59) (.64) (.69) (.01) (.74) (.43)
-------- ------ ------ ------ ------- -------
Distributions from capital gains . . . . . . . . (0.04) 0.00 0.00 0.00 0.00 0.00
-------- ------ ------ ------ ------- -------
Distributions in excess of capital gains . . . . (0.04) 0.00 0.00 0.00 0.00 0.00
-------- ------ ------ ------ ------- -------
Total distributions . . . . . . . . . . . . . . (0.67) (.64) (.69) (.01) (.74) (.43)
-------- ------ ------ ------ ------- -------
Net asset value, end of period . . . . . . . . . $ 9.57 $10.41 $ 9.88 $ 9.32 $ 9.25 $ 9.47
======== ======= ======= ======= ======= =======
Total return . . . . . . . . . . . . . . . . (1.79)% 12.13% 13.75% .28% 5.75% 9.89%
Ratios/supplemental data:
Net assets, end of period (in 000's) . . . . . . $ 503 $ 455 $ 417 $ 214 $ 0 $ 681
Ratio of expenses to average daily
net assets . . . . . . . . . . . . . . . . . . .65%(3) .65%(3) .65%(3) .65%(2,3) .65%(3) .60%(2,3)
Ratio of net investment income to
average daily net assets . . . . . . . . . . . 5.79% 6.25% 6.98% 7.69%(2) 8.11% 8.15%(2)
Portfolio turnover rate . . . . . . . . . . . . . 85% 103% 94% 52%(2) 38% 41%(2)
</TABLE>
- ---------------------------------
(1) First issuance of shares.
(2) Annualized.
(3) Without waivers of administration fees, advisory fees, trustees' fees
and officer's salary and expense reimbursements, the ratios of
expenses to average daily net assets for Fixed Income Dollar shares
would have been 1.21%, 1.18%, 1.25%, 1.59% (annualized), 1.48% and
1.44% (annualized), for the years ended June 30, 1994, 1993 and 1992,
for the period ended June 30, 1991, for the year ended June 30, 1990
and for the period ended June 30, 1989, respectively.
(4) As of June 30 1990, no Dollar shares were outstanding.
(5) Reissuance of shares.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to seek a high level of
current income consistent with prudent investment risk. The Fund intends to
meet its investment objective by investing substantially all of its assets in a
diversified portfolio of high grade fixed-income obligations. In pursuing its
investment objective, the Fund invests in a broad range of corporate,
government, bank and commercial obligations that may be available. The Fund's
policy is to invest at least 65% of the total value of its assets in
fixed-income securities under normal market conditions. At least 80% of the
fixed income obligations held by the Fund will have remaining maturities of 15
years or
-5-
<PAGE> 6
less. In acquiring particular portfolio securities for the Fund, the
investment adviser will consider, among other things, historical yield
relationships between corporate and government bonds, intermarket yield
relationships among various industry sectors, current economic cycles and the
attractiveness and creditworthiness of particular issuers. The Fund's net asset
value per share will fluctuate as the value of its portfolio changes in response
to changing market rates of interest and other factors. The following
descriptions illustrate the types of instruments in which the Fund invests.
The Fund may invest in debt obligations of corporations which
are rated at the time of purchase "AAA," "AA" or "A" by Standard & Poor's
Corporation ("S&P") or "Aaa," "Aa" or "A" by Moody's Investors Service, Inc.
("Moody's"). Corporate obligations which are unrated at the time of purchase
will be determined to be of comparable quality by the Fund's investment advise
pursuant to guidelines approved by the Company's Board of Trustees. The
applicable corporate obligation ratings are described in the Appendix to the
Statement of Additional Information.
The Fund may purchase obligations issued or guaranteed by the
U.S. Government or its agencies or instrumentalities. Obligations of certain
agencies and instrumentalities of the U.S. Government are backed by the full
faith and credit of the United States (such as obligations issued by the
Government National Mortgage Association). Others are backed by the right of
the issuer to borrow from the U.S. Treasury or are backed only by the credit of
the agency or instrumentality issuing the obligation (such as obligations
issued by the Federal Land Banks).
The Fund may purchase bank obligations, such as certificates
of deposit, bankers' acceptances and time deposits issued by domestic branches
of U.S. banks or savings institutions having total assets at the time of
purchase in excess of $1 billion. The Fund may also make interest-bearing
savings deposits in commercial and savings banks in amounts not in excess of 5%
of its total assets.
The Fund may purchase commercial paper rated (at the time of
purchase) "A-1" or higher by S&P or "Prime-1" by Moody's. Unrated commercial
paper purchased by the Fund will be determined to be of comparable quality by
the Fund's investment adviser pursuant to guidelines approved by the Company's
Board of Trustees. These rating symbols are described in the Appendix to the
Statement of Additional Information.
The Fund's portfolio securities may include variable rate
demand notes. Such notes frequently are not rated by credit rating agencies
but unrated notes purchased by the Fund will be determined by the Fund's
investment adviser to be of comparable
-6-
<PAGE> 7
quality at the time of purchase to rated instruments purchasable by the
Fund. Where necessary to ensure that a note is of "high quality," the Fund will
require that the issuer's obligation to pay the principal of the note be backed
by an unconditional bank letter or line of credit, guarantee or commitment to
lend. Although there may be no active secondary market with respect to a
particular variable rate demand note purchased by the Fund, the Fund may, upon
notice, demand payment of principal at any time or during specified periods not
exceeding one year, depending upon the instrument involved, and may resell the
note at any time to a third party. The absence of such an active secondary
market, however, could make it difficult for the Fund to dispose of a variable
rate demand note if the issuer defaulted on its payment obligation or during
periods that the Fund is not entitled to exercise its demand rights, and the
Fund could, for this or other reasons, suffer a loss to the extent of the
default.
The Fund may agree to purchase securities subject to agreement
by the seller (such as a bank or broker) to repurchase them from the Fund at an
agreed upon time and price ("repurchase agreements"). The investment adviser
will consider the creditworthiness of a seller in determining whether to enter
into a repurchase agreement. The seller under a repurchase agreement will be
required to maintain the value of the securities subject to the agreement at
not less than the repurchase price. Default by or bankruptcy of the seller
would, however, expose the Fund to possible loss because of adverse market
action or delay in connection with the disposition of the underlying
obligations.
The Fund may borrow funds for temporary purposes by entering
into reverse purchase agreements in accordance with the investment restrictions
described below. Pursuant to such agreements, the Fund would sell portfolio
securities to banks and agree to repurchase them at an agreed upon date and
price. The Fund would only consider entering into reverse repurchase
agreements to avoid otherwise selling securities during unfavorable market
conditions to meet redemptions. Reverse repurchase agreements involve the risk
that the market value of the portfolio securities sold by the Fund may decline
below the price at which the Fund is obligated to repurchase such securities.
The Fund may purchase securities on a "when-issued" basis.
When-issued securities are securities purchased for delivery beyond the normal
settlement date at a stated price and yield. The Fund will generally not pay
for such securities or start earning interest on them until they are received.
Securities purchased on a when-issued basis are recorded as an asset and are
subject to changes in value based upon changes in the general level of interest
rates. The Fund expects that commitments to purchase when-issued securities
will not exceed 25% of the value of its total assets absent unusual market
-7-
<PAGE> 8
conditions. The Fund does not intend to purchase when-issued securities for
speculative purposes but only in furtherance of its investment objective.
The Fund may invest in preferred stock and obligations
convertible into common stocks. Furthermore, the Fund may invest in common
stock and warrants if they are attached to a fixed-income obligation.
When conditions warrant, such as when comparable yielding
instruments are available, the Fund may also invest in debt obligations issued
by or on behalf of states, territories, and possessions of the United States,
the District of Columbia and other political subdivisions, agencies,
instrumentalities and authorities ("Municipal Obligations"), whether or not the
income thereon is exempt from federal income tax. The Fund may invest in
Municipal Obligations which are determined by the Fund's investment adviser to
present minimal credit risks and which at the time of purchase are rated: "A"
or higher by S&P or by Moody's in the case of bonds; "SP-1" by S&P or "MIG-1"
by Moody's in the case of notes; or "VMIG-1" by Moody's in the case of variable
rate demand obligations.
Municipal Obligations are classified as "general obligation"
bonds, "revenue" bonds and notes. They can bear fixed, variable or floating
rates of interest. General obligation bonds are secured by the issuer's pledge
of its full faith, credit and taxing power for the payment of principal and
interest. Revenue bonds are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise tax or other specific revenue source such as the user of
the facility being financed. Private activity bonds held by the Fund would in
most cases be revenue bonds and would not be payable from the unrestricted
revenues of the issuer. Consequently, the credit quality of private activity
bonds is usually directly related to the credit standing of the corporate user
of the facility involved. Municipal notes are often used to provide for
short-term capital needs and generally have maturities up to one year. These
include: tax anticipation notes, revenue anticipation notes, bond anticipation
notes, construction loan notes, and variable rate demand obligations.
The Fund will not knowingly invest more than 10% of its total
assets in illiquid securities, including securities that are illiquid by virtue
of the absence of a readily available market or legal or contractual
restrictions on resale. Securities that have a readily available market are
not deemed illiquid for purposes of this limitation. The Fund's investment
adviser will monitor the liquidity of such securities under the supervision of
the Board of Trustees. (See "Investment Objective
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<PAGE> 9
and Policies--Illiquid Securities" in the Statement of Additional Information.)
The Fund may sell an obligation soon after its acquisition if
the investment adviser believes that such a disposition is consistent with
attaining the Fund's investment objective. Investments may be sold for a
variety of reasons, such as a more favorable investment opportunity or other
circumstances bearing on the desirability of continuing to hold such
investments. A high rate of portfolio turnover involves correspondingly
greater transaction costs, which must be borne directly by the Fund and
ultimately by its shareholders. High portfolio turnover may result in the
realization of substantial net capital gains. (See "Taxes.")
The Fund's investment objective and the policies described
herein are nonfundamental and may be changed by the Company's Board of Trustees
without a vote of shareholders, except that any such change would be disclosed
to the Fund's shareholders prior to being made. If there is a change in the
investment objective, shareholders should consider whether the Fund remains an
appropriate investment in light of their then current financial position and
needs. In addition, the Fund may not change the following investment
limitations without the affirmative vote of the holders of a majority of the
Fund's outstanding shares. (A complete list of the investment limitations that
cannot be changed without a vote of shareholders is continued in the Statement
of Additional Information under "Investment Objectives and Policies.")
THE FUND MAY NOT:
1. Invest in the securities of any one issuer (other
than securities issued or guaranteed by the United States or its
agencies or instrumentalities), if immediately after and as a result
of such investment more than 5% of the value of the Fund's total
assets would be invested in the securities of such issuer or more than
10% of the outstanding securities, or more than 10% of the outstanding
voting securities, of such issuer would be owned by the Fund, except
that up to 25% of the value of the Fund's total assets may be invested
without regard to such limitations to the extent permitted by the
securities laws of the states in which the Fund's shares are offered
for sale.
2. Purchase any securities which would cause 25% or more
of the value of its total assets at the time of such purchase to be
invested in the securities of one or more issuers conducting their
principal business activities in the same industry, provided that
there is no limitation with respect to investments in U.S. Treasury
Bills or other
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<PAGE> 10
obligations issued or guaranteed by the U.S. Government, its agencies
and instrumentalities.
3. Borrow money, except from banks for temporary
purposes and then in amounts not in excess of 10% of the value of the
Fund's total assets at the time of such borrowing; or mortgage, pledge
or hypothecate any assets except in connection with any such borrowing
and in amounts not in excess of the lesser of the dollar amounts
borrowed or 10% of the value of the Fund's total assets at the time of
such borrowing; or purchase portfolio securities while borrowings in
excess of 5% of the Fund's net assets are outstanding.
PURCHASE AND REDEMPTION OF SHARES
PURCHASE PROCEDURES
Fund shares are sold at the net asset value per share next
determined after receipt of a purchase order by PFPC, the Fund's transfer
agent. Purchase orders for shares are accepted by the Fund until 4:00 P.M.,
Eastern time, only on days on which both the New York Stock Exchange and the
Federal Reserve Bank of Philadelphia are open for business (a "Business Day"),
and must be transmitted to PFPC in Wilmington, Delaware by telephone
(800-441-7450; in Delaware: 302-791-5350); or through the Fund's computer
access program. Purchase orders received before 4:00 P.M., Eastern time, will
be executed the following Business Day if payment has been received by 4:00
P.M., Eastern time, on that day. Orders for which payment has not been
received by 4:00 P.M., Eastern time, on the next Business Day following receipt
of the order will not be accepted, and notice thereof will be given to the
institution placing the order. (Payment for orders which are not received or
accepted will be returned after prompt inquiry to the sending institution.)
The Fund may in its discretion reject any order for shares.
Payment for Fund shares may be made only in federal funds or
other funds immediately available to PNC Bank, National Association ("PNC
Bank"), the Fund's custodian. The minimum initial investment by an institution
is $5,000; however, broker-dealers and other institutional investors may set a
higher minimum for their customers. There is no minimum subsequent investment.
Conflict of interest restrictions may apply to an
institution's receipt of compensation paid by the Fund on fiduciary funds that
are invested in Dollar shares. (See also "Management of the Fund--Service
Organizations.") Institutions, including banks regulated by the Comptroller of
the Currency and investment advisers and other money managers subject to the
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jurisdiction of the Securities and Exchange Commission ("SEC"), the Department
of Labor or state securities commissions, should consult their legal advisers
before investing fiduciary funds in Dollar shares. (See also "Management of
the Fund--Banking Laws.")
REDEMPTION PROCEDURES
Redemption orders must be transmitted to PFPC in Wilmington,
Delaware in the manner described under "Purchase Procedures." Redemption
orders are effected at the net asset value per share determined as of 4:00
P.M., Eastern time, on the day the order is received and will be executed on
the following Business Day. The proceeds paid to a shareholder upon redemption
may be more or less than the amount invested depending upon a share's net asset
value at the time of redemption.
Payment for redeemed shares is normally made in federal funds
wired to the redeeming shareholder on the next Business Day (the execution
date) following receipt of the order. The Fund reserves the right to wire
redemption proceeds within seven days after receiving the redemption order if,
in the judgment of the Fund's investment adviser, an earlier payment could
adversely affect the Fund.
The Fund shall have the right to redeem shares in any account
if the value of the account is less than $1,000 (for reasons other than a
decline in net asset value of Fund shares) after 60-days' prior written notice
to the shareholder. Any such redemption shall be effected at the net asset
value per share next determined after the redemption order is entered. If
during the 60-day period the shareholder increases the value of its account to
$1,000 or more, no such redemption shall take place. In addition, the Fund may
redeem shares involuntarily or suspend the right of redemption as permitted
under the Investment Company Act of 1940, as amended (the "1940 Act"), or under
certain special circumstances described in the Statement of Additional
Information under "Additional Purchase and Redemption Information."
OTHER MATTERS
The Fund's net asset value per share for purposes of pricing
purchase and redemption orders is determined by PNC Institutional Management
Corporation ("PIMC") as of 4:00 P.M., Eastern time, on each Business Day
(excluding those holidays on which either the Federal Reserve Bank of
Philadelphia or the New York Stock Exchange is closed). Currently, one or both
of these institutions are closed on the customary national business holidays of
New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day (observed), Independence Day (observed), Labor Day, Columbus Day,
Veterans
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<PAGE> 12
Day, Thanksgiving Day and Christmas Day (observed). The net asset value per
share of the Fund is calculated by adding the value of all securities and other
assets belonging to the Fund, subtracting liabilities and dividing the result
by the total number of the Fund's outstanding shares.
The net asset value of the Fund's shares will fluctuate as the
value of its portfolio changes in response to changing market rates of interest
and other factors. The value of the Fund's portfolio securities can be
expected to vary inversely with changes in prevailing interest rates.
Fixed-income obligations with longer maturities tend to produce higher yields
and are generally subject to potentially greater capital appreciation and
depreciation than obligations with shorter maturities and lower yields. Thus,
investing in obligations with longer maturities will cause greater fluctuations
in the Fund's net asset value than investing in obligations with shorter
maturities.
Portfolio securities for which market quotations are readily
available (other than debt securities with remaining maturities of 60 days or
less) are valued at the mean between the most recent quoted bid and asked
prices provided by investment dealers. Unlisted securities for which market
quotations are readily available will be valued at the most recent quoted bid
price. Other securities and assets for which market quotations are not readily
available, including restricted securities and other debt obligations purchased
in private transactions, are valued at their fair value in the best judgment of
PIMC under procedures established by, and under the supervision of the
Company's Board of Trustees. Debt securities with maturities of 60 days or
less are valued on an amortized cost basis (unless the Board determines that
such basis does not represent fair value at the time). Under this method, such
securities are valued initially at cost on the date of purchase or, in the case
of securities purchased with more than 60 days to maturity, are valued at their
market or fair value each day until the 61st day prior to maturity.
Thereafter, absent unusual circumstances, the Fund assumes a constant
proportionate amortization of any discount or premium until maturity of the
security.
Fund shares are sold and redeemed without charge by the Fund.
Institutional investors purchasing or holding Fund shares for their customer
accounts may charge customers fees for cash management and other services
provided in connection with their accounts. A customer should therefore
consider the terms of its account with an institution before purchasing Fund
shares. An institution purchasing or redeeming shares on behalf of its
customers is responsible for transmitting orders to the Fund's distributor in
accordance with its customer agreements.
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<PAGE> 13
MANAGEMENT OF THE FUND
BOARD OF TRUSTEES
The business and affairs of the Fund are managed under the
direction of the Company's Board of Trustees. The trustees of the Company are
as follows:
Philip E. Coldwell is an economic consultant and a former
Member of the Board of Governors of the Federal Reserve System.
Robert R. Fortune is a financial consultant and former
Chairman, President and Chief Executive Officer of Associated,
Electric & Gas Insurance Services Limited.
Rodney D. Johnson is President of Fairmount Capital Advisors,
Inc.
Anthony M. Santomero is the Richard K. Mellon Professor of
Finance at, and former Deputy Dean of The Wharton School, University
of Pennsylvania.
G. Willing Pepper, Chairman of the Board and President of the
Company, is a retired President of Scott Paper Company.
David R. Wilmerding, Jr., Vice-Chairman of the Board of the
Company, is President and Chief Executive Officer of Gates,
Wilmerding, Carper & Rawlings, Inc.
Mr. Pepper is considered by the Company to be an "interested
person" of the Company as defined in the 1940 Act.
The other officers of the Company are as follows:
Edward J. Roach is Vice President and Treasurer of the Company.
W. Bruce McConnel, III, Secretary of the Company, is a partner
of the law firm of Drinker Biddle & Reath, Philadelphia, Pennsylvania.
INVESTMENT ADVISER AND SUB-ADVISER
PIMC, a wholly owned subsidiary of PNC Bank, serves as the
Fund's investment adviser. PIMC was organized in 1977 by PNC Bank to perform
advisory services for investment companies and has its principal offices at
Bellevue Park Corporate Center, 103 Bellevue Parkway, 4th Floor, Wilmington,
Delaware 19809. PNC Bank serves as the Fund's sub-adviser. PNC Bank and its
predecessors have been in the business of managing the
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<PAGE> 14
investments of fiduciary and other accounts in the Philadelphia area since
1847. PNC Bank is a wholly owned, indirect subsidiary of PNC Bank Corp., and
its principal business address is Broad and Chestnut Streets, Philadelphia,
Pennsylvania 19102. PNC Financial Corp is a multi-bank holding company.
As adviser, PIMC manages the Fund's portfolio and is
responsible for all purchases and sales of the Fund's portfolio securities.
PIMC also maintains the Fund's financial accounts and records and computes the
Fund's net asset value and net income. For the advisory services provided and
expenses assumed by it, PIMC is entitled to receive a fee, computed daily and
payable monthly, at the annual rate of .20% of the Fund's average daily net
assets after taking into account agreed upon waivers. PIMC and the
administrators have agreed to reduce the advisory and administration fees
otherwise payable to them and to reimburse the Fund for its operating expenses
to the extent necessary to ensure that its operating expense ratio (excluding
fees paid to Service Organizations pursuant to Servicing Agreements) does not
exceed .40% of the Fund's average net assets. PIMC and the administrators may
terminate this agreement to reduce fees and limit expenses on 120-days' written
notice to the Fund. Any fees waived or expenses reimbursed by PIMC and the
administrators with respect to a particular fiscal year are not recoverable.
For the fiscal year ended June 30, 1994, PIMC voluntarily waived all of the
advisory fees payable to it by the Fund.
On February 3, 1994, William C. Lowry, IV became the Fund's
Portfolio Manager, the person primarily responsible for the day-to-day
management of the Fund's investment portfolio. Mr. Lowry has been with PNC
Bank since June 1992. Prior to 1992, Mr. Lowry was Vice-President and head of
fixed income management at Midlantic National Bank.
As sub-adviser, PNC Bank provides research, credit analysis
and recommendations with respect to the Fund's investments and supplies PIMC
with certain computer facilities, personnel and other services. For its
sub-advisory services, PNC Bank is entitled to receive from PIMC an amount
equal to 75% of the advisory fee paid by the Fund to PIMC (subject to
adjustment in certain circumstances). The sub-advisory fees paid by PIMC to
PNC Bank have no effect on the advisory fees payable by the Fund to PIMC. PNC
Bank also serves as the Fund's custodian. The services provided by PIMC and
PNC Bank and the fees payable by the Fund for these services are described in
the Statement of Additional Information under "Management of the Fund."
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<PAGE> 15
ADMINISTRATORS
PFPC Inc. ("PFPC"), whose principal business address is 103
Bellevue Parkway, Wilmington, Delaware 19809, and Provident Distributors, Inc.
("PDI"), whose principal business address is 259 Radnor-Chester Road, Suite
120, Radnor, Pennsylvania 19087, serve as administrators. PFPC is an indirect
wholly-owned subsidiary of PNC Bank Corp. A majority of the outstanding stock
of PDI is owned by its officers. The administrative services provided by the
administrators, which are described more fully in the Statement of Additional
Information, include providing and supervising the operation of processing
purchase and redemption orders; assisting in maintaining the Fund's Wilmington,
Delaware office; performing administrative services in connection with the
Fund's computer access program maintained to facilitate shareholder access to
the Fund; accumulating information for and coordinating the preparation of
reports to the Fund's shareholders and the SEC; and, maintaining the
registration or qualification of the Fund's shares for sale under state
securities laws.
For their administrative services, the administrators are
entitled jointly to receive a fee, computed daily and payable monthly,
determined in the same manner as PIMC's advisory fee described above. (For
information regarding the administrators' obligations to waive administrative
fees otherwise payable to them and to reimburse the Fund for operating
expenses, see "Investment Adviser and Sub-Adviser" above.) For the fiscal year
ended June 30,1993, the Fund's administrators, voluntarily waived all the
administration fees payable to it by the Fund.
PFPC also serves as transfer agent, registrar and dividend
disbursing agent. PFPC's address is P.O. Box 8950, Wilmington, Delaware
19885-9628. The services provided by PFPC and PDI and the fees payable by the
Fund for these services are described in the Statement of Additional
Information under "Management of the Funds."
DISTRIBUTOR
Provident Distributors, Inc. ("PDI") serves as distributor of
the Fund's shares. Its principal offices are located at 259 Radnor-Chester
Road, Suite 120, Radnor, Pennsylvania 19087. Fund shares are sold on a
continuous basis by the distributor as agent. The distributor pays the cost of
printing and distributing prospectuses to persons who are not shareholders of
the Fund (excluding preparation and printing expenses necessary for the
continued registration of the Fund's shares) and of printing and distributing
all sales literature. No compensation is payable by the Fund to the
distributor for its distribution services.
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<PAGE> 16
SERVICE ORGANIZATIONS
Institutional investors, such as banks, savings and loan
associations and other financial institutions, including affiliates of PNC Bank
Corp. ("Service Organizations"), may purchase Dollar shares. Dollar shares are
identical in all respects to the Company's Fixed Income shares except that they
bear the service fees described below and enjoy certain exclusive voting rights
on matters relating to these fees. The Fund will enter into an agreement with
each Service Organization which purchases Dollar shares requiring it to provide
support services to its customers who are the beneficial owners of Dollar
shares in consideration of the Fund's payment of .25% (on an annualized basis)
of the average daily net asset value of the Dollar shares held by the Service
Organization for the benefit of customers. Such services, which are described
more fully in the Statement of Additional Information under "Management of the
Fund--Service Organizations," include aggregating and processing purchase and
redemption requests from customers and placing net purchase and redemption
orders with PFPC; processing dividend payments from the Fund on behalf of
customers; providing information periodically to customers showing their
positions in Dollar shares; and providing sub-accounting or the information
necessary for sub-accounting with respect to Dollar shares beneficially owned
by customers. Under the terms of the agreements, Service Organizations are
required to provide to their customers a schedule of any fees that they may
charge to the customers relating to the investment of the customers' assets in
Dollar shares. Fixed Income shares are sold to institutions that have not
entered into servicing agreements with the Fund in connection with their
investments.
EXPENSES
Except as noted above and in the Statement of Additional
Information under "Management of the Fund Custodian and Transfer Agent," the
Fund's service contractors bear all expenses in connection with the performance
of their services. Similarly, the Fund bears the expenses incurred in its
operations. For the fiscal year ended June 30, 1994, the Fund's total expenses
with respect to Fixed Income shares and Fixed Income Dollar shares were .96%
and 1.21% (net of waivers and expense reimbursements of .56% and .56%,
respectively) of the average net assets of the Fixed Income shares and Fixed
Income Dollar shares, respectively. With regard to fees paid exclusively by
Dollar shares, see "Service Organizations" above.
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<PAGE> 17
BANKING LAWS
Banking laws and regulations presently prohibit a bank holding
company registered under the Federal Bank Holding Company Act of 1950 or any
bank or non-bank affiliate thereof from sponsoring, organizing or controlling a
registered, open-end investment company engaged continuously in the issuance of
its shares, and prohibit banks generally from issuing, underwriting, selling or
distributing securities such as Fund shares. Such banking laws and regulations
do not prohibit such a holding company or affiliate or banks generally from
acting as investment adviser, transfer agent or custodian to such an investment
company, or from purchasing shares of such a company for or upon the order of
customers. PNC Bank, PIMC, PFPC, as well as some Service Organizations, are
subject to such banking laws and regulations. In addition, state securities
laws on this issue may differ from the interpretation 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 bank Service Organizations in connection
with the provision of support services to their Customers, the Fund might be
required to alter or discontinue its arrangements with Service Organizations
and change its method of operations with respect to Dollar 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.
PERFORMANCE CALCULATIONS
From time to time, performance information such as total
return and yield data for the Fund may be quoted in advertisements or in
communications to shareholders. The Fund's total return may be calculated on
an average annual total return basis, and may also be calculated on an
aggregate total return basis, for various periods. Average annual total return
reflects the average annual percentage change in value of an investment in the
Fund over the particular measuring period. Aggregate total return reflects the
total percentage change in value over the measuring period. Both methods of
calculating total return assume that dividends and capital gain distributions
made by the Fund during the period are reinvested in Fund shares.
The yield of the Fund is computed based on its net income
during a 30-day (or one month) period (the particular period will be identified
in connection with a given yield quotation). More specifically, the Fund's
yield is computed by dividing its net income per share during a 30-day (or one
month)
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<PAGE> 18
period by the net asset value per share on the last day of the period and
annualizing the result on a semiannual basis.
The total return and yield of the Fund may be compared to
those of other mutual funds with similar investment objectives and to bond and
other relevant indices or to rankings prepared by independent services or other
financial or industry publications that monitor the performance of mutual
funds. For example, the total return and yield of the Fund's shares may be
compared to data prepared by Lipper Analytical Services, Inc. In addition, the
Fund's total return may be compared to the Lehman Brothers Intermediate
Government Bond Index, an index of U.S. Treasury bills, notes and other
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities with maturities of 1-10 years, Lehman Brothers Intermediate
Bond Index (Single A), an index of public, fixed rate, non-convertible
investment grade corporate debt issues rated "A" with maturities of 1-10 years,
Lehman Brothers 5-year Muni Bond Index, an index of municipal bond issues with
maturities of 5 years, Standard & Poor's 500 Stock Index, an index of unmanaged
groups of common stocks, the Consumer Price Index, or the Dow Jones Industrial
Average, a recognized unmanaged index of common stocks of 30 industrial
companies listed on the New York Stock Exchange. Total return and yield data
as reported in national financial publications such as Money Magazine, Forbes,
Barron's, The Wall Street Journal and The New York Times, or in publications of
a local or regional nature, may also be used in comparing the performance of
the Fund.
Performance quotations of the Fund represent the Fund's past
performance, will fluctuate, and should not be considered as representative of
future results. The investment return and principal value of an investment in
the Fund will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost. Any fees charged by Service
Organizations or other institutional investors directly to their customer
accounts in connection with investments in Fund shares are not reflected in the
Fund's calculations of total return and yield; and, such fees, if charged,
would reduce the actual total return and yield received by customers on their
investment.
DIVIDENDS AND DISTRIBUTIONS
Shareholders of the Fund are entitled to dividends and
distributions arising only from the net investment income and capital gains, if
any, earned on its investments. The Fund's net income is declared daily as a
dividend to shareholders of record at the close of business on the day of
declaration. Shares begin accruing dividends on the day the purchase order for
the shares is executed and continue to accrue dividends through the day before
the redemption order for the shares is executed.
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<PAGE> 19
Dividends are paid monthly by check, or by wire transfer if requested in
writing by the shareholder, within five business days after the end of the
month or with-in five business days after a redemption of all of a
shareholder's shares of a particular class. The Fund expects to distribute at
least once each year any net realized short and long-term capital gains.
Distributions will reduce the Fund's net asset value per share by the amount of
the distribution.
Dividends are determined in the same manner and are paid in
the same amount for each share of the Fund irrespective of class, except that
Dollar shares bear all the expense of fees paid to Service Organizations. As a
result, at any given time, the net yield on Dollar shares is approximately .25%
lower than the net yield on other shares of the Fund that are not subject to
agreements with Service Organizations. Yield quotations are computed for
Dollar shares separated from those for Fixed Income shares.
A shareholder will automatically receive all income dividends
and capital gains distributions in cash, unless the shareholder elects to
receive such dividends or distributions in additional full and fractional
shares of the same class at net asset value as of the date of payment. Such
election, or any revocation thereof, must be made in writing to PFPC, at P.O.
Box 8950, Wilmington Delaware 19885-9628, and will become effective with
respect to dividends and distributions paid after its receipt by PFPC.
Reinvested dividends receive the same tax treatment as dividends paid in cash.
Changes in the Fund's net asset value will affect its yield
for any period, and such changes should be considered together with the Fund's
yield in ascertaining the Fund's total return to shareholders for the period.
(See the Statement of Additional Information under "Dividends--Additional
Information on Performance Calculations" for a description of the methods used
by the Fund to calculate its yield and total return.)
PFPC, as transfer agent, will send each Fund shareholder or
its authorized representative an annual statement designating the amount, if
any, of any dividends and distributions made during each year and their federal
tax qualification.
TAXES
The Fund qualified in its last taxable year and intends to
qualify in future years as a "regulated investment company" under the Internal
Revenue Code of 1986, as amended (the "Code"). A regulated investment company
generally is exempt from federal income tax on amounts distributed to its
shareholders.
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<PAGE> 20
Qualification as a regulated investment company under the Code
for a taxable year requires, among other things, that the Fund distribute to
its shareholders an amount equal to at least the sum of 90% of its investment
company taxable income and 90% of its net tax-exempt interest income for such
year. In general, the Fund's investment company taxable income will be its
taxable income (including interest, dividends and short-term capital gains)
subject to certain adjustments and excluding the excess of any net long-term
capital gain for the taxable year over any net short-term capital loss for such
year. The Fund's net tax- exempt interest income will be its interest income
excludable from gross income under Code section 103(a), less deductions
disallowed under Code sections 265 and 171(a)(2). The Fund intends to
distribute substantially all of its investment company taxable income and net
tax-exempt interest income each year. Such distributions will be taxable as
ordinary income to Fund shareholders which are not currently exempt from
federal income taxes, whether such income is received in cash or reinvested in
additional shares. (Federal income taxes for Fund distributions to Individual
Retirement Accounts ("IRAs") are deferred under the Code.) Because little, if
any, of the Fund's income will consist of dividends, ordinary income
distributions generally will not qualify for the dividends received deduction
for corporations.
Substantially all of the Fund's net realized long-term capital
gains, if any, will be distributed at least annually to Fund shareholders. The
Fund will generally have no tax liability with respect to such gains and the
distributions will be taxable to Fund shareholders who are not currently exempt
from federal income taxes as long-term capital gains, regardless of how long
the shareholders have held Fund shares and whether such gains are received in
cash or reinvested in additional shares.
Dividends declared in October, November or December of any
year payable to shareholders of record on a specified date in such months will
be deemed to have been received by the shareholders and paid by the Fund on
December 31 of such year in the event such dividends are actually paid during
January of the following year.
A taxable gain or loss may be realized by a shareholder upon a
redemption, transfer or exchange of Fund shares depending upon the tax basis of
such shares and their price at the time of redemption, transfer or exchange.
The foregoing is only a brief summary of some of the important
federal tax considerations generally affecting the Fund and its shareholders.
As noted above, IRAs receive special tax treatment. No attempt is made to
present a detailed explanation of the federal, state or local income tax
treatment of the Fund or its shareholders and this discussion is not intended
as a
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<PAGE> 21
substitute for careful tax planning. Accordingly, potential investors in the
Fund should consult their tax advisers with specific reference to their own tax
situation.
DESCRIPTION OF SHARES AND MISCELLANEOUS
The Company was organized as a Maryland corporation on January
18, 1984 and was reorganized as a Massachusetts business trust on October 31,
1985. The Company commenced operations of the Fund on December 16, 1986.
The Company's Declaration of Trust authorizes the Board of
Trustees to issue an unlimited number of shares of beneficial interest in the
Company and to classify or reclassify any unissued shares into one or more
classes of shares. The Declaration of Trust further authorizes the trustees to
classify or reclassify any class of shares into one or more subclasses. The
Company currently offers shares designated as Class B ("Fixed Income"), and
Class B-Special Series 1 ("Fixed Income Dollar"). The Company is no longer
offering Value Fund, Short Fixed Income, Short Fixed Income Dollar,
Intermediate Fixed Income and Intermediate Fixed Income Dollar shares for sale.
THIS PROSPECTUS AND THE STATEMENT OF ADDITIONAL INFORMATION
INCORPORATED HEREIN RELATE PRIMARILY TO THE FUND AND DESCRIBE ONLY THE
INVESTMENT OBJECTIVE AND POLICIES, OPERATIONS, CONTRACTS AND OTHER MATTERS
RELATING TO THE FUND.
The Company does not presently intend to hold annual meetings
of shareholders except as required by the 1940 Act or other applicable law.
The Company will call a meeting of shareholders upon written request of
shareholders owning at least 10% of the outstanding shares of the Company
entitled to vote for the purpose of voting upon the question of removal of a
member of the Board of Trustees.
Each Fixed Income share and Fixed Income Dollar share
represents an equal proportionate interest in the assets belonging to the Fixed
Income Fund portfolio. Each share is without par value and has no preemptive
or conversion rights. When issued for payment as described in this Prospectus,
shares will be fully paid and non-assessable.
Holders of the Company's Fixed Income shares and Dollar shares
will vote in the aggregate and not by class on all matters, except where
otherwise required by law and except that only Dollar shares will be entitled
to vote on matters submitted to a vote of shareholders pertaining to the Fund's
arrangements with Service Organizations. Further, shareholders of all of the
Company's portfolios will vote in the aggregate and not by portfolio except as
otherwise required by law or when the Board
-21-
<PAGE> 22
of Trustees determines that the matter to be voted upon affects only the
interests of the shareholders of a particular portfolio. (See the Statement of
Additional Information under "Additional Description Concerning Fund Shares"
for examples where the 1940 Act requires voting by portfolio.) Shareholders of
the Company are entitled to one vote for each full share held (irrespective of
class or portfolio) and fractional votes for fractional shares held. Voting
rights are not cumulative and, accordingly, the holders of more than 50% of the
aggregate shares of the Company may elect all of the trustees. On September
30, 1994, Cohahco First National Bank of SW Ohio held of record approximately
25% of the Fund's outstanding shares.
For information concerning the redemption of Fund shares and
possible restrictions on their transferability, see "Purchase and Redemption of
Shares."
As stated above, the Company is organized as a trust under the
laws of the Commonwealth of Massachusetts. Shareholders of such a trust may,
under certain circumstances, be held personally liable (as if they were
partners) for the obligations of the trust. The Company's Declaration of Trust
provides for indemnification out of the trust property of any shareholder of
the Fund held personally liable solely by reason of being or having been a
shareholder and not because of any acts or omissions or some other reason.
-22-
<PAGE> 23
<TABLE>
<S> <C>
No person has been authorized to give any
information or to make any representations not FIXED
contained in this Prospectus, or in the Fund's INCOME FUND
Statement of Additional Information incorporated
herein by reference, in connection with the
offering made by this Prospectus and, if given or
made, such information or representations must not
be relied upon as having been authorized by the An Investment Portfolio
Company or its distributor. This Prospectus does Offered by
not constitute an offering by the Company or by Portfolios for
the distributor in any jurisdiction in which such Diversified Investment
offering may not lawfully be made.
--------------------
TABLE OF CONTENTS
Page
----
Background and Expense
Information . . . . . . . . . . . . . 2
Financial Highlights . . . . . . . . . . 4 PROVIDENT
Investment Objective
and Policies . . . . . . . . . . . . 5 INSTITUTIONAL
Purchase and Redemption FUNDS
of Shares . . . . . . . . . . . . . . 10
Management of the
Fund . . . . . . . . . . . . . . . . 13
Dividends and
Distributions . . . . . . . . . . . . 18
Taxes . . . . . . . . . . . . . . . . . . 19
Description of Shares
and Miscellaneous . . . . . . . . . . 21
Prospectus
October 28, 1994
</TABLE>
-23-
<PAGE> 24
FIXED INCOME FUND
An Investment Portfolio Offered By
Portfolios for Diversified Investment
Statement of Additional Information
October 28, 1994
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Investment Objective and Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Additional Purchase and Redemption Information . . . . . . . . . . . . . . . . . . . . . . . . . 8
Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Additional Information Concerning Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Additional Information on Performance Calculations . . . . . . . . . . . . . . . . . . . . . . . 21
Additional Description Concerning Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FS-1
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
</TABLE>
This Statement of Additional Information is meant to be read
in conjunction with the Prospectus for Fixed Income Fund dated October 28,
1994. This Statement of Additional Information is incorporated by reference in
its entirety into that Prospectus. Because this Statement of Additional
Information is not itself a prospectus, no investment in shares of Fixed Income
Fund should be made solely upon the information contained herein. Copies of
the Prospectus for Fixed Income Fund may be obtained by calling 800-821-7432.
Capitalized terms used but not defined herein have the same meanings as in the
Prospectus.
<PAGE> 25
THE COMPANY
Portfolios for Diversified Investment (the "Company") is a
no-load, diversified, open-end investment company originally incorporated in
Maryland on January 18, 1984 under the name Diversified Investment Fund for
Institutions, Inc. On April 12, 1984 the Company's predecessor corporation
changed its name to Diversified Investment Fund, Inc.; on June 15, 1984 the
Company changed its name to Diversified Securities Funds, Inc.; on September
28, 1984 the Company changed its name to Portfolios for Diversified Investment,
Inc., and on October 31, 1985 the Company reorganized into a Massachusetts
business trust named Portfolios for Diversified Investment.
The Company is currently offering one investment portfolio --
Fixed Income Fund (the "Fund").
THIS STATEMENT OF ADDITIONAL INFORMATION AND THE FUND'S
PROSPECTUS RELATE PRIMARILY TO THE FIXED INCOME FUND AND DESCRIBE ONLY THE
INVESTMENT OBJECTIVE AND POLICIES, OPERATIONS, CONTRACTS, AND OTHER MATTERS
RELATING TO THAT FUND.
INVESTMENT OBJECTIVE AND POLICIES
As stated in the Fund's Prospectus, the investment objective
of the Fund is to seek a high level of current income consistent with prudent
investment risk. The following policies supplement the description of the
Fund's investment objective and policies as contained in its Prospectus.
PORTFOLIO TRANSACTIONS
Subject to the general control of the Company's Board of
Trustees, PIMC, the Fund's investment adviser, is responsible for, makes
decisions with respect to and places orders for all purchases and sales of
portfolio securities for the Fund. PIMC purchases portfolio securities for the
Fund from dealers who specialize in fixed-income securities. Purchases and
sales of portfolio securities are usually principal transactions without
brokerage commissions. In making portfolio investments, PIMC seeks to obtain
the best net price and the most favorable execution of orders. To the extent
that the execution and price offered by more than one dealer are comparable,
PIMC may, in its discretion, effect transactions in portfolio securities with
dealers who provide the Company with research advice or other services.
Research advice and other services furnished by brokers through whom the Fund
effects securities transactions may be used by PIMC in servicing accounts in
addition to the Fund, and not all such services will necessarily benefit the
Fund. For the fiscal years ended June 30, 1992, 1993 and 1994, the Fund paid
no brokerage commissions. As of June 30, 1994, the Fund did
-2-
<PAGE> 26
not hold any debt securities which were issued by an entity associated with one
of the Fund's regular broker-dealers.
Transactions in the over-the-counter market are generally
principal transactions with dealers, and the costs of such transactions involve
dealer spreads rather than brokerage commissions. With respect to
over-the-counter transactions, the Fund, where possible, will deal directly
with the dealers who make a market in the securities involved except in those
circumstances where better prices and execution are available elsewhere.
In selecting securities for the Fund, PIMC will perform its
own credit analysis of each issuer and issue, in addition to relying on ratings
assigned by recognized rating services (Moody's Investors Service and Standard
& Poor's Corporation). Ratings are indications of investment quality, but do
not reflect the fine shadings of risks among the various securities.
Therefore, two securities identically rated are unlikely to be precisely the
same in investment quality. PIMC's credit analysis is intended to identify
those securities within a credit rating which represent improving financial
situations and therefore represent less risk. Interest rate trends and
specific developments which may affect individual issuers are also analyzed.
Investment decisions for the Fund are made independently from
those other investment company portfolios or accounts advised or managed by
PIMC. Such other portfolios may invest in the same securities as the Fund.
When purchases or sales of the same security are made at substantially the same
time on behalf of such other portfolios, transactions are averaged as to price,
and available investments allocated as to amount, in a manner which PIMC
believes to be equitable to each portfolio, including the Fund. In some
instances, this investment procedure may adversely affect the price paid or
received by the Fund or the size of the position obtained for the Fund. To the
extent permitted by law, PIMC may aggregate the securities to be sold or
purchased for the Fund with those to be sold or purchased for such other
investment company portfolios in order to obtain best execution.
The Fund will not execute portfolio transactions through or
acquire portfolio securities issued by PIMC, PNC Bank, National Association
("PNC Bank"), PFPC Inc. ("PFPC"), Provident Distributors, Inc. ("PDI") or any
affiliated person (as such term is defined in the 1940 Act) of them except to
the extent permitted by the SEC. In addition, with respect to such
transactions, securities and deposits, the Fund will not give preference to
Service Organizations with whom the Fund enters into agreements concerning the
provision of support services to customers who beneficially own Fixed Income
Dollar shares
-3-
<PAGE> 27
("Dollar shares"). (See the Prospectus, "Management of the Fund -- Service
Organizations.")
The Fund does not intend to seek profits through short-term
trading, but, when circumstances warrant, securities held by the Fund may be
sold without regard to the length of time held. The annual portfolio turnover
rates for the Fund for the fiscal years ended June 30, 1992, 1993 and 1994 were
94%, 103%, and 85%, respectively. Higher portfolio turnover rates would result
in correspondingly higher transaction costs, which would be borne by the Fund
and ultimately by its shareholders.
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS
Attached to this Statement of Additional Information is a
description of the rating symbols used by Standard & Poor's Corporation and
Moody's Investors Service for corporate and municipal obligations and
commercial paper that may be purchased by the Fund.
Examples of the types of U.S. Government obligations that may
be held by the Fund include in addition to U.S. Treasury Bills, Treasury Notes
and Treasury Bonds, the obligations of the Federal Housing Administration,
Farmers Home Administration, Export-Import Bank of the United States, Small
Business Administration, Government National Mortgage Association, Federal
National Mortgage Association, Federal Financing Bank, General Services
Administration, Student Loan Marketing Association, Central Bank for
Cooperatives, Federal Home Loan Banks, Federal Home Loan Mortgage Corporation,
Federal Intermediate Credit Banks, Federal Land Banks, Federal Farm Credit
Banks, Maritime Administration, Tennessee Valley Authority, Washington D.C.
Armory Board and International Bank for Reconstruction and Development.
Repurchase Agreements. The repurchase price under the
repurchase agreements described in the Fund's Prospectus generally equals the
price paid by the Fund plus interest negotiated on the basis of current
short-term rates (which may be more or less than the rate on the securities
underlying the repurchase agreement). Securities subject to repurchase
agreements will be held by the Fund's custodian in the Federal Reserve/Treasury
book-entry system or by another authorized securities depository. Repurchase
agreements are considered to be loans by the Fund under the 1940 Act.
Reverse Repurchase Agreements. Whenever the Fund enters into
reverse repurchase agreements as described in its Prospectus, it will place in
a segregated custodial account liquid assets having a value equal to the
repurchase price (including accrued interest) and will subsequently monitor the
account to ensure such equivalent value is maintained. Reverse
-4-
<PAGE> 28
repurchase agreements are considered to be borrowings by the Fund involved
under the 1940 Act.
Variable Rate Demand Notes. For purposes of determining
whether or not a variable rate demand note complies with the maturity
restriction on instruments purchased for the Fund, such a note will be deemed
to have a maturity equal to the longer of the period remaining until the next
readjustment of the interest rate or the period remaining until the principal
amount can be recovered through demand.
When-Issued Securities. As stated in the Fund's Prospectus,
the Fund may purchase securities on a "when-issued" basis (i.e., for delivery
beyond the normal settlement date at a stated price and yield). When the Fund
agrees to purchase when- issued securities, its custodian will set aside cash
or liquid portfolio securities equal to the amount of the commitment in a
separate account. Normally, the custodian will set aside portfolio securities
to satisfy a purchase commitment, and in such a case the Fund may be required
subsequently to place additional assets in the separate account in order to
ensure that the value of the account remains equal to the amount of the Fund's
commitment. It may be expected that the Fund's net assets will fluctuate to a
greater degree when it sets aside portfolio securities to cover such purchase
commitments than when it sets aside cash. Because the Fund will set aside cash
or liquid assets to satisfy its purchase commitments in the manner described,
the Fund's liquidity and ability to manage its portfolio might be affected in
the event its commitments to purchase when-issued securities ever exceeded 25%
of the value of its assets. The Fund does not intend to purchase when-issued
securities for speculative purposes but only in furtherance of its investment
objective. The Fund reserves the right to sell the securities before the
settlement date if it is deemed advisable.
When the Fund engages in when-issued transactions, it relies
on the seller to consummate the trade. Failure of the seller to do so may
result in the Fund's incurring a loss or missing an opportunity to obtain a
price considered to be advantageous.
Illiquid Securities. The Fund may not knowingly invest more
than 10% of its total assets in illiquid securities. Securities that have a
maturity of longer than seven days or legal or contractual restrictions on
resale but have a readily available market are not considered illiquid for
purposes of this limitation. The Fund's investment adviser will monitor the
liquidity of such securities under the supervision of the Board of Trustees.
Repurchase agreements subject to demand are deemed to have a maturity equal to
the notice period.
-5-
<PAGE> 29
The SEC has adopted Rule 144A under the Securities Act of 1933
(the "1933 Act") which allows for a broader institutional trading market for
securities otherwise subject to restriction on resale to the general public.
Rule 144A establishes a "safe harbor" from the registration requirements of the
1933 Act for resales of certain securities to qualified institutional buyers.
The investment adviser anticipates that the market for certain restricted
securities such as institutional commercial paper will expand further as a
result of this regulation and the development of automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National
Association of Securities Dealers.
The Fund's investment adviser will monitor the liquidity of
restricted securities in the Fund under the supervision of the Board of
Trustees. In reaching liquidity decisions, the investment advisor will
consider, inter alia, the following factors: (1) the unregistered nature of a
Rule 144A security; (2) the frequency of trades and quotes for the Rule 144A
security; (3) the number of dealers wishing to purchase or sell the Rule 144A
security and the number of other potential purchasers; (4) dealer undertakings
to make a market in the Rule 144A security; (5) the trading markets for the
Rule 144A security; and (6) the nature of the Rule 144A security and the nature
of the marketplace trades (including, the time needed to dispose of the Rule
144A security, the methods of soliciting offers and the mechanics of the
transfer).
INVESTMENT LIMITATIONS
The Prospectus for the Fund summarizes certain investment
limitations that may not be changed without the affirmative vote of the holders
of a "majority of the outstanding shares" of the Fund (as defined below under
"Miscellaneous"). Below is a complete list of the investment limitations that
may not be changed without such a vote of shareholders.
The Fund may not:
1. Invest in the securities of any one issuer (other
than securities issued or guaranteed by the United States or its agencies or
instrumentalities), if immediately after and as a result of such investment
more than 5% of the value of the Fund's total assets would be invested in the
securities of such issuer or more than 10% of the outstanding securities, or
more than 10% of the outstanding voting securities, of such issuer would be
owned by the Fund, except that up to 25% of the value of the Fund's total
assets may be invested without regard to such limitations to the extent
permitted by the securities laws of the states in which the Fund's shares are
offered for sale.
-6-
<PAGE> 30
2. Purchase any securities which would cause 25% or more
of the value of its total assets at the time of such purchase to be invested in
the securities of one or more issuers conducting their principal business
activities in the same industry, provided that there is no limitation with
respect to investments in U.S. Treasury Bills or other obligations issued or
guaranteed by the U.S. Government, its agencies and instrumentalities.
3. Make investments for the purpose of exercising
control or management.
4. Invest in securities of other investment companies,
except as they may be acquired as part of a merger, consolidation or
acquisition of assets and except to the extent permitted by Section 12 of the
1940 Act (currently, up to 5% of the value of the Fund's total assets and not
more than 3% of the total outstanding voting stock with respect to one
investment company, and up to 10% of the value of the Fund's total assets with
respect to all investment companies).
5. Purchase or sell real estate, provided that the Fund
may invest in securities secured by real estate or interests therein or issued
by companies or investment trusts which invest in real estate or interests
therein.
6. Purchase or sell commodities or commodity contracts,
or invest in oil, gas or mineral exploration or development programs.
7. Write or sell puts, calls or combinations thereof.
8. Borrow money, except from banks for temporary
purposes and then in amounts not in excess of 10% of the value of the Fund's
total assets at the time of such borrowing; or mortgage, pledge or hypothecate
any assets except in connection with any such borrowing and in amounts not in
excess of the lesser of the dollar amounts borrowed or 10% of the value of the
Fund's total assets at the time of such borrowing; or purchase portfolio
securities while borrowings in excess of 5% of the Fund's net assets are
outstanding.
9. Make loans, except that the Fund may purchase or hold
debt instruments in accordance with its investment objective and policies,
including, without limitation, repurchase agreements.
10. Sell securities short or purchase any securities on
margin, except that the Fund may obtain such short-term credit as may be
necessary for the clearance of purchases and sales of portfolio shares.
-7-
<PAGE> 31
11. Act as an underwriter of securities, except insofar
as the Fund may be deemed an underwriter under the 1933 Act in selling its
securities.
In order to permit the sale of shares of the Fund in certain
states, the Fund may make commitments more restrictive than the investment
policies and limitations above. Should the Fund determine that any such
commitment is no longer in its best interests, it will revoke the commitment by
terminating sales of its shares in the state involved.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
IN GENERAL
Information on how to purchase and redeem the Fund's shares is
included in its Prospectus. The issuance of the Fund's shares is recorded on
the books of the Fund, and share certificates are not issued unless expressly
requested in writing. Certificates are not issued for fractional shares.
The regulations of the Comptroller of the Currency provide
that funds held in a fiduciary capacity by a national bank approved by the
Comptroller to exercise fiduciary powers must be invested in accordance with
the instrument establishing the fiduciary relationship and local law. The
Company believes that the purchase of Fixed Income shares by such national
banks acting on behalf of their fiduciary accounts is not contrary to
applicable regulations if consistent with the particular account and proper
under the law governing the administration of the account. With respect to
Fixed Income Dollar shares, conflict of interest restrictions may apply to an
institution's receipt of compensation paid by the Fund on fiduciary funds that
are invested in Dollar 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, should consult their legal advisors before investing
fiduciary funds in Dollar shares.
Prior to effecting a redemption of shares represented by
certificates, PFPC, the Fund's transfer agent, must have received such
certificates at its principal office. All such certificates must be endorsed
by the redeeming shareholder or accompanied by a signed stock power, in each
instance with the signature guaranteed by a commercial bank or a member of a
major stock exchange or other eligible guarantor institution, unless other
arrangements satisfactory to the Fund have previously been made. The Fund may
require any additional information reasonably necessary to evidence that a
redemption has been duly authorized.
-8-
<PAGE> 32
Under the 1940 Act, the Fund may suspend the right of
redemption or postpone the date of payment upon redemption for any period
during which the New York Stock Exchange is closed, other than customary
weekend and holiday closings, or during which trading on said Exchange is
restricted, or during which (as determined by the SEC by rule or regulation) an
emergency exists as a result of which disposal or valuation of portfolio
securities is not reasonably practicable, or for such other periods as the SEC
may permit. (The Fund may also suspend or postpone the recordation of the
transfer of its shares upon the occurrence of any of the foregoing conditions.)
In addition, the Fund may redeem shares involuntarily in
certain other circumstances: (a) in connection with the termination of any
class of shares; (b) to reimburse the Company for any loss it has sustained by
reason of the failure of a shareholder to make full payment for shares
purchased by such shareholder; or (c) to collect any charge relating to a
transaction effected for the benefit of a shareholder which is applicable to
such shares.
Any institution purchasing shares on behalf of separate
accounts will be required to hold the shares in a single nominee name (a
"Master Account"). Institutions investing in more than one of the Company's
classes of shares must maintain a separate Master Account for each class or
subclass of shares. Institutions may also arrange with PFPC for certain
sub-accounting services (such as purchase, redemption and dividend record
keeping). Sub-accounts may be established by name or number either when the
Master Account is opened or later.
NET ASSET VALUE
As stated in the Fund's Prospectus, the Fund's net asset value
per share is calculated by adding the value of all portfolio securities and
other assets belonging to the Fund, subtracting the liabilities charged to the
Fund, and dividing the result by the total number of the Fund's shares
outstanding (irrespective of class). "Assets belonging to" the Fund consist of
the consideration received upon the issuance of shares of the Fund together
with all income, earnings, profits and proceeds derived from the investment
thereof, including any proceeds from the sale, exchange or liquidation of such
investments, any funds or payments derived from any reinvestment of such
proceeds, and a portion of any general assets of the Company not belonging to a
particular portfolio. Assets belonging to the Fund are charged with the direct
liabilities of the Fund.
Among the factors that ordinarily will be considered in
valuing portfolio securities are the existence of restrictions upon the sale of
the security by the Fund, the existence and extent of a market for the
security, the extent of any discount
-9-
<PAGE> 33
in acquiring the security, the estimated time during which the security will
not be freely marketable, the expenses of registering or otherwise qualifying
the security for public sale, underwriting commissions if underwriting would be
required to effect a sale, the current yields on comparable securities for debt
obligations traded independently of any equity equivalent, changes in the
financial condition and prospects of the issuer, and any other factors
affecting fair value. In making valuations, opinions of counsel to the issuer
may be relied upon as to whether or not securities are restricted securities
and as to the legal requirements for public sale.
PIMC may use a pricing service to value certain portfolio
securities where the prices provided are believed to reflect the fair market
value of such securities. In valuing the Fund's securities, the pricing
service would normally take into consideration such factors as performance,
risk, quality, maturity, type of issue, trading characteristics, special
circumstances and other factors it deems relevant in determining valuations for
normal institutionalized trading units of debt securities and would not rely
exclusively on quoted prices. The methods used by the pricing service and the
valuations so established will be reviewed by PIMC under the general
supervision of the Company's Board of Trustees. Several pricing services are
available, one or more of which may be used by PIMC at its own expense from
time to time.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The Company's trustees and executive officers, their
addresses, principal occupations during the past 5 years and other affiliations
are as follows:
<TABLE>
<CAPTION>
Principal Occupations
Position with During Past 5 Years and
Name and Address the Company Other Affiliations
- ---------------- ------------- -----------------------
<S> <C> <C>
PHILIP E. COLDWELL(3,4) Trustee Economic Consultant;
3330 Southwestern Boulevard Member of the Board of
Dallas, Texas 75225 Governors of the Federal
Reserve System, 1974 to
1980; President, Federal
Reserve Bank of Dallas,
1968 to 1974; Director,
Maxus Energy Corporation
(energy and chemical
products); Director,
Diamond Shamrock Corp.
(energy products) until
1987.
</TABLE>
-10-
<PAGE> 34
<TABLE>
<CAPTION>
Principal Occupations
Position with During Past 5 Years and
Name and Address the Company Other Affiliations
- ---------------- ------------- -----------------------
<S> <C> <C>
ROBERT R. FORTUNE(2,3,4) Trustee Financial Consultant;
2920 Ritter Lane Retired, Chairman,
Allentown, PA 18104 President and
Chief Executive Officer,
Associated Electric & Gas
Insurance Services,
Limited, July 1984 to
August 1993; Member of the
Financial Executives
Institute and American
Institute of Certified
Public Accountants;
Director, Prudential
Utility Fund, Inc.,
Prudential IncomeVertible
Fund, Inc., and Prudential
Structured Maturity Fund,
Inc.
RODNEY D. JOHNSON(4) Trustee President, Fairmount
Fairmount Capital Capital Advisors, Inc.
Advisors, Inc. (financial advising) since
1435 Walnut Street 1987.
Drexel Building, 3rd Floor
Philadelphia, PA 19102
G. WILLING PEPPER(1,2) Chairman of Retired, Chairman of the
128 Springton Lake Road the Board, Board, The Institute for
Media, PA 19063 President and Cancer Research until
Trustee 1979; Director,
Philadelphia National Bank
until 1978; President,
Scott Paper Company, 1971
to 1973; Chairman of the
Board, Specialty
Composites Corp. until May
1984.
ANTHONY M. SANTOMERO Trustee Deputy Dean, December, 1990
310 Keithwood Road through June 1994, Richard
Wynnewood, PA 19096 K. Mellon Professor of
Finance since April, 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,
</TABLE>
-11-
<PAGE> 35
<TABLE>
<CAPTION>
Principal Occupations
Position with During Past 5 Years and
Name and Address the Company Other Affiliations
- ---------------- ------------- -----------------------
<S> <C> <C>
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.
DAVID R. WILMERDING, JR.(2,3) Vice Chairman President and Chief
Gates, Wilmerding, Carper of the Board Executive Officer, Gates,
& Rawlings, Inc. and Trustee Wilmerding, Carper &
One Aldwyn Center Rawlings, Inc. (successor
Villanova, PA 19085 to Wilmerding & Co., Inc.)
(investment advisers);
Director, Beaver
Management Corporation.
EDWARD J. ROACH Vice President and Certified Public
Bellevue Park Corporate Treasurer Accountant; Partner of the
Center accounting firm of Main
Suite 100 Hurdman until 1981; Vice
400 Bellevue Parkway Chairman of the Board, Fox
Wilmington, DE 19809 Chase Cancer Center;
Trustee Emeritus,
Pennsylvania School for
the Deaf; Trustee
Emeritus, Immaculata
College; President or Vice
President and Treasurer of
various investment
companies advised by PNC
Institutional Management
Corporation.
</TABLE>
-12-
<PAGE> 36
<TABLE>
<CAPTION>
Principal Occupations
Position with During Past 5 Years and
Name and Address the Company Other Affiliations
- ---------------- ------------- -----------------------
<S> <C> <C>
W. BRUCE McCONNEL, III Secretary Partner of the law firm of
Philadelphia National Bank Drinker Biddle & Reath,
Building Philadelphia,
1345 Chestnut Street Pennsylvania.
Philadelphia, PA 19107-3496
</TABLE>
- ----------------------
(1) This trustee is considered by the Company to be an "interested person" of
the Company as defined in the 1940 Act.
(2) Executive Committee Member.
(3) Audit Committee Member.
(4) Nominating Committee Member.
------------------------------
During intervals between meetings of the Board, the Executive
Committee may exercise the authority of the Board of Trustees in the management
of the Company's business to the extent permitted by law.
Each trustee of the Company serves as a director of Temporary
Investment Fund, Inc. ("Temp") and as a trustee of Trust for Federal Securities
("Fed") and of Municipal Fund for Temporary Investment ("Muni") and The PNC
Fund ("PNC"). In addition, Messrs. Fortune, Pepper and Wilmerding are
directors of Independence Square Income Securities, Inc. ("ISIS") and Managing
General Partners of Chestnut Street Exchange Fund ("Chestnut"); Messrs.
Johnson, Santomero and Pepper are directors of Municipal Fund for California
Investors, Inc. ("Cal Muni"); and Mr. Johnson is a director of Municipal Fund
for New York Investors, Inc. ("New York Muni").
Each of the Company's officers, with the exception of Mr.
McConnel, holds like offices with Temp, Fed, Muni and PNC. In addition, Mr.
McConnel is Secretary of Temp and Fed; Mr. Roach is Treasurer of Chestnut,
President and Treasurer of The RBB Fund, Inc., and Vice President and Treasurer
of ISIS, New York Muni and Cal Muni; and Mr. Pepper is President and Chairman
of the Board of Cal Muni. Each of the investment companies named above receives
various advisory and other services from PIMC and PNC Bank. Of the
above-mentioned funds, the distributor provides distribution services to Temp,
Fed, Muni, Cal Muni, New York Muni and PNC. Of the above-mentioned funds, the
administrators provide administrative services to Temp, Fed, Muni, Cal Muni,
New York Muni, and PNC.
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<PAGE> 37
For the Company's fiscal year ended June 30, 1994, the Company
paid a total of $5,561 to its officers and trustees in all capacities, of which
$1,092 was allocated to the Fund. For the same fiscal year, trustees' fees and
officer's salaries of $46,207 were voluntarily waived, of which $0 was
allocated to the Fund. In addition, the Company contributed $546 during its
last fiscal year to its retirement plan for employees (which included Mr.
Roach) of which $103 was allocated to the Fund. Drinker Biddle & Reath, of
which Mr. McConnel is a partner, receives legal fees as counsel to the Company.
No employee of PFPC, PDI, PIMC or PNC Bank receives any compensation from the
Company for acting as an officer or trustee of the Company. The trustees and
officers of the Company as a group beneficially own less than 1% of the shares
of the Fund.
By virtue of the responsibilities assumed by PFPC, PDI, PIMC
and PNC Bank under their respective agreements with the Company, the Company
itself requires only one part-time employee in addition to its officers.
INVESTMENT ADVISER AND SUB-ADVISER
The advisory services provided by PIMC and PNC Bank, as well
as the fees payable to them for such advisory services provided and expenses
assumed, are described in the Fund's Prospectus.
PIMC and the administrators have each agreed that if, in any
fiscal year, the expenses borne by the Fund exceed the applicable expense
limitations imposed by the securities regulations of any state in which shares
of the Fund are registered or qualified for sale to the public, they will each
reimburse the Fund for one-half of any excess to the extent required by such
regulations. Unless otherwise required by law, such reimbursement would be
accrued and paid on the same basis that the advisory and administration fees
are accrued and paid by the Fund. To the Fund's knowledge, of the expense
limitations in effect on the date of this Statement of Additional Information,
none is more restrictive than two and one-half percent (2-1/2%) of the first
$30 million of a Fund's average annual net assets, two percent (2%) of the next
$70 million of the average annual net assets and one and one- half percent
(1-1/2%) of the remaining average annual net assets.
For the fiscal years ended June 30, 1992, 1993, and 1994, PIMC
waived all of the $52,457, $65,250 and $67,284, respectively, in advisory fees
payable to it by the Fund. As of June 30, 1994 PIMC owed the Fund $8,376 for
reimbursed expenses. Fees waived by the contractors are not recoverable.
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<PAGE> 38
BANKING LAWS
Certain banking laws and regulations with respect to
investment companies are discussed in the Fund's Prospectus. PIMC, PFPC and
PNC Bank believe that they may perform the services for the Funds contemplated
by the respective investment advisory, sub-advisory, custodial and shareholder
servicing agreements, Prospectuses and this Statement of Additional Information
without violation of applicable banking laws and regulations. It should be
noted, however, that future changes in legal requirements relating to the
permissible activities of banks and their affiliates, as well as further
interpretations of present requirements, could prevent PIMC and PFPC from
continuing to perform such services for the Fund and PNC Bank from continuing
to perform such services for PIMC and the Fund. If PIMC, PFPC or PNC Bank were
prohibited from continuing to perform such services, it would be expected that
the Company's Board of Trustees would recommend that the Fund enter into new
agreements with other qualified firms. Any new advisory agreements would be
subject to shareholder approval.
ADMINISTRATORS
As the Fund's administrators, PFPC and PDI have agreed to provide the
following services: (i) assist generally in supervising the Fund's operations,
including providing a Wilmington, Delaware order-taking facility with toll-free
IN-WATS telephone lines, providing for the preparing, supervising the mailing
of purchase and redemption order confirmations to shareholders of record,
providing and supervising the operation of an automated data processing system
to process purchase and redemption orders, maintaining a back-up procedure to
reconstruct lost purchase and redemption data, providing information concerning
the Fund to its shareholders of record, handling shareholder problems,
supervising the services of employees, provided by PDI, whose principal
responsibility and function is to preserve and strengthen shareholder relations
and monitoring the arrangements pertaining to the Funds' agreements with
Service Organizations; (ii) assure that persons are available to receive and
transmit purchase and redemption orders; (iii) participate in the periodic
updating of the Fund's Prospectus and Registration Statements; (iv) assist in
maintaining the Fund's Wilmington, Delaware office; (v) perform administrative
services in connection with the Fund's computer access program maintained to
facilitate shareholder access to the Fund; (vi) accumulate information for and
coordinate the preparation of reports to the Fund's shareholders and the SEC;
(vii) maintain the registration or qualification of the Fund's shares for sale
under state securities laws; (viii) review and provide advice with respect to
all sales literature of the Fund; and (ix) assist in the monitoring the
regulatory and legislative developments which may affect the Company,
participate in counseling and assisting the
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<PAGE> 39
Company in relation to routine regulatory examinations and investigations, and
work with the Company's counsel in connection with regulatory matters and
litigation.
The fees payable to the administrators for the administrative
services provided and expenses assumed are described in the Fund's Prospectus.
For the fiscal years ended June 30, 1992, the Fund's former administrator,
Boston Company Advisors, Inc. ("Boston Advisors"), waived all of the $52,457,
in administration fees payable to it by the Fund. For the fiscal years ended
June 30, 1993 and 1994, the administrators waived all of the $65,250 and
$67,284, respectively, in administration fees payable to them by the Fund.
For information regarding the administrators' obligations to
reimburse the Fund in the event its expenses exceed certain prescribed limits,
see "Investment Adviser" above. PFPC, a wholly owned, indirect subsidiary of
PNC Bank, and PDI, provide advisory, administrative and, in some cases,
sub-advisory and/or sub-administrative services to investment companies which
are distributed by PDI.
DISTRIBUTOR
PDI acts as the distributor of the Fund's shares. Shares of the Fund
are sold on a continuous basis by the Distributor as agent, although the
distributor is not obliged to sell any particular amount of shares. The
distributor pays the cost of printing and distributing prospectuses to persons
who are not shareholders of the Fund (excluding preparation and printing
expenses necessary for the continued registration of the Fund's shares) and of
preparing, printing and distributing all sales literature. No compensation is
payable by the Fund to the distributor for its distribution services. PDI is a
Delaware corporation, with its principal place of business located at 259
Radnor-Chester Road, Suite 120, Radnor, Pennsylvania 19087.
CUSTODIAN AND TRANSFER AGENT
Pursuant to a Custodian Agreement, PNC Bank serves as the
Fund's custodian. Under the Agreement, PNC Bank has agreed to provide the
following services: (i) maintain a separate account or accounts in the name of
the Fund; (ii) hold and disburse portfolio securities on account of the Fund;
(iii) collect and make disbursements of money on behalf of the Fund; (iv)
collect and receive all income and other payments and distributions on account
of the Fund's portfolio securities; and (v) make periodic reports to the
Company's Board of Trustees concerning the Fund's operations. PNC Bank may
select one or more banks or trust companies to serve as sub-custodian on behalf
of the Fund, provided that PNC Bank shall remain responsible for the
performance of all its duties under the Custodian Agreement
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<PAGE> 40
and shall hold the Fund harmless from the acts and omissions of any
sub-custodian. The Custodian Agreement permits PNC Bank, on 30 days notice, to
assign its rights and delegate its duties thereunder to any other affiliate of
PNC Bank or PNC Bank Corp. PNC Bank's principal business address is Broad and
Chestnut Streets, Philadelphia, Pennsylvania 19102.
Under the Custodian Agreement, the Fund pays PNC Bank an
annual fee equal to $.25 for each $1,000 of the Fund's average daily gross
assets, which fee declines as the Fund's average daily gross assets increase.
In addition, the Fund pays the custodian a fee for each purchase, sale or
delivery of a security, interest collection or claim item, and reimburses PFPC
for out- of-pocket expenses incurred on behalf of the Fund. For the fiscal
years ended June 30, 1992, 1993 and 1994, the Fund paid fees for custodian
services aggregating $13,408, $11,919 and $12,447, respectively.
PFPC, a wholly owned indirect subsidiary of PNC Bank Corp.,
serves as the Fund's transfer agent, registrar and dividend disbursing agent
pursuant to a Transfer Agency Agreement. Under the Agreement, PFPC has agreed
to provide the following services: (i) maintain a separate account or accounts
in the name of the Fund; (ii) issue, transfer and redeem shares of the Fund;
(iii) disburse dividends and distributions, in the manner described in the
Fund's Declaration of Trust and Prospectus, to shareholders of the Fund; (iv)
mail all communications by the Fund to its shareholders or their authorized
representatives, including reports to shareholders, confirmations of purchases
and sales of Fund shares, monthly statements, distribution and dividend notices
and proxy materials for its meetings of shareholders; (v) prepare and file with
the appropriate taxing authorities reports or notices relating to dividends and
distributions made by the Fund; (vi) respond to correspondence by shareholders,
security brokers and others relating to its duties; (vii) maintain shareholder
accounts; and (viii) make periodic reports to the Company's Board of Trustees
concerning the Fund's operations. The Transfer Agency Agreement permits PFPC,
on 30 days notice, to assign its rights and delegate its duties thereunder to
any other affiliate of PNC Bank or PNC Bank Corp.
Under the Transfer Agency Agreement, the Fund pays PFPC a fee
at an annual rate of $12.00 per account and sub- account maintained by PFPC
plus $1.00 for each purchase or redemption transaction by an account (other
than a purchase transaction made in connection with the automatic reinvestment
of dividends). Payments to PFPC for sub-accounting services provided by others
are limited to the amount which PFPC pays to others for such services. In
addition, the Fund reimburses PFPC for out-of-pocket expenses related to such
services. For the fiscal years ended June 30, 1992, 1993 and 1994, the Fund
paid fees for
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<PAGE> 41
transfer agency services aggregating $0, $4,325 and $5,701, respectively.
SERVICE ORGANIZATIONS
As stated in the Fund's Prospectus, the Fund may enter into
agreements with banks, savings and loan associations and other financial
institutions, including affiliates of PNC Bank Corp. ("Service Organizations"),
requiring them to provide administrative support services to their customers
("Customers") who own shares of the Fund in consideration of the Fund's payment
of .25% (on an annualized basis) of the average daily net asset value of the
outstanding shares of the Fund held by the Service Organizations for the
benefit of Customers. Under Servicing Agreements for the Fund, such services
include: (i) aggregating and processing purchase and redemption requests from
Customers and placing net purchase and redemption orders with the transfer
agent; (ii) providing Customers with a service that invests the assets of their
accounts in Fund shares pursuant to specific or pre- authorized instructions;
(iii) processing distributions from the Fund on behalf of Customers; (iv)
providing information periodically to Customers showing their positions in Fund
shares; (v) arranging for bank wires; (vi) responding to Customer inquiries
relating to the services performed by the Service Organization; (vii) providing
information to the Fund necessary for accounting with respect to Fund shares
owned by Customers; (viii) forwarding shareholder communications from the Fund
(such as proxies, shareholder reports, annual and semiannual financial
statements and distribution and tax notices) to Customers, if required by law;
and (ix) other similar services if requested by the Fund. For the fiscal years
ended June 30, 1992, 1993 and 1994, the Company paid $9,067, $1,064 and $1,340,
respectively, in servicing fees to an affiliate of the Company's investment
adviser (representing 100% of the aggregate servicing fees), pursuant to a
servicing agreement in effect during such period.
EXPENSES
The Fund's expenses include taxes, interest, fees and salaries
of the Company's trustees and officers who are not directors, officers or
employees of the Fund's service contractors, SEC fees, state securities
qualification fees, costs of preparing and printing prospectuses for regulatory
purposes and for distribution to shareholders, advisory and administration
fees, charges of the custodian and of the transfer agent and dividend
disbursing agent, Service Organization fees, certain insurance premiums,
outside auditing and legal expenses, costs of the Fund's computer access
program, costs of shareholder reports and shareholder meetings and any
extraordinary expenses. The Fund also pays for brokerage fees and commissions
(if any) in connection with the purchase and sale of portfolio securities.
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<PAGE> 42
ADDITIONAL INFORMATION CONCERNING TAXES
The following summarizes certain additional tax considerations
generally affecting the Fund and its shareholders that are not described in the
Fund's Prospectus. No attempt is made to present a detailed explanation of the
tax treatment of the Fund or its shareholders or possible legislative changes,
and the discussion here and in the Fund's Prospectus is not intended as a
substitute for careful tax planning. Investors should consult their tax
advisors with specific reference to their own tax situation.
The Fund intends to qualify each year as a regulated
investment company under the Code. In order to so qualify for a taxable year,
the Fund must satisfy the distribution requirement described in the Prospectus,
derive at least 90% of its gross income for the year from certain qualifying
sources, comply with certain diversification requirements and derive less than
30% of its gross income from the sale or other disposition of securities and
certain other investments held for less than three months. Interest (including
original issue discount and accrued market discount) received by the Fund upon
maturity or disposition of a security held for less than three months will not
be treated as gross income derived from the sale or other disposition of such
security within the meaning of this requirement. However, any other income
which is attributable to realized market appreciation will be treated as gross
income from the sale or other disposition of securities for this purpose.
The Fund will designate any distribution of long-term capital
gains as a capital gain dividend in a written notice mailed to shareholders
within 60 days after the close of the Fund's taxable year. Shareholders should
note that, upon the sale or exchange of Fund shares, if the shareholder has not
held such shares for more than six months, any loss on the sale or exchange of
those shares will be treated as long-term capital loss to the extent of the
capital gain dividends received with respect to the shares. Prior to
purchasing shares of the Fund, the impact of distributions which are expected
to be announced or have been announced, but not paid, should be carefully
considered. Any distribution paid to an investor who purchases shares just
prior to the record date will have the effect of reducing the per share net
asset value of the investor's shares by the per share amount of the
distribution. All or a portion of such distributions, although in effect a
return of capital, may be subject to tax.
Ordinary income of individuals is taxable at a maximum nominal
rate of 39.6%, but because of limitations on itemized deductions otherwise
allowable and the phase-out of personal exemptions, the maximum effective
marginal rate of tax for some taxpayers may be higher. An individual's
long-term capital gains
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<PAGE> 43
are taxable at a maximum rate of 28%. For corporations, long-term capital
gains and ordinary income are both taxable at a maximum nominal rate of 35% (or
at a maximum effective marginal rate of 39% in the case of corporations having
taxable income between $100,000 and $335,000).
A 4% nondeductible excise tax is imposed on regulated
investment companies that fail to currently distribute an amount equal to
specified percentages of their ordinary taxable income and capital gain net
income (excess of capital gains over capital losses). The Fund intends to make
sufficient distributions or deemed distributions of its ordinary taxable income
and any capital gain net income each calendar year to avoid liability for this
excise tax.
If for any taxable year the Fund does not qualify for tax
treatment as a regulated investment company, all of its taxable income will be
subject to federal income tax at regular corporate rates without any deduction
for distributions to Fund shareholders. In such event, dividend distributions
to shareholders would be taxable as ordinary income to the extent of the Fund's
current and accumulated earnings and profits and would be eligible for the
dividends received deduction in the case of corporate shareholders.
The Fund will be required in certain cases to withhold and
remit to the United States Treasury 31% of taxable dividends or 31% of gross
proceeds realized upon sale paid to any shareholder which has failed to provide
either a correct tax identification number in the manner required, which is
subject to withholding by the Internal Revenue Service for failure to properly
include on its return payments of taxable interest or dividends, or which has
failed to certify to the Fund that it is not subject to backup withholding when
required or that it is an "exempt recipient."
Depending upon the extent of the Fund's activities in states
and localities in which its offices are maintained, in which its agents or
independent contractors are located or in which they are otherwise deemed to be
conducting business, the Fund may be subject to the tax laws of such states or
localities. In addition, in those states and localities which have income tax
laws, the treatment of the Fund and its shareholders under such laws may differ
from their treatment under federal income tax laws. Shareholders are advised
to consult their tax advisors concerning the application of state and local
taxes.
The foregoing discussion is based on federal tax laws and
regulations which are in effect on the date of this filing; such laws and
regulations may be changed by legislative or administrative action.
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<PAGE> 44
DIVIDENDS
GENERAL
Net income for dividend purposes consists of (i) interest
accrued and original issue discount earned on the Fund's assets, (ii) plus the
amortization of market discount and minus the amortization of market premium on
such assets, (iii) less accrued expenses attributable to the Fund and the
general expenses (e.g. legal, accounting and trustees' fees) of the Company.
In addition, Dollar shares bear exclusively the expense of fees paid to Service
Organizations. See "Management of the Funds -- Service Organizations."
ADDITIONAL INFORMATION ON PERFORMANCE CALCULATIONS
From time to time, the yield and total return of the Fund may
be quoted in advertisements, shareholder reports or other communications to
shareholders.
Yield Calculations. The yield of the Fund is calculated by
dividing the net investment income per share (as described below) earned by the
Fund during a 30-day (or one month) period by the net asset value per share on
the last day of the period and annualizing the result on a semiannual basis by
adding one to the quotient, raising the sum to the power of six, subtracting
one from the result and then doubling the difference. The Fund's net
investment income per share earned during the period is based on the average
daily number of shares outstanding during the period entitled to receive
dividends and includes dividends and interest earned during the period minus
expenses accrued for the period, net of reimbursements. This calculation can
be expressed as follows:
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 waivers
and reimbursements).
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends.
d = net asset value per share on the last day
of the period.
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<PAGE> 45
For the purpose of determining net investment income earned
during the period (variable "a" in the formula), dividend income on equity
securities held by the Fund is recognized by accruing 1/360 of the stated
dividend rate of the security each day that the security is in the Fund.
Interest earned on any debt obligations held by the Fund is calculated by
computing the yield to maturity of each obligation held by the Fund 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 Fund. 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. The
amortization schedule will be adjusted monthly to reflect changes in the market
values of such debt obligations.
Undeclared earned income will be subtracted from the net asset
value 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 as a
dividend shortly thereafter. Based on the foregoing calculations, the yields
of Fixed Income shares and Fixed Income Dollar shares for the month ended June
30, 1994 were 6.25% and 6%, respectively. Fee waivers and/or expense
reimbursements were in effect for the periods presented.
Total Return Calculations. The Fund computes its average
annual total return by determining the average annual compounded rate of return
during specified periods that equate the initial amount invested to the ending
redeemable value of such investment. This is done by dividing the ending
redeemable value of a hypothetical $1,000 initial payment by $1,000 and raising
the quotient to a power equal to one divided by the number of years (or
fractional portion thereof) covered by the computation and subtracting one from
the result. This calculation can be expressed as follows:
ERV (1/n)
T = [(-----) - 1]
P
Where: T = average annual total return.
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<PAGE> 46
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 = covered by the computation, expressed in terms
of years.
The aggregate total returns are computed by determining the
aggregate compounded rates of return during specified periods that likewise
equate the initial amount invested to the ending redeemable value of such
investment. The formula for calculating aggregate total return is as follows:
ERV
Aggregate Total Return = [(-----) - 1]
P
The calculations of average annual total return and aggregate
total return assume the reinvestment of all dividends and capital gain
distributions on the reinvestment dates during the period. The ending
redeemable value (variable "ERV" in each formula) is determined by assuming
complete redemption of the hypothetical investment and the deduction of all
nonrecurring charges at the end of the period covered by the computations.
PERFORMANCE WILL FLUCTUATE, AND ANY QUOTATIONS OF PERFORMANCE
DATA SHOULD NOT BE CONSIDERED REPRESENTATIVE OF THE FUTURE PERFORMANCE OF THE
FUND. Since performance will fluctuate, performance data for the Fund should
not be used to compare an investment in the Fund's shares with bank deposits,
savings accounts and similar investment alternatives which often provide an
agreed or guaranteed fixed yield for a stated period of time. Shareholders
should remember that performance is generally a function of the kind and
quality of the instruments held in a portfolio, portfolio maturity, operating
expenses net of waivers and expense reimbursements, and market conditions.
Based on the foregoing calculations, the average annual total
returns for Fixed Income shares for the year ended June 30, 1994 and for the
period from December 16, 1986 (commencement of operations) to June 30, 1994
were (1.54%) and 7.33%, respectively. The aggregate total returns for Fixed
Income shares for the same periods were (1.54%) and 70.58%, respectively. The
annualized average annual total return for Fixed Income Dollar shares for the
year ended June 30, 1994 was (1.79%). The annualized aggregate total return
for Fixed Income Dollar shares for the same period was (1.79%). Fee waivers
and/or expense reimbursements were in effect for the periods presented.
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<PAGE> 47
ADDITIONAL DESCRIPTION CONCERNING SHARES
The Company does not presently intend to hold annual meetings
of shareholders except as required by the 1940 Act or other applicable law.
The law under certain circumstances provides shareholders with the right to
call for a meeting of shareholders to consider the removal of one or more
trustees. To the extent required by law, the Company will assist in
shareholder communication in such matters.
As stated in the Fund's Prospectus, holders of the Company's
non-Dollar and Dollar shares of the Fund will vote in the aggregate and not by
class on all matters, except where otherwise required by law and except that
only Dollar shares will be entitled to vote on matters submitted to a vote of
shareholders pertaining to the Fund's arrangements with Service Organizations.
(See "Management of the Fund -- Service Organizations.") Rule 18f-2 under the
1940 Act provides that any matter required to be submitted by the provisions of
such Act or applicable state law, or otherwise, to the holders of the
outstanding securities of an investment company such as the Company shall not
be deemed to have been effectively acted upon unless approved by the holders of
a majority of the outstanding shares of the portfolio affected by the matter.
Rule 18f-2 further provides that a portfolio shall be deemed to be affected by
a matter unless it is clear that the interests of each portfolio in the matter
are identical or that the matter does not affect any interest of the portfolio.
Under the Rule, the approval of an investment advisory agreement or any change
in a fundamental investment policy would be effectively acted upon with respect
to a portfolio only if approved by the holders of a majority of the outstanding
voting securities of such portfolio.
COUNSEL
Drinker Biddle & Reath, Philadelphia National Bank Building,
1345 Chestnut Street, Philadelphia, Pennsylvania 19107-3496, of which W. Bruce
McConnel, III, Secretary of the Company, is a partner, serves as counsel to the
Company and will pass upon the legality of the shares offered hereby.
AUDITORS
Coopers & Lybrand L.L.P., independent accountants, with
principal offices at 2400 Eleven Penn Center, Philadelphia, Pennsylvania 19103
serve as auditors of the Company. The financial statements for the year ended
June 30, 1994 which appear in this Statement of Additional Information have
been audited by Coopers & Lybrand L.L.P. whose report thereon appears
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<PAGE> 48
elsewhere herein, and have been included herein in reliance upon the report of
such firm of accountants given upon their authority as experts in accounting
and auditing.
MISCELLANEOUS
SHAREHOLDER VOTE
As used in this Statement of Additional Information and the
Fund's Prospectus, a "majority of the outstanding shares" of the Fund or of any
other portfolio means the lesser of (1) 67% of the shares of the Fund
(irrespective of class) or of the portfolio represented at a meeting at which
the holders of more than 50% of the outstanding shares of the Fund or the
portfolio are present in person or by proxy, or (2) more than 50% of the
outstanding shares of the Fund (irrespective of class) or of the portfolio.
CERTAIN RECORD HOLDERS
On September 30, 1994, Cohahco First National Bank of SW Ohio,
Third and High Streets, Hamilton, Ohio 45011 owned of record 25% of the
outstanding shares of Fixed Income Fund. The Company does not know whether
Cohahco First National Bank is the beneficial owner of the shares held by it.
SHAREHOLDER AND TRUSTEE LIABILITY
The Company is a trust of the type commonly known as a
"business trust" and is governed by the laws of the Commonwealth of
Massachusetts. Shareholders of such a trust may, under certain circumstances,
be held personally liable (as if they were partners) for the obligations of the
trust. The Declaration of Trust of the Company provides that shareholders
shall not be subject to any personal liability for the acts or obligations of
the Company and that every note, bond, contract, order or other undertaking
made by the Company shall contain a provision to the effect that the
shareholders are not personally liable thereunder. The Declaration of Trust
provides for indemnification out of the trust property of any shareholder held
personally liable solely by reason of being or having been a shareholder and
not because of acts or omissions or some other reason. The Declaration of
Trust also provides that the Company shall, upon request, assume the defense of
any claim made against any shareholder for any act or obligation of the Company
and satisfy any judgment thereon. Thus, the risk of a shareholder's incurring
financial loss beyond its investment on account of shareholder liability is
limited to circumstances in which the Company itself would be unable to meet
its obligations.
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<PAGE> 49
The Company's Declaration of Trust provides further that no
trustee, officer or agent of the Company shall be personally liable for or on
account of any contract, debt, tort, claim, damage, judgment or decree arising
out of or connected with the administration of preservation of the trust estate
or the conduct of any business of the Company, nor shall any trustee be
personally liable to any person for any action or failure to act except by
reason of bad faith, willful misfeasance, gross negligence in the performance
of any duties or by reason of reckless disregard of obligations and duties as
trustee. It also provides that all persons having any claim against the
trustees or the Company shall look solely to the trust property for payment.
With the exceptions stated, the Declaration of Trust provides that a trustee is
entitled to be indemnified against all liabilities and expenses reasonably
incurred in connection with the defense or disposition of any proceeding in
which the trustee may be involved or with which the trustee may be threatened
by reason of being or having been a trustee, and that the trustees have the
power, but not the duty, to indemnify officers and employees of the Company
unless such person would not be entitled to indemnification had he or she been
a trustee.
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<PAGE> 50
[LETTERHEAD]
PORTFOLIOS FOR DIVERSIFIED INVESTMENT
G. Willing Pepper
Chairman August 15, 1994
Dear Shareholder:
We are pleased to present the Annual Report to Shareholders of
Portfolios for Diversified Investment, which includes the Fixed Income Fund,
for the year ended June 30, 1994.
Since February 1994, the Federal Reserve Board has continued its
pressure on interest rates, creating negative investor sentiment and extreme
market volatility. The Fed tightenings were designed to slow the economy to a
more sustainable growth rate, with an acceptable level of inflation. However,
broad market pessimism has contributed to diminished investor enthusiasm in the
fixed income markets.
During this particularly volatile environment, we have continued to
provide our shareholders with quality service and have attempted to maintain
competitive investment returns. Our commitment to credit quality will endure
as a primary ingredient in our investment strategy and policies.
If you have any questions regarding the Fixed Income Fund, or would
like information about the broad range of high quality Money Market, Fixed
Income and Equity Funds offered to investors by the Provident Institutional
Funds, please contact your Provident Distributors, Inc. account representative
or our Client Service Center at (800) 821-7432.
We appreciate your participation in the Provident Institutional Funds,
and we welcome further opportunities to serve your investment needs.
Sincerely,
/s/ G. WILLING PEPPER
---------------------
G. Willing Pepper
Chairman
FS-1
<PAGE> 51
Fixed Income Fund
ANNUAL INVESTMENT ADVISER'S REPORT
The Fund's fiscal year ended with the economy continuing on its
improving trend with GDP remaining above 3% throughout the first half of 1994
(3.3% first quarter and 3.7% second quarter). Strong economic growth in the
fourth quarter of 1993 (6.3% GDP), and the anticipation of future inflation
caused the Federal Reserve to increase the Fed funds rate by 25 basis points on
February 4th. The Federal Reserve again increased the Fed funds rate by 25
basis points on March 22nd and 50 basis points on May 17th due to continued
signs of strength in the economy. Throughout the first half of 1994, the
foreign exchange markets played an increasingly important role in the bond
market with the significant decline in the value of the U.S. Dollar versus the
Japanese Yen and German Mark. This movement caused foreign investors to reduce
investments in dollar denominated securities.
During the past year the bond market experienced an increase in
volatility as the economy and inflation expectations shifted from positive to
negative influences. The slow economy and low inflation figures caused the
Treasury long bond yield to fall to 5.75% in mid-October before rising to 7.61%
at the end of June. The yield on the ten year Treasury increased from 5.17% to
7.32% over the same period. In this environment, the yield curve from 3 month
bills to the 30 year bond shifted from 364 basis points in early July to 272
basis points in mid-October before widening to 339 basis points at the end of
June. The corporate bond market performed well before the first increase in
the Fed funds rate despite the volatility in Treasury market, with spreads
narrowing across the board. Between mid-February and the end of June,
corporates underperformed Treasuries due to rising concerns about credit risk
and scheduled in depth reviews of industries by the rating agencies.
Mortgage-backed securities underperformed Treasuries throughout the year. That
sector's underperformance during the second half of 1993 was attributable to
rapid prepayments which shortened durations; underperformance in the first half
of 1994 was caused by the slowing of prepayments which lengthened durations.
The Fixed Income Fund maintained a heavy concentration in intermediate
corporate securities which negatively impacted its performance over the past
year. The Fund's total return for the last twelve months was -1.54% compared
to the Lipper Intermediate Investment Grade average return of -1.44% and the
Lehman Aggregate Index of -1.30%.*
PNC Institutional Management Corporation
August 10, 1994
- -------------
* This performance data reflects all fee waivers in effect, and represents past
performance. Past performance is not necessarily indicative of future results.
The investment return and principal value of an investment will fluctuate so
that an investor's shares, when redeemed, may be worth more or less than their
original cost.
FS-2
<PAGE> 52
================================================================================
PORTFOLIOS FOR DIVERSIFIED INVESTMENT
FIXED INCOME FUND -- FIXED INCOME SHARES
JUNE 30, 1994 (UNAUDITED)
================================================================================
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN FIXED INCOME SHARES AND
THE LEHMAN INTERMEDIATE GOVERNMENT/CORPORATE INDEX
From inception (1/01/87) and at each fiscal year end
- ---------------------------------
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------
FROM
1 YEAR 5 YEARS INCEPTION
- ---------------------------------
(1.54%) 7.96% 7.33%
- ---------------------------------
Lehman
Fixed Intermed.
Year Income Index
1/01/87 $10,000 $10,000
1987 $9,787 $10,114
1988 $10,351 $10,703
1989 $11,568 $12,026
1990 $12,270 $12,881
1991 $13,428 $14,198
1992 $15,322 $16,210
1993 $17,239 $18,342
1994 $17,058 $18,074
FS-3
<PAGE> 53
================================================================================
PORTFOLIOS FOR DIVERSIFIED INVESTMENT
FIXED INCOME FUND -- FIXED INCOME DOLLAR SHARES
JUNE 30, 1994 (UNAUDITED)
================================================================================
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN FIXED INCOME DOLLAR
SHARES AND THE LEHMAN INTERMEDIATE GOVERNMENT/CORPORATE INDEX
From inception (1/01/89) and at each fiscal year end
- ---------------------------------
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------
FROM
1 YEAR 5 YEARS INCEPTION
- ---------------------------------
(1.79%) 7.71% 7.08%
- ---------------------------------
Fixed Lehman
Income Intermed.
Year Dollar Index
1/01/89 $10,000 $10,000
1989 $11,009 $10,925
1990 $11,648 $11,702
1991 $12,712 $12,898
1992 $14,459 $14,726
1993 $16,214 $16,663
1994 $15,924 $16,418
FS-4
<PAGE> 54
FIXED INCOME FUND
PORTFOLIOS FOR DIVERSIFIED INVESTMENT
Statement of Net Assets
June 30, 1994
<TABLE>
<CAPTION>
Par
Maturity (000) Value
-------- ------ -------
<S> <C> <C> <C>
UNITED STATES TREASURY AND AGENCY
OBLIGATIONS - 61.6%
FEDERAL FARM CREDIT BANK - 3.1%
5.85%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 04/29/96 $ 1,000 $ 994,270
----------
FEDERAL HOME LOAN BANK
NOTES - 15.7%
5.07%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 05/17/96 1,000 1,000,000
5.45%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 01/25/95 1,000 1,000,780
5.70%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 05/26/95 1,000 1,000,630
5.15%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 03/22/99 500 498,515
7.04%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 05/24/99 1,500 1,493,730
----------
4,993,655
----------
FEDERAL HOME LOAN MORTGAGE
CORPORATION - 2.9%
7.05%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 03/24/04 1,000 940,270
----------
FEDERAL HOME LOAN MORTGAGE
CORPORATION DISCOUNT NOTES - 5.9%
4.20%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 07/01/94 300 300,000
4.30%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 08/01/94 1,600 1,594,076
----------
1,894,076
----------
FEDERAL NATIONAL MORTGAGE
ASSOCIATION - 9.0%
7.45%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 07/11/94 1,000 1,000,840
7.30%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 07/10/02 1,000 956,800
6.625%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 04/10/03 1,000 917,830
----------
2,875,470
----------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION - 6.2%
7.00%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11/16/13 1,000 980,625
7.50%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 05/15/09 1,016 1,008,455
----------
1,989,080
----------
U.S. TREASURY BONDS - 9.2%
8.125%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 08/15/19 1,000 1,041,080
7.25%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 08/15/22 1,000 950,600
7.125%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 02/15/23 1,000 935,960
----------
2,927,640
----------
U.S. TREASURY NOTES - 9.6%
5.875%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 05/15/95 1,000 1,003,750
6.50%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11/30/96 1,000 1,003,900
7.875%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 04/15/98 1,000 1,036,900
----------
3,044,550
----------
TOTAL UNITED STATES TREASURY
AND AGENCY OBLIGATIONS
(Cost $20,203,605) 19,659,011
----------
</TABLE>
See Notes to Financial Statements
FS-5
<PAGE> 55
FIXED INCOME FUND
PORTFOLIOS FOR DIVERSIFIED INVESTMENT
Statement of Net Assets (Continued)
June 30, 1994
<TABLE>
<CAPTION>
Par
Maturity (000) Value
-------- ------ -------
<S> <C> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS - 9.5%
FEDERAL HOME LOAN MORTGAGE
CORPORATION - (CMO) - 3.1%
5.50%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 08/15/03 $ 1,000 $ 952,709
7.95%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 08/15/17 58 58,290
------------
1,010,999
------------
FEDERAL NATIONAL MORTGAGE
ASSOCIATION - (CMO) - 6.4%
6.75%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 01/25/15 1,000 997,487
9.50%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 05/25/17 115 115,130
5.75%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 01/25/15 1,000 920,305
------------
2,032,922
------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $3,135,323). . . . . . . . . . . . . . . . . . . . . . . . . . . 3,043,921
------------
CORPORATE BONDS - 27.8%
BANKS - 3.3%
North Carolina National Bank (A2,A)
8.50%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11/01/96 1,000 1,043,750
------------
BROKERAGE SERVICES - 5.7%
Merrill Lynch & Co., Inc. (A1,A+)
8.23%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 04/30/02 500 516,875
7.75%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 03/01/99 500 505,625
Morgan Stanley Group, Inc.
(A1,A+)
8.875%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10/15/01 750 799,687
------------
1,822,187
------------
CONSUMER GOODS - 1.7%
Campbell Soup Co.(Aa2,AA)
8.58%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 03/15/01 500 525,000
------------
ELECTRIC SERVICES - 3.0%
Virginia Electric & Power (A2,A)
7.375%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 07/01/02 1,000 965,000
------------
FINANCIAL - 3.2%
ITT Financial (A2,A)
8.125%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11/15/98 1,000 1,027,500
------------
LIFE INSURANCE - 0.9%
Chubb Corporation(Aa2,AA+)
8.75%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11/15/99 275 293,563
------------
PETROLEUM REFINING - 4.2%
Mobil Oil Corporation(Aa2,AA)
8.375%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 02/12/01 500 524,375
Standard Oil Co. of Ohio (A2,AA)
9.00%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 06/01/19 250 255,312
Texaco Capital Co.(A1,A+)
9.00%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12/15/99 500 536,250
------------
1,315,937
------------
</TABLE>
See Notes to Financial Statements
FS-6
<PAGE> 56
FIXED INCOME FUND
PORTFOLIOS FOR DIVERSIFIED INVESTMENT
Statement of Net Assets (Concluded)
June 30, 1994
<TABLE>
<CAPTION>
Par
Maturity (000) Value
-------- ------ -------
<S> <C> <C> <C>
TRANSPORTATION - 3.0%
Union Pacific Corporation (A2,A)
6.25%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 03/15/99 $ 1,000 $ 958,750
----------
YANKEE NOTES - 2.8%
WMC Finance Ltd(A2,A)
6.50%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11/15/03 1,000 893,750
----------
TOTAL CORPORATE BONDS
(Cost $ 8,779,339). . . . . . . . . . . . . . . . . . . . . . . . . . 8,845,437
----------
VARIABLE RATE OBLIGATIONS - 3.1%
BROKERAGE SERVICES - 3.1%
Morgan Stanley Group, Inc. (A1,A+)
5.69%+
(Cost $ 1,000,000). . . . . . . . . . . . . . . . . . . . . . . . . . 09/09/94 1,000 1,000,000
----------
TOTAL INVESTMENT IN SECURITIES - 102.0%
(Cost $33,118,267*) . . . . . . . . . . . . . . . . . . . . . . . . . 32,548,369
LIABILITIES IN EXCESS OF OTHER ASSETS - (2.0%). . . . . . . . . . . . . . . (653,573)
----------
NET ASSETS (100.0%) (Equivalent to $9.57
per share based on 3,280,578 Fixed Income
shares and 52,616 Fixed Income Dollar
shares of beneficial interest outstanding). . . . . . . . . . . . . . . $31,894,796
==========
NET ASSET VALUE,
offering and redemption price per Fixed
Income and Fixed Income Dollar share
($31,894,796/3,333,194). . . . . . . . . . . . . . . . . . . . . . . . . $ 9.57
==========
</TABLE>
- -----------------------------
* Aggregate cost for federal income tax purposes. The
aggregate gross unrealized appreciation (depreciation)
for all securities is as follows: Excess of value over tax
cost $205,713, excess of tax cost over value ($775,611).
+ Floating Rate Note - The rate shown is the rate as of June 30,
1994, and the maturity shown is the next interest readjustment date.
Average Weighted Maturity of the Portfolio - 6.1 years.
The Moody's Investors Service, Inc. and Standard and
Poor's Corp. ratings indicated are the most recent ratings
available at June 30,1994. These ratings have not been
verified by the Independent Accountants and, therefore,
are not covered by the Report of Independent Accountants.
See Notes to Financial Statements
FS-7
<PAGE> 57
FIXED INCOME FUND
PORTFOLIOS FOR DIVERSIFIED INVESTMENT
Statement of Operations
Year Ended June 30,1994
<TABLE>
<S> <C>
Investment income:
Interest........................................................... $ 2,164,440
-------------
Expenses:
Investment advisory fees........................................... 67,284
Administrative fees................................................ 67,284
Trustees' fees and officer's salary................................ 51,402
Legal fees......................................................... 47,660
Audit fees......................................................... 39,249
Registration fees.................................................. 18,301
Custodian fees..................................................... 12,447
Insurance expense.................................................. 2,991
Printing fees...................................................... 9,533
Service Organization fees.......................................... 1,340
Transfer agent fees................................................ 5,701
Miscellaneous...................................................... 1,869
-------------
325,061
Less fees waived................................................... (189,152)
-------------
Net expenses.................................................... 135,909
-------------
Net investment income........................................... 2,028,531
-------------
Realized and unrealized gain(loss) from investment activities:
Net realized gain from securities transactions........................ 62,893
Change in unrealized appreciation of investments...................... (2,540,325)
-------------
Net loss on investments......................................... (2,477,432)
-------------
Net decrease in net assets resulting from operations..................... $ (448,901)
==============
</TABLE>
See Notes to Financial Statements
FS-8
<PAGE> 58
FIXED INCOME FUND
PORTFOLIOS FOR DIVERSIFIED INVESTMENT
Statement of Changes in Net Assets For
the Years Ended June 30,
<TABLE>
<CAPTION>
1994 1993
------------ -----------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income............................................. $ 2,028,531 $ 2,121,199
Net realized gain from securities transactions.................... 62,893 773,705
Change in unrealized appreciation (depreciation) of investments... (2,540,325) 914,314
------------ -----------
Net increase (decrease) in net assets resulting from operations. (448,901) 3,809,218
------------ -----------
Dividends to shareholders:
Net investment income:
Fixed Income shares............................................ (1,997,498) (2,094,469)
Fixed Income Dollar shares..................................... (31,047) (26,730)
Distributions to shareholders:
Net capital gain:
Fixed Income shares............................................ (129,153) 0
Fixed Income Dollar shares..................................... (2,054) 0
In excess of net capital gain:
Fixed Income shares............................................ (145,828) 0
Fixed Income Dollar shares..................................... (2,320) 0
------------ -----------
Total dividends and distributions to shareholders.............. (2,307,900) (2,121,199)
------------ -----------
Capital share transactions:
Sales of shares................................................... 12,284,599 38,942,235
Shares issued in reinvestment of dividends........................ 976,863 912,671
Shares repurchased................................................ (18,027,816) (32,281,015)
------------ -----------
Net increase (decrease) in net assets derived
from capital share transactions............................. (4,766,354) 7,573,891
------------ -----------
Total increase (decrease) in net assets........................ (7,523,155) 9,261,910
Net Assets:
Beginning of year.................................................... 39,417,951 30,156,041
------------ -----------
End of year.......................................................... $ 31,894,796 $ 39,417,951
============ ===========
</TABLE>
See Notes to Financial Statements
FS-9
<PAGE> 59
FIXED INCOME FUND
Fixed Income Shares
PORTFOLIOS FOR DIVERSIFIED INVESTMENT
Financial Highlights
The table below sets forth selected financial data for a share of
capital stock outstanding throughout each year presented.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
June 30 June 30 June 30 June 30, June 30
1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year............ $ 10.41 $ 9.88 $ 9.32 $ 9.25 $ 9.47
-------- ------- ------- -------- --------
Income(loss) from investment operations:
Net investment income......................... 0.61 0.66 0.71 0.76 0.77
Net gains(losses) on securities
(realized and unrealized)................... (0.75) 0.53 0.56 0.07 (0.22)
-------- ------- ------- -------- --------
Total income(loss) from
investment operations................. (0.14) 1.19 1.27 0.83 0.55
-------- ------- ------- -------- --------
Less distributions:
Dividends from net investment income.......... (0.62) (0.66) (0.71) (0.76) (0.77)
Distributions from capital gains.............. (0.04) 0.00 0.00 0.00 0.00
Distributions in excess of capital gains...... (0.04) 0.00 0.00 0.00 0.00
-------- ------- ------- -------- --------
Total distributions..................... (0.70) (0.66) (0.71) (0.76) (0.77)
-------- ------- ------- -------- --------
Net asset value, end of year.................. $ 9.57 $ 10.41 $ 9.88 $ 9.32 $ 9.25
======== ======= ======= ======== ========
Total return.................................. (1.54%) 12.41% 14.07% 9.43% 6.09%
Ratios/supplemental data:
Net assets, end of year (in 000's)............ $ 31,392 $ 38,963 $ 29,739 $ 13,896 $ 12,599
Ratio of expenses to average daily
net assets.................................. 0.40% (a) 0.40% (a) 0.40% (a) 0.40% (a) 0.40% (a)
Ratio of net investment income to
average daily net assets.................... 6.04% 6.48% 7.34% 8.29% 8.27%
Portfolio turnover rate....................... 85% 103% 94% 52% 38%
</TABLE>
- -------------------
(a) Without the waiver of administrative fees, advisory fees, trustees' fees
and officer's salary and expense reimbursements, the the ratios of expenses
to average daily net assets would have been .96%,.93%, 1.00%, 1.34% and
1.22% for the years ended June 30, 1994, 1993, 1992, 1991 and 1990,
respectively.
See notes to financial statements.
FS-10
<PAGE> 60
FIXED INCOME FUND
Fixed Income Dollar Shares
PORTFOLIOS FOR DIVERSIFIED INVESTMENT
Financial Highlights
The table below sets forth selected financial data for a share of capital stock
outstanding throughout each period presented.
<TABLE>
<CAPTION>
June 28,(d)
Year Ended Year Ended Year Ended through Year Ended
June 30, June 30, June 30, June 30, June 30,
1994 1993 1992 1991 1990(c)
--------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period.......... $ 10.41 $ 9.88 $ 9.32 $ 9.30 $ 9.47
------- ------- ------- ------- -------
Income(loss) from investment operations:
Net investment income......................... 0.58 0.64 0.69 0.01 0.74
Net gains(losses) on securities
(realized and unrealized)................... (0.75) 0.53 0.56 0.02 (0.22)
------- ------- ------- ------- -------
Total income(loss) from investment
operations............................ (0.17) 1.17 1.25 0.03 0.52
------- ------- ------- ------- -------
Less distributions:
Dividends from net investment income.......... (0.59) (0.64) (0.69) (0.01) (0.74)
Distributions from capital gains.............. (0.04) 0.00 0.00 0.00 0.00
Distributions in excess of capital gains...... (0.04) 0.00 0.00 0.00 0.00
------- ------- ------- ------- -------
Total distributions..................... (0.67) (0.64) (0.69) (0.01) (0.74)
------- ------- ------- ------- -------
Net asset value, end of period................ $ 9.57 $ 10.41 $ 9.88 $ 9.32 $ 9.25
======= ======= ======= ======= =======
Total return.................................. (1.79%) (a) 12.13% 13.75% 0.28% 5.75%
Ratios/supplemental data:
Net assets, end of period (in 000's).......... $ 503 $ 455 $ 417 $ 214 $ 0
Ratio of expenses to average daily
net assets.................................. 0.65% (b) 0.65% (b) 0.65% (b) 0.65% (a)(b) 0.65% (b)
Ratio of net investment income to
average daily net assets.................... 5.79% 6.25% 6.98% 7.69% (a) 8.11%
Portfolio turnover rate....................... 85% 103% 94% 52% (a) 38%
</TABLE>
- --------------------
(a) Annualized.
(b) Without the waiver of administrative fees, advisory fees, trustees' fees
and officer's salary and expense reimbursements, the ratios of expenses
to average daily net assets would have been 1.21%, 1.18%, 1.25%,
1.59%(annualized), and 1.48% for the years ended June 30, 1994, 1993 and
1992, the period ended June 30, 1991, and the year ended June 30,1990,
respectively.
(c) No shares were outstanding June 30,1990.
(d) Reissuance of shares.
See notes to financial statements.
FS-11
<PAGE> 61
NOTES TO FINANCIAL STATEMENTS
A. Portfolios for Diversified Investment ("the Company") was
incorporated in Maryland on January 18, 1984 and was reorganized as a
Massachusetts business trust on October 31, 1985. The Company is
registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. The Company
currently offers one portfolio, Fixed Income Fund ("Income Fund").
The Company's Declaration of Trust authorizes the Board of
Trustees to issue an unlimited number of shares of beneficial interest
in the Company and to classify or reclassify any unissued shares into
one or more classes of shares. The Declaration of Trust further
authorizes the trustees to classify or reclassify any class of shares
into one or more subclasses.
B. Significant accounting policies relating to Income Fund are as
follows:
Security Valuation--Portfolio securities which are listed on
an exchange are valued at the last quoted sales price on that
exchange, or, if there has been no such reported sale on that day, at
the mean between the closing bid and asked price. If a security is
traded on more than one exchange, the security is valued at the last
quoted sales price on the exchange where the security is primarily
traded. Unlisted securities are valued at the most recent quoted bid
price. Short-term investments having a maturity of sixty days or less
are valued on the basis of amortized cost.
Securities Transactions and Investment Income--Securities
transactions are accounted for on the trade date. The cost of
investments sold is determined by the use of the specific
identification method for both financial reporting and income tax
purposes. Interest income is recorded on an accrual basis.
Dividends and Distributions to Shareholders-- All of the net
investment income of Income Fund is distributed as dividends monthly
to shareholders. Net realized capital gains, if any, are distributed
at least annually.
FS-12
<PAGE> 62
NOTES TO FINANCIAL STATEMENTS
(Continued)
Federal Taxes--No provision is made for federal taxes as it is the
Company's intention to have Income Fund continue to qualify as a regulated
investment company and to make the requisite distributions to its shareholders
which will be sufficient to relieve it from all or substantially all federal
income and excise taxes.
Repurchase Agreements--Income Fund may engage in repurchase agreements
on obligations issued or guaranteed as to principal and interest by the United
States Government, its agencies or instrumentalities and other securities in
which the Portfolio is authorized to invest. With respect to any repurchase
agreement transaction engaged in by Income Fund, the investment adviser will
require the seller of the securities subject to the repurchase agreement to
maintain, on a daily basis, the value of such securities at not less than the
repurchase price (including accrued interest). The agreements are conditioned
upon the collateral being deposited under the Federal Reserve/Treasury
book-entry system or by another authorized securities depository.
C. PNC Institutional Management Corporation (PIMC) is adviser for
Income Fund and maintains the Company's financial accounts. PIMC is a
subsidiary of PNC Bank National Association (PNC Bank). PNC Bank is the
Company's custodian, and PFPC Inc. (PFPC) is the Company's transfer agent.
PNC Bank is a wholly owned subsidiary of PNC Bank Corp. Provident Distributors,
Inc. began to serve as the Company's distributor as of January 31, 1994,
succeeding Pennsylvania Merchant Group, Ltd. No compensation is payable by the
Company for distribution services.
The Company has entered into an Administration Agreement with PFPC and
Provident Distributors, Inc. for certain administrative services.
In return for their advisory and administration services, PIMC and the
administrators are each entitled to receive a fee from the Company, computed
daily and payable monthly, at the annual rate of .20% each with respect to
Income Fund. In addition, PIMC and the administrators have agreed to reduce the
advisory and administrative expenses otherwise payable to them and to reimburse
the Company for certain of its operating expenses to the extent necessary to
ensure that the operating expense ratio (excluding fees paid to Service
Organizations pursuant to Servicing Agreements) does not exceed .40% of the
average net assets of Income Fund for a period of twelve months.
FS-13
<PAGE> 63
NOTES TO FINANCIAL STATEMENTS
(Continued)
During the year ended June 30, 1994, PIMC, PFPC and the Company's
trustees and officer voluntarily waived fees or salaries or voluntary agreed to
reimburse expenses as shown below:
<TABLE>
<S> <C>
Advisory and Administration $ 134,568
fees waived
Expenses reimbursed 8,377
Trustees' and officer's fees
and salaries waived 46,207
</TABLE>
Expenses include legal fees paid to Drinker Biddle & Reath. A partner
of that firm is Secretary of the Company.
D. Income Fund may enter into agreements with certain institutions, such
as banks and savings and loan associations ("Service Organizations"), requiring
them to provide administrative support services to their customers who are
beneficial owners of shares of Income Dollar Shares. In consideration for
their services, Income Fund will pay .25% (on an annualized basis) of the
average daily net asset value of the Income Dollar shares held by the Service
Organizations for the benefit of their customers.
E. Purchases and sales of securities, other than short-term obligations,
for the year ended June 30, 1994, were as follows:
<TABLE>
<CAPTION>
Purchases Sales
--------- -------------
<S> <C> <C>
Corporate Obligations $ 8,811,661 $ 16,125,535
Government Obligations 18,851,913 12,615,273
</TABLE>
F. At June 30, 1994 net assets consisted of:
<TABLE>
<S> <C>
Capital paid-in $ 32,612,842
Distributions in excess of net
investment income (20,023)
Distributions in excess of net
realized gains (128,125)
Net unrealized
depreciation of investments (569,898)
--------------
$ 31,894,796
=============
</TABLE>
FS-14
<PAGE> 64
NOTES TO FINANCIAL STATEMENTS
(Continued)
G.Transactions in Fixed Income shares and Fixed Income Dollar shares are
summarized as follows:
<TABLE>
<CAPTION>
INCOME SHARES INCOME DOLLAR SHARES
------------------------------- -------------------------------
Year Ended Year Ended Year Ended Year Ended
June 30, 1994 June 30, 1993 June 30, 1994 June 30,1993
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Shares sold . . . . . . . . . . . . . . . . 1,173,487 3,832,138 26,640 12,388
Shares issues in
reinvestment of
dividends . . . . . . . . . . . . . . . . 79,414 89,679 0 0
Shares issued in reinvestment of
capital gains . . . . . . . . . . . . . . 15,817 0 0 0
Shares repurchased . . . . . . . . . . . . (1,731,327) (3,188,477) (17,714) (11,475)
------------ ------------- ------------ ------------
Net increase
(decrease) in shares . . . . . . . . . . (462,609) 733,340 8,926 913
Shares outstanding:
Beginning of period . . . . . . . . . . . 3,743,187 3,009,847 43,690 42,777
------------ ------------- ------------ ------------
End of period . . . . . . . . . . . . . . 3,280,578 3,743,187 52,616 43,690
============ ============= ============ ============
</TABLE>
H. Change in Accounting for Distributions to Shareholders
Effective July 1, 1993, the Company adopted Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distribution by Investment Companies. As a
result the classification of distributions to shareholders has been changed to
better disclose the differences between financial statement accounts and
distributions determined in accordance with income tax regulations. There were
no material reclassifications to paid-in capital.
FS-15
<PAGE> 65
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Trustees of
Portfolios for Diversified Investment
We have audited the accompanying statement of net assets of Portfolios for
Diversified Investment - Fixed Income Fund as of June 30, 1994, and the related
statement of operations for the year then ended, the statements of changes in
net assets for each of the two years in the period then ended, and the
financial highlights for each of the periods presented. These financial
statements and financial highlights are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation and physical
inspection of investments held by the custodian as of June 30, 1994. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Portfolios for Diversified Investment - Fixed Income Fund as of June 30, 1994,
the results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and the financial
highlights for each of the periods presented, in conformity with generally
accepted accounting principles.
Coopers & Lybrand
2400 Eleven Penn Center
Philadelphia, Pennsylvania
July 26, 1994
FS-16
<PAGE> 66
APPENDIX
DESCRIPTION OF CORPORATE AND MUNICIPAL
DEBT AND COMMERCIAL PAPER RATINGS
The following summarizes the highest three ratings used by
Standard & Poor's Corporation ("Standard & Poor's") for bonds:
"AAA" - This is 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 rated "AA" has a very strong capacity to
pay interest and repay principal and differs from "AAA" issues
only in small degree.
"A" - Debt rated "A" has a strong capacity to pay
interest and repay principal although it is somewhat more
susceptible to the adverse effects of changes in circumstances
and economic conditions than debt in higher rated categories.
To provide more detailed indications of credit quality, the
"AA" and "A" ratings may be modified by the addition of a plus or minus sign to
show relative standing within this major rating category.
The following summarizes the highest three ratings used by
Moody's Investors Service ("Moody's") for bonds:
"Aaa" - Bonds that are rated "Aaa" are judged to be
of the best quality. They carry the smallest degree of
investment risk and are generally referred to as "gilt edge."
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 that are rated "Aa" 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-1
<PAGE> 67
"A" - Bonds that are rated "A" 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.
Moody's applies numerical modifiers ("1","2", and "3") with
respect to corporate bonds rated "Aa" or "A". The modifier "1" indicates that
the bond being rated ranks in the higher end of its generic rating category;
the modifier "2" indicates a mid-range ranking; and the modifier "3" indicates
that the bond ranks in the lower end of its generic rating category. With
regard to municipal bonds, those bonds in the "Aa" and "A" groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols "Aa1" or "A1".
The following summarizes the highest three ratings used by
Duff & Phelps Credit Rating Co. ("D&P") for bonds:
"AAA" - Bonds that are rated "AAA" are of the highest
credit quality. The risk factors are considered to be
negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Bonds that are rated "AA" are of high credit
quality. Protection factors are strong. Risk is modest but
may vary slightly from time to time because of economic
conditions.
"A" - Bonds that are rated "A" have protection
factors which are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
To provide more detailed indications of credit quality, the
"AA" and "A" 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 three ratings used by
Fitch Investors Service, Inc. ("Fitch") for 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
A-2
<PAGE> 68
pay interest and repay principal is very strong, although not
quite as strong as bonds rated "AAA". Because bonds rated in
the "AAA" and "AA" categories are not significantly vulnerable
to foreseeable future developments, short- term debt of these
issuers is generally rated "F-1+".
"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.
To provide more detailed indications of credit quality, the
"AA" and "A" ratings may be modified by the addition of a plus (+) or minus (-)
sign to show relative standing within these major rating categories.
The following summarizes the highest rating used by Standard &
Poor's for municipal notes:
"SP-1" is the highest rating assigned by Standard &
Poor's to municipal notes and indicates very strong or strong
capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics are
given a plus (+) designation.
The following summarizes the highest ratings used by Moody's
for short-term notes and variable rate demand obligations:
"MIG-1"/"VMIG-1" - Obligations bearing these
designations are of the best quality. There is present a
strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the
market for refinancing.
The following summarizes the highest ratings assigned by D&P
for short-term debt:
The three highest rating categories of D&P for
short-term debt are "Duff 1", "Duff 2", and "Duff 3". D&P
employs three designations, "Duff 1+", "Duff 1" and "Duff 1-",
within the highest rating category. "Duff 1+" indicates
highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or access
to alternative sources of funds, is judged to be "outstanding,
and safety is just below risk-free U.S. Treasury short-term
obligations." "Duff 1" indicates very high certainty
A-3
<PAGE> 69
of timely payment. Liquidity factors are excellent and
supported by good fundamental protection factors. Risk
factors are considered to be minor. "Duff 1-" indicates high
certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk
factors are very small.
"Duff 2" - indicates 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.
"Duff 3" - indicates satisfactory liquidity and other
protection factors qualify issue as to investment grade. Risk
factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
The following summarizes the three highest 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
carrying 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.
Commercial paper rated "A-1" by Standard & Poor's indicates
that the degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety
characteristics are denoted "A-1+".
The rating "Prime-1" is the highest commercial paper rating
assigned by Moody's. Issuers rated Prime-1 (or related supporting
institutions) are considered to have a superior capacity for repayment of
short-term promissory obligations.
D&P uses the short-term ratings described above for commercial
paper.
A-4
<PAGE> 70
Fitch uses the short-term ratings described above for commercial paper.
A-5
<PAGE> 1
THE PNC(R)FUND
THE FIXED INCOME PORTFOLIOS
SUPPLEMENT TO PROSPECTUS DATED JANUARY 30, 1995
The section entitled "Introduction -- Portfolio Management" has been amended to
read as follows:
PNC Institutional Management Corporation ("PIMC") serves as the Fund's
investment adviser. BlackRock Financial Management, Inc. ("BlackRock")
serves as sub-adviser to the Managed Income, Intermediate Government,
Intermediate-Term Bond, Short-Term Bond, Government Income, Pennsylvania
Tax-Free Income and Ohio Tax-Free Income Portfolios; PNC Bank, National
Association ("PNC Bank") serves as sub-adviser to the Tax-Free Income
Portfolio; and Provident Capital Management, Inc. ("PCM") serves as
sub-adviser to the International Fixed Income Portfolio. The investment
adviser and sub-advisers are indirect wholly-owned subsidiaries of PNC Bank
Corp.
The section entitled "Management -- Adviser and Sub-Advisers" has been amended
as follows:
The second sentence of the first paragraph has been amended to read as follows:
The principal business address of: PIMC is 400 Bellevue Parkway, Wilmington,
Delaware 19809; PNC Bank is Broad and Chestnut Streets, Philadelphia,
Pennsylvania 19107; PCM is 1700 Market Street, 27th Floor, Philadelphia,
Pennsylvania 19103; and BlackRock is 345 Park Avenue, New York, New York
10154.
The fourth paragraph has been amended to read as follows:
The Pennsylvania Tax-Free Income and Ohio Tax-Free Income Portfolios'
manager, Kevin Klingert, is the person primarily responsible for the day-
to-day management of the Portfolios' investments. Mr. Klingert has been with
BlackRock since 1991 and the Portfolios' manager since March 1995. Mr.
Klingert was formerly an Assistant Vice-President at Merrill, Lynch, Pierce,
Fenner & Smith.
The fifth paragraph has been deleted.
The sixth paragraph has been amended to read as follows:
The Short-Term Bond, Intermediate-Term Bond, Intermediate Government,
Government Income and Managed Income Portfolios have been managed by a
BlackRock portfolio management team since March 1995. The team is led by
Robert S. Kapito and includes Michael P. Lustig, Scott Amero and Beth A.
Coyne. Mr. Kapito has been with BlackRock since 1988 and serves as Vice
Chairman of BlackRock. Mr. Lustig has been with BlackRock since 1989, prior
to which he was an associate at Pacific Merchant Bank. Mr. Amero joined
BlackRock in 1990 where he is a Managing Director. Prior to 1990, Mr. Amero
was a Vice President at First Boston Company. Ms. Coyne has been with PNC
Bank since 1990 and with BlackRock since April 1995. Prior to 1990, Ms.
Coyne sold fixed income securities for Kidder, Peabody & Co., Inc. Ms. Coyne
was formerly the person primarily responsible for managing the Short-Term
Bond, Intermediate-Term Bond, Managed Income and Intermediate Government
Portfolios for PNC Bank.
The seventh paragraph has been amended to read as follows:
The International Fixed Income Portfolio's Manager, Herve van Caloen, is the
person primarily responsible for the day-to-day management of the
Portfolio's investments. Mr. van Caloen has been a portfolio manager with
PCM since 1992 and currently heads PCM's International Group. Mr. van Caloen
has managed the Portfolio since April 1995. Before joining PCM, Mr. van
Caloen managed international portfolios for Mitchell Hutchins and Scudder,
Stevens and Clark.
The date of this Supplement is April 12, 1995.
<PAGE> 2
THE FIXED INCOME PORTFOLIOS
SERVICE CLASS
The PNC(R) Fund (the "Fund") consists of twenty-five investment portfolios.
This Prospectus relates to nine classes of shares (the "Service Shares" or
"Shares") representing interests in nine of those portfolios (collectively, the
"Portfolios") which offer investors a range of investment opportunities with the
following objectives:
MANAGED INCOME PORTFOLIO--to provide current income consistent with
prudent investment management and preservation of capital. It pursues this
objective by investing primarily in high and medium grade fixed-income
securities.
TAX-FREE INCOME PORTFOLIO--to seek as high a level of current income
exempt from Federal income tax as is consistent with preservation of
capital. It pursues this objective by investing primarily in obligations
issued by or on behalf of states, territories and possessions of the United
States, the District of Columbia, and their political subdivisions,
agencies, instrumentalities and authorities and tax-exempt derivative
securities relating thereto ("Municipal Obligations").
INTERMEDIATE GOVERNMENT PORTFOLIO--to provide current income consistent
with preservation of capital. It pursues this objective by investing
primarily in obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities and repurchase agreements and collateralized
mortgage obligations ("CMOs") relating to such obligations.
OHIO TAX-FREE INCOME PORTFOLIO--to seek as high a level of current
income exempt from Federal and, to the extent possible, from Ohio income tax
as is consistent with preservation of capital. It pursues this objective by
investing primarily in municipal obligations issued by the State of Ohio and
its political subdivisions, agencies, instrumentalities and authorities and
tax-exempt derivative securities relating thereto ("Ohio Municipal
Obligations").
PENNSYLVANIA TAX-FREE INCOME PORTFOLIO--to seek as high a level of
current income exempt from Federal and, to the extent possible, from
Pennsylvania income tax as is consistent with preservation of capital. It
pursues this objective by investing primarily in municipal obligations
issued by the Commonwealth of Pennsylvania and its political subdivisions,
agencies, instrumentalities and authorities and tax-exempt derivative
securities relating thereto ("Pennsylvania Municipal Obligations").
SHORT-TERM BOND PORTFOLIO--to seek a high level of current income
consistent with prudent investment risk. It pursues this objective by
investing primarily in investment grade debt securities. The Portfolio will
generally have a dollar-weighted average portfolio maturity of five years or
less.
INTERMEDIATE-TERM BOND PORTFOLIO--to seek a high level or current income
consistent with prudent investment risk. It pursues this objective by
investing primarily in investment grade debt securities. The Portfolio will
generally have a dollar-weighted average portfolio maturity of five to ten
years.
GOVERNMENT INCOME PORTFOLIO--to seek as high a level of current income
as is consistent with a reasonable concern for safety of principal. It
pursues this objective by investing primarily in debt securities issued,
guaranteed or otherwise backed by the U.S. Government or its agencies or
instrumentalities and repurchase agreements relating to such obligations.
INTERNATIONAL FIXED INCOME PORTFOLIO--to achieve as high a level of
current income as is consistent with prudent investment risk. It pursues
this objective by investing primarily in an internationally diversified
portfolio of high quality government and corporate obligations.
Service Shares are sold by the Fund's distributor to institutional investors
("Institutions") acting on behalf of their customers ("Customers"). These
Customers, which may include individuals, trusts, partnerships and corporations,
must maintain accounts (such as custody, trust or escrow accounts) with the
Institutions. Service Shares are sold and redeemed at net asset value without
any purchase or redemption charge imposed by the Fund, although the Institutions
may receive compensation from the Fund for providing various shareholder
services and may charge their customer accounts for services provided in
connection with the purchase or redemption of Shares.
Shares of the Ohio Tax-Free Income and Pennsylvania Tax-Free Income
Portfolios are intended for residents of Ohio and Pennsylvania, respectively.
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 January 30, 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 January 30, 1995
<PAGE> 3
INTRODUCTION
- --------------------------------------------------------------------------------
The Fund is an open-end management investment company which has registered
shares in 25 investment portfolios, nine of which are included in this
Prospectus.
PORTFOLIO MANAGEMENT
PNC Institutional Management Corporation ("PIMC") serves as the Fund's
investment adviser. PNC Bank, Ohio, National Association ("PNC Bank Ohio")
serves as sub-adviser to the Ohio Tax-Free Income Portfolio, PNC Bank, National
Association ("PNC Bank") serves as sub-adviser to the Managed Income,
Intermediate Government, Tax-Free Income, Pennsylvania Tax-Free Income,
Short-Term Bond, Intermediate-Term Bond and Government Income Portfolios and
Provident Capital Management, Inc. ("PCM") serves as sub-adviser to the
International Fixed Income Portfolio. The investment adviser and sub-advisers
are indirect wholly-owned subsidiaries of PNC Bank Corp.
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> 4
EXPENSE TABLE
ANNUAL FUND OPERATING EXPENSES FOR SERVICE SHARES AFTER FEE WAIVERS
AND EXPENSE REIMBURSEMENTS AS A PERCENTAGE OF DAILY NET ASSETS
<TABLE>
<CAPTION> INTER- INTER-
INTER- OHIO PENNSYLVANIA SHORT- MEDIATE GOVERN- NATIONAL
MANAGED TAX-FREE MEDIATE TAX-FREE TAX-FREE TERM TERM MENT FIXED
INCOME INCOME GOVERNMENT INCOME INCOME BOND BOND INCOME INCOME
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------- --------- ---------- --------- ------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Advisory
fees(1)...... .38% 0% .23% 0% .28% .23% .28% .38% .43%
Other
operating
expenses...... .50 .83 .50 .83 .55 .50 .50 .50 .65
--- --- --- --- --- --- --- --- ---
Administration
fees(1)... .15 0 .13 0 .09 .09 .10 .10 .10
Shareholder
Servicing
Fee....... .15 .15 .15 .15 .15 .15 .15 .15 .15
Other
expenses(1). .20 .68 .22 .68 .31 .26 .25 .25 .40
--- --- --- --- --- --- --- --- ---
Total fund
operating
expenses...... .88% .83% .73% .83% .83% .73% .78% .88% 1.08%
=== === === === === === === === ====
</TABLE>
- ------------------
(1) Advisory fees are net of waivers of .12%, .50%, .27%, .50%, .22%, .27%,
.22%, .12% and .12% and administration fees are net of waivers of .05%,
.20%, .07%, .20%, .11%, .11%, .10%, .10% and .10% for the 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, respectively. In addition, the
Expense Table reflects reimbursements made to the Tax-Free Income Portfolio
by the adviser. PIMC and the Administrators are under no obligation to waive
or continue waiving such fees or reimbursing such expenses, but have
informed the Fund that they expect to waive or continue waiving such fees
and reimbursing such expenses during the current fiscal year as necessary to
maintain the Portfolios' total operating expenses at the levels set forth in
the table. The expenses noted above under "Other expenses" are estimated
based on the level of such expenses for the 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 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>
Managed Income............................... $ 9 $28 $ 49 $ 108
Tax-Free Income.............................. 8 26 46 103
Intermediate Government...................... 7 23 41 91
Ohio Tax-Free Income......................... 8 26 46 103
Pennsylvania Tax-Free Income................. 8 26 46 103
Short-Term Bond.............................. 7 23 41 91
Intermediate-Term Bond....................... 8 25 43 97
Government Income............................ 9 28
International Fixed Income................... 11 34
</TABLE>
The foregoing Expense Table and Example are intended to assist investors
in understanding the Portfolios' estimated operating expenses. Investors bear
these expenses either directly or indirectly. The information in the table for
the Managed Income, Tax-Free Income, Intermediate Government, Ohio Tax-Free
Income, Pennsylvania Tax-Free Income, Short-Term Bond and Intermediate-Term
Bond Portfolios is based on the advisory and administration fees and other
expenses payable after fee waivers for the fiscal year ended September 30,
1994, as restated to reflect fees relating to the Service Plan and fees for
other shareholder support activities borne by Service Shares and revised fee
waivers. The table estimates fees, expenses, waivers and assets for the other
Portfolios for the current fiscal year. Total operating expenses would have
been 1.05%, 1.53%, 1.07%, 1.53%, 1.16%, 1.11%, 1.10%, 1.10% and 1.30% for
Service Shares of the Managed Income, Tax-Free Income, Intermediate Government,
Ohio Tax-Free Income,
3
<PAGE> 5
Pennsylvania Tax-Free Income, Short-Term Bond, Intermediate-Term Bond,
Government Income and International Fixed Income Portfolios, respectively,
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," "Distribution of Shares,"
"Management--Shareholder Servicing," "How to Purchase Shares" and "Description
of Shares" for a further description of shareholder transaction expenses and
operating expenses.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
INVESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND OPERATING
EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
CERTAIN RISK FACTORS TO CONSIDER
An investment in any of the Portfolios is subject to certain investment
considerations, as set forth in detail under "Investment Policies." As with
other mutual funds, there can be no assurance that any Portfolio will achieve
its investment objective. Some or all of the Portfolios may: purchase
mortgage-related securities, foreign securities and illiquid securities; enter
into repurchase and reverse repurchase agreements; lend portfolio securities to
third parties; and enter into futures contracts and options. The Ohio Tax-Free
Income and Pennsylvania Tax-Free Income Portfolios are classified as
non-diversified under the Investment Company Act of 1940 (the "1940 Act"). These
and the other investment practices set forth below and their associated risks
deserve careful consideration by investors. See "Investment Policies."
4
<PAGE> 6
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
BACKGROUND
The Fund currently offers four classes of shares in each
Portfolio--Service, Series A Investor, Series B Investor and Institutional
Shares. Service, Series A Investor, Series B Investor and Institutional Shares
in a Portfolio represent equal pro rata interests in such Portfolio, except that
they bear different expenses which reflect the difference in the range of
services provided to them. Under the Fund's Service Plan, Service Shares bear
the expense of fees at an annual rate not to exceed .15% of the average daily
net asset value of each Portfolio's outstanding Service Shares. Service Shares
also bear the expense of a service fee at an annual rate not to exceed .15% of
the average daily net asset value of each Portfolio's outstanding Service Shares
for other shareholder support activities provided by service organizations. See
"Management--Shareholder Servicing" for a description of the Service Plan and
shareholder support activities. Series A Investor Shares bear the expense of the
Fund's Distribution and Service Plan at an annual rate not to exceed .55% of the
average daily net asset value of each Portfolio's outstanding Series A Investor
Shares. Series B Investor Shares bear the expense of the Fund's Series B
Distribution Plan and Series B Service Plan at annual rates not to exceed .75%
and .25%, respectively, of the average daily net asset value of each Portfolio's
outstanding Series B Investor Shares. See "Description of Shares" for a
description of the Distribution and Service Plan, the Series B Distribution Plan
and the Series B Service Plan. Institutional Shares bear no shareholder
servicing or distribution fees.
During periods in which fees relating to the Service Plan and shareholder
support activities and to the Distribution and Service Plan were not charged to
a Portfolio's Service Shares or Series A Investor Shares, respectively, the
financial data in the tables below pertaining to Service Shares or Series A
Investor Shares of such Portfolio are identical to the financial data relating
to Institutional Shares of the Portfolio for such periods or to what such
financial data would have been had Institutional Shares in the Portfolio been
outstanding for such periods (except, in each case, for the number of Service
and Series A Investor Shares outstanding).
The SEC requires that this Prospectus contain Financial Highlights for each
class of each Portfolio described herein. Series A Investor Shares of the Ohio
Tax-Free Income Portfolio did not bear any expenses relating to the Distribution
and Service Plan during the year ended September 30, 1994 and during all prior
periods. It is expected that Series A Investor Shares of the Ohio Tax-Free
Income Portfolio will bear such expenses after the date of this Prospectus. No
Series B Investor Shares of the Portfolios and no shares of the Government
Income and International Fixed Income Portfolios were issued during the year
ended September 30, 1994.
The financial data included in the tables 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. Further information about the performance of the
Portfolios 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> 7
THE PNC(R) FUND
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
MANAGED INCOME PORTFOLIO
----------------------------------------------------------------
INSTITUTIONAL CLASS
----------------------------------------------------------------
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 11/1/89(1)
ENDED ENDED ENDED ENDED THROUGH
9/30/94 9/30/93 9/30/92 9/30/91 9/30/90
---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period..................... $ 11.17 $ 10.74 $ 10.26 $ 9.70 $ 10.00
---------- ---------- ---------- ---------- --------
Income from investment operations
Net investment income.................................. 0.64 0.67 0.69 0.74 0.66
Net gain (loss) on investments
(both realized and unrealized)....................... (1.21) 0.56 0.48 0.63 (0.29)
---------- ---------- ---------- ---------- -------
Total from investment operations................... (0.57) 1.23 1.17 1.37 0.37
---------- ---------- ---------- ---------- -------
Less distributions
Distributions from net investment income............... (0.64) (0.67) (0.69) (0.73) (0.66)
Distribution in excess of net investment income........ (0.02) -- -- (0.08) (0.01)
Distributions from net realized capital gains.......... (0.14) (0.13) -- -- --
Distributions in excess of net realized gains.......... (0.01) -- -- -- --
---------- ---------- ---------- ---------- -------
Total distributions................................ (0.81) (0.80) (0.69) (0.81) (0.67)
---------- ---------- ---------- ---------- -------
Net asset value at end of period........................... $ 9.79 $ 11.17 $ 10.74 $ 10.26 $ 9.70
========== ========== ========== ========== =======
Total return............................................... (5.27)% 12.13% 11.80% 14.74% 3.80%
Ratios/Supplemental data
Net assets at end of period
(in thousands)....................................... $395,060 $341,791 $314,075 $ 52,802 $38,328
Ratios of expenses to average net assets
After advisory/administration fee waivers............ 0.55% 0.74% 0.80% 0.80% 0.80%(2)
Before advisory/administration fee waivers........... 0.77% 0.78% 0.80% 0.84% 0.82%(2)
Ratios of net investment income to average net assets
After advisory/administration fee waivers............ 6.11% 6.25% 6.28% 7.36% 7.31%(2)
Before advisory/administration fee waivers........... 5.89% 6.21% 6.28% 7.32% 7.29%(2)
Portfolio turnover rate................................ 61% 72% 56% 38% 18%
</TABLE>
- -------------
(1) Commencement of operations.
(2) Annualized.
6
<PAGE> 8
THE PNC(R) FUND
FINANCIAL HIGHLIGHTS (Continued)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
MANAGED INCOME PORTFOLIO
-------------------------------------------------------
SERVICE CLASS SERIES A INVESTOR CLASS
------------------- ------------------------------
FOR THE FOR THE
PERIOD PERIOD
YEAR 7/29/93(1) YEAR YEAR 2/05/92(1)
ENDED THROUGH ENDED ENDED THROUGH
9/30/94 9/30/93 9/30/94 9/30/93 9/30/92
------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period............................. $ 11.17 $ 10.96 $ 11.18 $10.74 $10.40
------- -------- ------- ------- -------
Income from investment operations
Net investment income.......................................... 0.59 0.11 0.57 0.66 0.46
Net gain (loss) on investments (both realized and
unrealized).................................................. (1.18) .21 (1.19) 0.57 0.34
------- -------- ------- ------- -------
Total from investment operations........................... (0.59) 0.32 (0.62) 1.23 0.80
------- -------- ------- ------- -------
Less distributions
Distributions from net investment income....................... (0.62) (0.11) (0.60) (0.66) (0.46)
Distribution in excess of net investment income................ (0.02) -- (0.02) -- --
Distributions from net realized capital gains.................. (0.14) -- (0.14) (0.13) --
Distributions in excess of net realized gains.................. (0.01) -- (0.01) -- --
------- -------- ------- ------- ------
Total distributions........................................ (0.79) (0.11) (0.77) (0.79) (0.46)
------- -------- ------- ------- ------
Net asset value at end of period................................... $ 9.79 $ 11.17 $ 9.79 $11.18 $10.74
======= ======== ======= ======= ======
Total return....................................................... (5.49)% 2.93% (5.76)%3 12.13%3 7.86%(3)
Ratios/Supplemental data
Net assets at end of period (in thousands)..................... $67,655 $15,322 $10,921 $7,252 $1,417
Ratios of expenses to average net assets
After advisory/administration fee waivers.................... 0.80% 0.80%(2) 1.00% 0.84% 0.80%(2)
Before advisory/administration fee waivers................... 1.02% 0.84%(2) 1.22% 0.88% 0.80%(2)
Ratios of net investment income to average net assets
After advisory/administration fee waivers.................... 5.95% 5.83%(2) 5.66% 6.09% 6.28%(2)
Before advisory/administration fee waivers................... 5.73% 5.79%(2) 5.44% 6.05% 6.28%(2)
Portfolio turnover rate........................................ 61% 72% 61% 72% 56%
</TABLE>
- -------------
(1) Commencement of operations.
(2) Annualized.
(3) Sales load not reflected in total return.
7
<PAGE> 9
THE PNC(R) FUND
FINANCIAL HIGHLIGHTS (Continued)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
TAX-FREE INCOME PORTFOLIO
---------------------------------------------
INSTITUTIONAL CLASS SERVICE CLASS
-------------------- --------------------
FOR THE FOR THE
PERIOD PERIOD
YEAR 1/21/93(1) YEAR 7/29/93(1)
ENDED THROUGH ENDED THROUGH
9/30/94 9/30/93 9/30/94 9/30/93
------- -------- ------- --------
<S> <C> <C> <C> <C>
Net asset value at beginning of period..................................... $11.31 $10.61 $11.31 $10.97
------- -------- ------- --------
Income from investment operations
Net investment income.................................................. 0.53 0.42 0.51 0.09
Net gain (loss) on investments (both realized and unrealized).......... (0.93) 0.70 (0.93) 0.34
------- -------- ------- --------
Total from investment operations................................... (0.40) 1.12 (0.42) 0.43
------- -------- ------- --------
Less distributions
Distributions from net investment income............................... (0.53) (0.42) (0.51) (0.09)
Distributions from net realized capital gains.......................... (0.34) -- (0.34) --
------- -------- ------- --------
Total distributions................................................ (0.87) (0.42) (0.85) (0.09)
------- -------- ------- --------
Net asset value at end of period........................................... $10.04 $11.31 $10.04 $11.31
======= ======== ======= ========
Total return............................................................... (3.77)% 10.72% (4.02)% 3.92%
Ratios/Supplemental data
Net assets at end of period (in thousands)............................. $ 132 $ 675 $2,109 $ 634
Ratios of expenses to average net assets
After advisory/administration fee waivers............................ 0.50% 0.50%(2) 0.75% 0.71%(2)
Before advisory/administration
fee waivers........................................................ 1.73% 1.28%(2) 1.98% 1.49%(2)
Ratios of net investment income to average net assets
After advisory/administration fee waivers............................ 4.97% 5.14%(2) 4.75% 4.99%(2)
Before advisory/administration fee waivers........................... 3.74% 4.36%(2) 3.52% 4.21%(2)
Portfolio turnover rate................................................ 40% 71% 40% 71%
</TABLE>
- -------------
(1) Commencement of operations.
(2) Annualized.
8
<PAGE> 10
THE PNC(R) FUND
FINANCIAL HIGHLIGHTS (Continued)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
TAX-FREE INCOME PORTFOLIO
----------------------------------------------------------------
SERIES A INVESTOR CLASS
----------------------------------------------------------------
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 5/14/90(1)
ENDED ENDED ENDED ENDED THROUGH
9/30/94 9/30/93 9/30/92 9/30/91 9/30/90
---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period..................... $11.31 $10.60 $10.33 $ 9.91 $10.00
---------- ---------- ---------- ---------- --------
Income from investment operations
Net investment income.................................. 0.48 0.55 0.58 0.64 0.25
Net gain (loss) on investments (both realized and
unrealized).......................................... (0.93) 0.83 0.49 0.46 (0.11)
---------- ---------- ---------- ---------- --------
Total from investment operations................... (0.45) 1.38 1.07 1.10 0.14
---------- ---------- ---------- ---------- --------
Less distributions
Distributions from net investment income............... (0.48) (0.55) (0.59) (0.66) (0.23)
Distributions from net realized capital gains.......... (0.34) (0.12) (0.21) (0.02) --
---------- ---------- ---------- ---------- --------
Total distributions................................ (0.82) (0.67) (0.80) (0.68) (0.23)
---------- ---------- ---------- ---------- --------
Net asset value at end of period........................... $10.04 $11.31 $10.60 $10.33 $ 9.91
========== ========== ========== ========== ========
Total return............................................... (4.19)%(3) 13.48%(3) 10.67%(3) 11.40%(3) 1.40%(3)
Ratios/Supplemental data
Net assets at end of period (in thousands)............. $6,972 $7,831 $7,349 $3,510 $4,044
Ratios of expenses to average net assets
After advisory/administration fee waivers............ 0.95% 0.57% 0.53% 1.00% 1.00%(2)
Before advisory/administration fee waivers........... 2.18% 1.36% 1.67% 1.89% 1.70%(2)
Ratios of net investment income to average net assets
After advisory/administration fee waivers............ 4.53% 5.06% 5.56% 6.23% 6.56%(2)
Before advisory/administration fee waivers........... 3.30% 4.27% 4.42% 5.34% 5.86%(2)
Portfolio turnover rate................................ 40% 71% 38% 95% 18%
</TABLE>
- -------------
(1) Commencement of operations.
(2) Annualized.
(3) Sales load not reflected in total return.
9
<PAGE> 11
THE PNC(R) FUND
FINANCIAL HIGHLIGHTS (Continued)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
INTERMEDIATE GOVERNMENT PORTFOLIO
--------------------------------------
INSTITUTIONAL CLASS
--------------------------------------
FOR THE
PERIOD
YEAR YEAR 4/20/92(1)
ENDED ENDED THROUGH
9/30/94 9/30/93 9/30/92
-------- -------- --------
<S> <C> <C> <C>
Net asset value at beginning of period........................................... $ 10.60 $ 10.46 $ 10.00
-------- -------- --------
Income from investment operations
Net investment income........................................................ 0.55 0.54 0.24
Net gain (loss) on investments (both realized and unrealized)................ (0.86) 0.16 0.46
-------- -------- --------
Total from investment operations......................................... (0.31) 0.70 0.70
-------- -------- --------
Less distributions
Distributions from net investment income..................................... (0.55) (0.54) (0.24)
Distributions from net realized capital gains................................ (0.10) (0.02) --
-------- -------- --------
Total distributions...................................................... (0.65) (0.56) (0.24)
-------- -------- --------
Net asset value at end of period................................................. $ 9.64 $ 10.60 $ 10.46
======== ======== ========
Total return..................................................................... (3.08)% 6.88% 7.14%
Ratios/Supplemental data
Net assets at end of period (in thousands)................................... $128,974 $137,065 $105,620
Ratios of expenses to average net assets
After advisory/administration fee waivers.................................. 0.40% 0.73% 0.80%(2)
Before advisory/administration fee waivers................................. 0.80% 0.81% 0.80%(2)
Ratios of net investment income to average net assets
After advisory/administration fee waivers.................................. 5.48% 5.23% 5.28%(2)
Before advisory/administration fee waivers................................. 5.08% 5.15% 5.28%(2)
Portfolio turnover rate.......................................................... 9% 80% 38%
</TABLE>
- -------------
(1) Commencement of operations.
(2) Annualized.
10
<PAGE> 12
THE PNC(R) FUND
FINANCIAL HIGHLIGHTS (Continued)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
INTERMEDIATE GOVERNMENT PORTFOLIO
-------------------------------------------------------------
SERVICE CLASS SERIES A INVESTOR CLASS
------------------- -----------------------------------
FOR THE FOR THE
PERIOD PERIOD
YEAR 7/29/93(1) YEAR YEAR 5/11/92(1)
ENDED THROUGH ENDED ENDED THROUGH
9/30/94 9/30/93 9/30/94 9/30/93 9/30/92
------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period........................... $10.60 $ 10.45 $10.60 $10.46 $10.05
------- -------- ------- ------- --------
Income from investment operations
Net investment income........................................ 0.53 0.09 0.53 0.54 0.24
Net gain (loss) on investments (both realized and
unrealized)................................................ (0.86) 0.15 (0.87) 0.16 0.41
------- -------- ------- ------- --------
Total from investment operations......................... (0.33) 0.24 (0.34) 0.70 0.65
------- -------- ------- ------- --------
Less distributions
Distributions from net investment income..................... (0.53) (0.09) (0.52) (0.54) (0.24)
Distributions from net realized capital gains................ (0.10) -- (0.10) (0.02) --
------- -------- ------- ------- --------
Total distributions...................................... (0.63) (0.09) (0.62) (0.56) (0.24)
------- -------- ------- ------- --------
Net asset value at end of period................................. $ 9.64 $ 10.60 $ 9.64 $10.60 $10.46
======= ======== ======= ======= ========
Total return..................................................... (3.31)% 2.30% (3.36)%(3) 6.84%(3) 6.64%(3)
Ratios/Supplemental data
Net assets at end of period (in thousands)................... $60,812 $15,035 $8,508 $7,666 $1,484
Ratios of expenses to average net assets
After advisory/administration fee waivers.................. 0.65% 0.67%(2) 0.65% 0.76% 0.80%(2)
Before advisory/administration fee waivers................. 1.05% 0.75%(2) 1.05% 0.84% 0.80%(2)
Ratios of net investment income to average net assets
After advisory/administration fee waivers.................. 5.30% 5.14%(2) 5.24% 5.19% 5.28%(2)
Before advisory/administration fee waivers................. 4.90% 5.06%(2) 4.84% 5.11% 5.28%(2)
Portfolio turnover rate.......................................... 9% 80% 9% 80% 38%
</TABLE>
- -------------
(1) Commencement of operations.
(2) Annualized.
(3) Sales load not reflected in total return.
11
<PAGE> 13
THE PNC(R) FUND
FINANCIAL HIGHLIGHTS (Continued)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
OHIO TAX-FREE INCOME PORTFOLIO
---------------------------------------------------------------------
SERIES A
INSTITUTIONAL CLASS SERVICE CLASS INVESTOR CLASS
------------------- ------------------- -----------------------
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
YEAR 12/1/92(1) YEAR 7/29/93(1) YEAR 12/1/92(1)
ENDED THROUGH ENDED THROUGH ENDED THROUGH
9/30/94 9/30/93 9/30/94 9/30/93 9/30/94 9/30/93
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period.............. $10.53 $10.00 $10.53 $10.24 $10.53 $10.00
------- -------- ------- -------- ------- --------
Income from investment operations
Net investment income........................... 0.53 0.36 0.49 0.09 0.53 0.36
Net gain (loss) on investments (both realized
and unrealized)............................... (0.91) 0.53 (0.91) 0.29 (0.91) 0.53
------- -------- ------- -------- ------- --------
Total from investment operations............ (0.38) 0.89 (0.42) 0.38 (0.38) 0.89
------- -------- ------- -------- ------- --------
Less distributions
Distributions from net investment income........ (0.53) (0.36) (0.49) (0.09) (0.53) (0.36)
Distributions from net realized capital gains... (0.02) -- (0.02) -- (0.02) --
------- -------- ------- -------- ------- --------
Total distributions......................... (0.55) (0.36) (0.51) (0.09) (0.55) (0.36)
------- -------- ------- -------- ------- --------
Net asset value at end of period.................... $ 9.60 $10.53 $ 9.60 $10.53 $ 9.60 $10.53
======= ======== ======= ======== ======= ========
Total return........................................ (3.75)% 9.10% (4.00)% 3.68% (3.75)%(3) 9.10%(3)
Ratios/Supplemental data
Net assets at end of period (in thousands)...... $ 127 $1,676 $4,428 $ 907 $3,825 $2,386
Ratios of expenses to average net assets
After advisory/administration
fee waivers................................. 0.10% 0.08%(2) 0.35% 0.32%(2) 0.10% 0.07%(2)
Before advisory/administration
fee waivers................................. 1.49% 2.59%(2) 1.74% 2.83%(2) 1.49% 2.58%(2)
Ratios of net investment income to average net
assets
After advisory/administration
fee waivers................................. 5.16% 4.99%(2) 5.06% 4.71%(2) 5.18% 4.90%(2)
Before advisory/administration
fee waivers................................. 3.77% 2.48%(2) 3.67% 2.20%(2) 3.79% 2.39%(2)
Portfolio turnover rate............................. 61% 36% 61% 36% 61% 36%
</TABLE>
- -------------
(1) Commencement of operations.
(2) Annualized.
(3) Sales load not reflected in total return.
12
<PAGE> 14
THE PNC(R) FUND
FINANCIAL HIGHLIGHTS (Continued)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
PENNSYLVANIA TAX-FREE INCOME PORTFOLIO
-------------------------------------------------------------------
INSTITUTIONAL SERIES A
CLASS SERVICE CLASS INVESTOR CLASS
------------------ ------------------ -------------------
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
YEAR 12/1/92(1) YEAR 7/29/931 YEAR 12/1/92(1)
ENDED THROUGH ENDED THROUGH ENDED THROUGH
9/30/94 9/30/93 9/30/94 9/30/93 9/30/94 9/30/93
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period................... $10.70 $10.00 $10.70 $10.43 $10.70 $ 10.00
------- -------- ------- -------- ------- --------
Income from investment operations
Net investment income................................ 0.53 0.39 0.51 0.09 0.52 0.42
Net gain (loss) on investments (both realized and
unrealized)........................................ (0.85) 0.73 (0.85) 0.28 (0.85) 0.73
------- -------- ------- -------- ------- --------
Total from investment operations................. (0.32) 1.12 (0.34) 0.37 (0.33) 1.15
------- -------- ------- -------- ------- --------
Less distributions
Distributions from net investment income............. (0.53) (0.39) (0.51) (0.09) (0.52) (0.42)
Distributions from net realized
capital gains...................................... (0.03) (0.03) (0.03) (0.01) (0.03) (0.03)
------- -------- ------- -------- ------- --------
Total distributions.............................. (0.56) (0.42) (0.54) (0.10) (0.55) (0.45)
------- -------- ------- -------- ------- --------
Net asset value at end of period......................... $ 9.82 $10.70 $ 9.82 $10.70 $ 9.82 $ 10.70
======= ======== ======= ======== ======= ========
Total return............................................. (2.96)% 11.69% (3.20)% 3.54% (3.06)%(3) 11.69%(3)
Ratios/Supplemental data
Net assets at end of period (in thousands)........... $ 639 $ 256 $11,518 $3,894 $46,563 $35,934
Ratios of expenses to average net assets
After advisory/administration
fee waivers...................................... 0.39% 0.09%(2) 0.55% 0.34%(2) 0.41% 0.07%(2)
Before advisory/administration
fee waivers...................................... 0.99% 0.97%(2) 1.15% 1.22%(2) 1.01% 0.95%(2)
Ratios of net investment income to average net assets
After advisory/administration
fee waivers...................................... 5.27% 5.19%(2) 4.97% 4.90%(2) 5.06% 5.19%(2)
Before advisory/administration
fee waivers...................................... 4.67% 4.31%(2) 4.37% 4.02%(2) 4.46% 4.31%(2)
Portfolio turnover rate.................................. 30% 40% 30% 40% 30% 40%
</TABLE>
- -------------
(1) Commencement of operations.
(2) Annualized.
(3) Sales load not reflected in total return.
13
<PAGE> 15
THE PNC(R) FUND
FINANCIAL HIGHLIGHTS (Continued)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SHORT-TERM BOND PORTFOLIO
--------------------------------------------------------------------
SERIES A
INSTITUTIONAL CLASS SERVICE CLASS INVESTOR CLASS
--------------------- --------------------- --------------
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
YEAR 9/1/93(1) YEAR 9/1/93(1) 11/17/93(1)
ENDED THROUGH ENDED THROUGH THROUGH
9/30/94 9/30/93 9/30/94 9/30/93 9/30/94
---------- -------- ---------- -------- --------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period.................... $ 10.00 $10.00 $10.00 $10.00 $ 9.96
---------- -------- ---------- -------- ------
Income from investment operations
Net investment income................................. 0.42 0.02 0.39 0.02 0.34
Net gain (loss) on investments (both realized and
unrealized)......................................... (0.42) -- (0.42) -- (0.38)
---------- -------- ---------- -------- ------
Total from investment operations.................. -- 0.02 (0.03) 0.02 (0.04)
---------- -------- ---------- -------- ------
Less distributions
Distributions from net investment income.............. (0.42) (0.02) (0.39) (0.02) (0.34)
Distributions from net realized capital gains......... -- -- -- -- --
---------- -------- ---------- -------- ------
Total distributions............................... (0.42) (0.02) (0.39) (0.02) (0.34)
---------- -------- ---------- -------- ------
Net asset value at end of period.......................... $ 9.58 $10.00 $ 9.58 $10.00 $ 9.58
========== ======== ========== ======== ============
Total return.............................................. (0.02)% 0.23% (0.26)% 0.21% (0.43)(3)
Ratios/Supplemental data
Net assets at end of period (in thousands)............ $ 17,619 $3,748 $6,230 $2,811 $ 277
Ratios of expenses to average net assets
After advisory/administration fee waivers........... 0.40% 0.40%(2) 0.65% 0.65%(2) 0.65%(2)
Before advisory/administration fee waivers.......... 0.95% 1.42%(2) 1.20% 1.67% 1.20%(2)
Ratios of net investment income to average
net assets
After advisory/administration fee waivers........... 4.27% 2.92%(2) 4.07% 2.57%(2) 4.19%(2)
Before advisory/administration fee waivers.......... 3.72% 1.90%(2) 3.52% 1.55%(2) 3.64%(2)
Portfolio turnover rate................................... 113% 0% 113% 0% 113%
</TABLE>
- -------------
(1) Commencement of operations.
(2) Annualized.
(3) Sales load not reflected in total return.
14
<PAGE> 16
THE PNC(R) FUND
FINANCIAL HIGHLIGHTS (Continued)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
INTERMEDIATE-TERM BOND PORTFOLIO
--------------------------------------------------------------------
SERIES A
INSTITUTIONAL CLASS SERVICE CLASS INVESTOR CLASS
--------------------- --------------------- --------------
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
YEAR 9/17/93(1) YEAR 9/23/93(1) 5/20/94(1)
ENDED THROUGH ENDED THROUGH THROUGH
9/30/94 9/30/93 9/30/94 9/30/93 9/30/94
---------- -------- ---------- -------- --------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period.................. $ 10.01 $ 10.00 $ 10.01 $ 9.99 $ 9.23
---------- -------- ---------- -------- ------
Income from investment operations
Net investment income............................... 0.54 0.02 0.54 -- 0.20
Net gain (loss) on investments (both realized and
unrealized)....................................... (0.88) (0.01) (0.91) 0.02 (0.17)
---------- -------- ---------- -------- ------
Total from investment operations................ (0.34) 0.01 (0.37) 0.02 0.03
---------- -------- ---------- -------- ------
Less distributions
Distributions from net investment income............ (0.56) -- (0.53) -- (0.21)
Distributions from net realized capital gains....... (0.06) -- (0.06) -- --
---------- -------- ---------- -------- ------
Total distributions............................. (0.62) -- (0.59) -- (0.21)
---------- -------- ---------- -------- ------
Net asset value at end of period........................ $ 9.05 $ 10.01 $ 9.05 $10.01 $ 9.05
========== ======== ========== ======== ============
Total return............................................ (3.52)% 0.10% (3.80)% 0.20% 0.31%(3)
Ratios/Supplemental data
Net assets at end of period (in thousands).......... $ 71,896 $56,713 $ 35,764 $ 91 $ 87
Ratios of expenses to average net assets
After advisory/administration fee waivers......... 0.45% 0.45%(2) 0.70% 0.70%(2) 0.85%(2)
Before advisory/administration fee waivers........ 0.88% 0.84%(2) 1.13% 1.09%(2) 1.28%(2)
Ratios of net investment income to average net
assets
After advisory/administration fee waivers......... 5.54% 4.72%(2) 5.33% 4.35%(2) 5.35%(2)
Before advisory/administration fee waivers........ 5.11% 4.33%(2) 4.90% 3.96%(2) 4.92%(2)
Portfolio turnover rate................................. 92% 4% 92% 4% 92%
</TABLE>
- -------------
(1) Commencement of operations.
(2) Annualized.
(3) Sales load not reflected in total return.
15
<PAGE> 17
INVESTMENT POLICIES
- --------------------------------------------------------------------------------
MANAGED INCOME PORTFOLIO
The Portfolio will normally invest at least 80% of the value of its total
assets in debt securities of all types, although up to 20% of the value of its
total assets may be invested in preferred stocks. Debt securities may include,
without limitation, bonds, debentures, notes, equipment lease and trust
certificates, mortgage-related securities, Municipal Obligations (other than
tax-exempt derivative securities), guaranteed investment contracts (GICs) and
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. The sub-adviser uses a number of factors in selecting
securities, including without limitation as applicable, debt to equity and
capital ratios, pre-tax fixed charge coverage, return on equity, the issuance's
size, current yield, general economic analysis, preservation of capital,
potential for realizing capital appreciation, maturity and yield to maturity.
Purchasable debt securities and preferred stock are rated at the time of
purchase within the four highest ratings assigned by Moody's Investors Service,
Inc. ("Moody's") (i.e., Aaa, Aa, A, Baa for bonds and preferred stock) or by
Standard & Poor's Corporation ("S&P") (i.e., AAA, AA, A, BBB for bonds and
preferred stock) or, if unrated, are determined by sub-adviser at the time of
purchase to be of comparable quality. Securities rated "Baa" by Moody's or "BBB"
by S&P, respectively, are generally considered to be investment grade although
they have speculative characteristics and changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case for higher grade bonds. If a
portfolio security is reduced below Baa by Moody's or BBB by S&P, the
Portfolio's sub-adviser will dispose of the security in an orderly fashion as
soon as practicable. See Appendix A to the Statement of Additional Information
for a description of Moody's and S&P's rating symbols.
The Portfolio may invest up to 10% of the value of its total assets in debt
securities of foreign issuers. Investors should realize that investing in
securities of foreign issuers involves considerations not typically associated
with investing in securities of companies organized and operated in the United
States. Because foreign securities generally are denominated and pay dividends
or interest in foreign currencies, and the Portfolio may hold from time to time
various foreign currencies pending their investment in foreign securities or
their conversion into U.S. dollars, the value of the Portfolio's assets as
measured in U.S. dollars may be affected favorably or unfavorably by changes in
exchange rates. Although the Portfolio intends to invest in securities of
companies and governments of developed, stable nations, investors should realize
that the value of the Portfolio's investments may be adversely affected by
changes in political or social conditions, diplomatic relations, confiscatory
taxation, expropriation, limitation on the removal of funds or assets, or
imposition of (or change in) exchange control regulations in those foreign
nations. In addition, changes in government administrations or economic or
monetary policies in the U.S. or abroad could result in appreciation or
depreciation of portfolio securities and could favorably or adversely affect the
Portfolio's operations. Furthermore, the economies of individual foreign nations
may differ from that of the United States, whether favorably or unfavorably, in
areas such as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position. Any
foreign investments made by the Portfolio must be made in compliance with U.S.
and foreign currency restrictions and tax laws restricting the amounts and types
of foreign investments.
In general, less information is publicly available with respect to foreign
issuers than is available with respect to U.S. companies. Most foreign companies
are also not subject to the uniform accounting and financial reporting
requirements applicable to issuers in the United States. The Portfolio's foreign
investments may be less liquid and their prices may be more volatile than
comparable investments in securities in U.S. companies. Expenses relating to
foreign investments are higher than those relating to domestic securities. In
addition, there is generally less government supervision and regulation of
securities exchanges, brokers and issuers in foreign countries than in the
United States.
16
<PAGE> 18
The two principal classifications of Municipal Obligations are "general
obligation" securities and "revenue" securities. General obligation securities
are secured by the issuer's pledge of its full faith, credit and taxing power
for the payment of principal and interest. Revenue securities are payable only
from the revenues derived from a particular facility or class of facilities or,
in some cases, from the proceeds of a special excise tax or other specific
revenue source such as the user of the facility being financed. Revenue
securities include private activity bonds which are not payable from the
unrestricted revenues of the issuer. Consequently, the credit quality of private
activity bonds is usually directly related to the credit standing of the
corporate user of the facility involved. Municipal Obligations may also include
"moral obligation" bonds, which are normally issued by special purpose public
authorities. If the issuer of moral obligation bonds is unable to meet its debt
service obligations from current revenues, it may draw on a reserve fund, the
restoration of which is a moral commitment but not a legal obligation of the
state or municipality which created the issuer.
Purchasable Municipal Obligations include debt obligations issued by
governmental entities to obtain funds for various public purposes, including the
construction of a wide range of public facilities, the refunding of outstanding
obligations, the payment of general operating expenses and the extension of
loans to public institutions and facilities. Private activity bonds issued by or
on behalf of public authorities to finance various privately operated facilities
are considered Municipal Obligations. Dividends paid by the Portfolio that are
derived from interest on such Municipal Obligations would be taxable to the
Portfolio's shareholders for Federal income tax purposes.
When investing in GICs, the Portfolio makes cash contributions to a deposit
fund of an insurance company's general account. The insurance company then
credits to the deposit fund on a monthly basis guaranteed interest which is
based on an index (in most cases this index is expected to be the Salomon
Brothers CD Index). GICs provide that this guaranteed interest will not be less
than a certain minimum rate. A GIC is a general obligation of the issuing
insurance company and not a separate account. The purchase price paid for a GIC
becomes part of the general assets of the insurance company, and the contract is
paid from the general assets of the insurance company. The Portfolio will only
purchase GICs from insurance companies which, at the time of purchase, are rated
"A+" by A.M. Best Company, have assets of $1 billion or more and meet quality
and credit standards established by the sub-adviser pursuant to guidelines
approved by the Board of Trustees. Generally, GICs are not assignable or
transferable without the permission of the issuing insurance companies, and an
active secondary market in GICs does not currently exist.
Also included within the general category of Municipal Obligations are
participation certificates in a lease, an installment purchase contract, or a
conditional sales contract ("lease obligations") entered into by a state or
political subdivision to finance the acquisition or construction of equipment,
land, or facilities. Although lease obligations do not constitute general
obligations of the issuer for which the lessee's unlimited taxing power is
pledged, certain lease obligations are backed by the lessee's covenant to
appropriate money to make the lease obligation payments. However, under certain
lease obligations, the lessee has no obligation to make these payments in future
years unless money is appropriated on a yearly basis. Although
"non-appropriation" lease obligations are secured by the leased property,
disposition of the property in the event of foreclosure might prove difficult.
These securities represent a relatively new type of financing that is not yet as
marketable as more conventional securities. Moreover, certain investments in
lease obligations may be illiquid and subject to the investment limitations
described below. The Portfolio does not currently intend to invest in such lease
obligations. See "Investment Policies--Common Investment Policies" for a
description of other investment policies.
Under normal market conditions, the Managed Income Portfolio's
average-weighted maturity will generally be between 5 and 15 years.
17
<PAGE> 19
------------------------------------
TAX-FREE INCOME PORTFOLIO
Purchasable Municipal Obligations are rated within the four highest
categories assigned by Moody's (Aaa, Aa, A or Baa) or by S&P (AAA, AA, A or BBB)
in the case of bonds, rated SP-2 or higher by S&P or MIG-2 or higher by Moody's
in the case of notes, rated A-2 or higher by S&P or Prime-2 or higher by Moody's
in the case of tax-exempt commercial paper or VMIG-2 or higher by Moody's in the
case of variable rate demand notes or are unrated securities determined at the
time of purchase to be of comparable quality by the sub-adviser. In the event
that the rating of a Portfolio security is reduced below Baa by Moody's or BBB
by S&P, the security will be disposed of in an orderly fashion as soon as
practicable. See "Investment Policies--Managed Income Portfolio" for a
description of Municipal Obligations and certain considerations relating to
securities rated Baa or BBB by Moody's or S&P, respectively, "Investment
Policies--Common Investment Policies" for a description of other investment
policies and Appendix A to the Statement of Additional Information for a
description of Moody's and S&P's ratings.
Under normal market conditions, the Tax-Free Income Portfolio's
average-weighted maturity will generally be between 10 and 25 years.
------------------------------------
INTERMEDIATE GOVERNMENT PORTFOLIO
Treasury obligations differ in their interest rates, maturities and times
of issuance. Some obligations issued or guaranteed by U.S. Government agencies
and instrumentalities such as Government National Mortgage Association
pass-through certificates are supported by the United States' full faith and
credit; others such as those of the Federal Home Loan Banks are supported by the
right of the issuer to borrow from the Treasury; others such as those issued by
the Federal National Mortgage Association and the Student Loan Marketing
Association are supported by the U.S. Government's discretionary authority to
purchase certain obligations of the agency or instrumentality; and others are
supported only by the credit of the agency or instrumentality. While the U.S.
Government provides financial support to such U.S. Government-sponsored agencies
or instrumentalities, no assurance can be given that it always will do so
because it is not so obligated by law. The Portfolio may invest in CMOs rated at
the time of purchase within the four highest ratings assigned by Moody's (i.e.,
Aaa, Aa, A, Baa) or by S&P (i.e., AAA, AA, A, BBB) or, if unrated, are
determined by sub-adviser at the time of purchase to be of comparable quality.
CMOs are not government securities. During normal market conditions, at least
65% of the Portfolio's total assets will be invested in U.S. Government
obligations or repurchase agreements relating to such obligations. See
"Investment Policies--Managed Income Portfolio" for a description of certain
considerations relating to securities rated Baa or BBB by Moody's or S&P,
respectively, "Investment Policies--Common Investment Policies" for a
description of other investment policies and Appendix A to the Statement of
Additional Information for a description of Moody's and S&P's ratings.
Under normal market conditions, the Intermediate Government Portfolio's
average-weighted maturity will generally be between three and ten years.
------------------------------------
OHIO TAX-FREE INCOME PORTFOLIO
Purchasable Municipal Obligations are rated within the four highest ratings
assigned by Moody's (i.e., Aaa, Aa, A, Baa) or by S&P (AAA, AA, A, BBB) in the
case of bonds, rated SP-2 or higher by S&P or MIG-2 or higher by Moody's
18
<PAGE> 20
in the case of notes, rated A-2 or higher by S&P or Prime-2 or higher by Moody's
in the case of tax-exempt commercial paper or VMIG-2 or higher by Moody's in the
case of variable rate demand notes or are unrated securities determined at the
time of purchase to be of comparable quality by the sub-adviser. If a portfolio
security is reduced below Baa by Moody's or BBB by S&P, the Portfolio's
sub-adviser will dispose of the security in an orderly fashion as soon as
practicable. The Portfolio will not trade its securities for the purpose of
seeking profits. For purposes of this policy, the Portfolio may vary its
portfolio securities if (i) there has been an adverse change in a security's
credit rating or in that of its issuer or in the adviser's or sub-adviser's
credit analysis of the security or its issuer; (ii) there has been, in the
opinion of the adviser and sub-adviser, a deterioration or anticipated
deterioration in general economic or market conditions affecting issuers of Ohio
Municipal Obligations, or a change or anticipated change in interest rates;
(iii) adverse changes or anticipated changes in market conditions or economic or
other factors temporarily affecting the issuers of one or more portfolio
securities make necessary or desirable the sale of such security or securities
in anticipation of the Portfolio's repurchase of the same or comparable
securities at a later date; or (iv) the adviser or sub-adviser engages in
temporary defensive investment strategies. See "Investment Policies--Managed
Income Portfolio" for a description of Municipal Obligations and certain
considerations relating to securities rated Baa or BBB by Moody's or S&P,
respectively, and Appendix A to the Statement of Additional Information for a
description of Moody's and S&P's ratings.
The concentration of investments in Ohio Municipal Obligations raises
special investment considerations. While diversifying more into the service and
other non-manufacturing areas, the economy of Ohio 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 in Ohio, 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 Ohio 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 national figure of 5.5%. However,
for 1991, 1992 and 1993 the State rates (6.4%, 7.2% and 6.5%) were below the
national rates (6.7%, 7.4% and 6.8%). The unemployment rate and its effects vary
among particular 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 will not adversely affect the
market value of Ohio Municipal Obligations held in the Portfolio or the ability
of the respective obligors to make timely payments of debt service on (or lease
payments relating to) these obligations. See the Statement of Additional
Information for further discussions of investment considerations associated with
Ohio Municipal Obligations and see "Investment Policies--Common Investment
Policies" for a description of other investment policies.
Under normal market conditions, the Ohio Tax-Free Income Portfolio's
average-weighted maturity will generally be between 10 and 25 years.
------------------------------------
PENNSYLVANIA TAX-FREE INCOME PORTFOLIO
Purchasable Municipal Obligations are rated within the four highest ratings
assigned by Moody's (i.e., Aaa, Aa, A, Baa) or by S&P (AAA, AA, A, BBB) in the
case of bonds, rated SP-2 or higher by S&P or MIG-2 or higher by Moody's in the
case of notes, rated A-2 or higher by S&P or Prime-2 or higher by Moody's in the
case of tax-exempt commercial paper or VMIG-2 or higher by Moody's in the case
of variable rate demand notes or are unrated securities determined at the time
of purchase to be of comparable quality by the sub-adviser. If a portfolio
security is reduced below Baa by
19
<PAGE> 21
Moody's or BBB by S&P, the Portfolio's sub-adviser will dispose of the security
in an orderly fashion as soon as practicable. See "Investment Policies--Managed
Income Portfolio" for a description of Municipal Obligations and certain
considerations relating to securities rated Baa or BBB by Moody's or S&P,
respectively, and Appendix A to the Statement of Additional Information for a
description of Moody's and S&P's ratings.
The concentration of investments in Pennsylvania Municipal Obligations
raises special investment considerations. In particular, changes in the economic
condition and governmental policies of the Commonwealth of Pennsylvania and its
political subdivisions, agencies, instrumentalities and authorities could
adversely affect the value of the Portfolio and its portfolio securities.
Although the General Fund of the Commonwealth (the principal operating fund of
the Commonwealth) experienced deficits in 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. Rising
unemployment, a relatively high proportion of persons 65 and older in the
Commonwealth and court ordered increases in healthcare reimbursement rates place
increased pressures on the tax resources of the Commonwealth and its
municipalities. See the Statement of Additional Information for further
discussion of investment considerations associated with Pennsylvania Municipal
Obligations and see "Investment Policies--Common Investment Policies" for a
description of other investment policies.
The Commonwealth has sold a substantial amount of bonds over the past
several years, but the debt burden remains moderate. The recession has affected
Pennsylvania's economic base, with income and job growth at levels below
national averages. Employment growth has shifted to the trade and service
sectors, with losses in more high-paid manufacturing positions. A new governor
took office in January, but the Commonwealth is likely to continue to show
fiscal restraint.
Under normal market conditions, the Pennsylvania Tax-Free Income
Portfolio's average-weighted maturity will generally be between 10 and 25 years.
------------------------------------
SHORT-TERM BOND PORTFOLIO
The Portfolio will invest up to 100% of the value of its total assets in
debt securities rated at the time of purchase within the four highest ratings
assigned by Moody's (Aaa, Aa, A, Baa) or by S&P (AAA, AA, A, BBB), or if
unrated, are determined by the sub-adviser at the time of purchase to be of
comparable quality. Debt securities may include, without limitation, bonds,
debentures, notes, equipment lease and trust certificates, mortgage-related
securities, structured rate notes and obligations issued or guaranteed by the
U.S. Government or its agencies or instrumentalities. See "Investment
Policies--Managed Income Portfolio" for a discussion of mortgage-backed
securities. See "Investment Policies--Intermediate Government Portfolio" for
examples of the types of U.S. Government Obligations that the Portfolio may
purchase.
The Portfolio may purchase bank obligations, such as certificates of
deposit, bankers' acceptances and demand and time deposits, including U.S.
dollar-denominated 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 Portfolio may invest substantially in
obligations of foreign banks or foreign branches of U.S. banks where the adviser
deems the instrument to present minimal credit risks. Such investments may
include Eurodollar Certificates of Deposit ("EDCs") which are U.S.
dollar-dominated certificates of deposit issued by foreign and domestic banks
located outside the United States; Eurodollar Time Deposits ("ETDs") which are
U.S. dollar-denominated deposits in a foreign branch of a U.S. bank or a
20
<PAGE> 22
foreign bank; Canadian Time Deposits ("CTDs") which are essentially the same as
ETDs except that they are issued by Canadian offices of major Canadian banks;
and Yankee Certificates of Deposit ("Yankee CDs") which are U.S. dollar-
denominated certificates of deposit issued by a U.S. branch of a foreign bank
and held in the United States. The Portfolio may also make interest-bearing
savings deposits in commercial and savings banks.
Investments in obligations issued by foreign banks and foreign branches of
U.S. banks may involve risks that are different from investments in obligations
of domestic branches of U.S. banks. These risks may include future unfavorable
political and economic developments, possible withholding taxes on interest
income, seizure or nationalization of foreign deposits, currency controls,
interest limitations, or other governmental restrictions which might affect the
payment of principal or interest on the securities held by the Portfolio.
Additionally, these institutions may be subject to less stringent reserve
requirements and to different accounting, auditing, reporting and recordkeeping
requirements than those applicable to domestic branches of U.S. banks.
The Portfolio may purchase rated and unrated variable and floating rate
instruments. 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. Issuers of unrated variable and
floating rate instruments must satisfy the same criteria as set forth above for
the Portfolio and will be determined to present minimal credit risks by the
sub-adviser. The absence of an active secondary market with respect to
particular variable and floating rate instruments, however, could make it
difficult for the Portfolio to dispose of a variable or floating rate instrument
if the issuer defaulted on its payment obligation or during periods when 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. See "Investment Policies--Common Investment Policies" for a
description of other investment policies.
Under normal market conditions, the Short-Term Bond Portfolio's
average-weighted maturity is expected to be five years or less.
------------------------------------
INTERMEDIATE-TERM BOND PORTFOLIO
The Intermediate-Term Bond Portfolio will invest up to 100% of its total
assets in debt securities similar to those of the Short-Term Bond Portfolio. See
"Investment Policies--Short-Term Bond Portfolio" for a discussion of the types
of securities in which the Portfolio may invest. See "Investment
Policies--Common Investment Policies" for a discussion of other investment
policies.
Under normal market conditions, the Intermediate-Term Bond Portfolio's
average-weighted maturity is expected to be between five and ten years.
------------------------------------
GOVERNMENT INCOME PORTFOLIO
The Portfolio is designed primarily for investors seeking current income
through a professionally-managed diversified portfolio of U.S. Government
securities. During normal market periods, at least 65% of the Portfolio's assets
will be invested in U.S. Government obligations (or repurchase agreements
relating to such obligations). The composition and dollar-weighted average
portfolio maturity of the Portfolio will vary from time to time based upon the
sub-adviser's assessment of relative yields available on U.S. Government
securities of different maturities, its
21
<PAGE> 23
expectations of future changes in interest rates and the determination of the
sub-adviser of how best to further the Portfolio's investment objective. The
Portfolio may invest in securities of all maturities--short-term,
intermediate-term and long-term. Treasury obligations differ only in their
interest rates, maturities and times of issuance. Obligations of certain
agencies and instrumentalities of the U.S. Government such as the Government
National Mortgage Association are supported by the United States' full faith and
credit; others such as those of the Federal National Mortgage Association and
the Student Loan Marketing Association are supported by the right of the issuer
to borrow from the Treasury; others such as those of the Federal Farm Credit
Banks or the Federal Home Loan Mortgage Corporation are supported only by the
credit of the instrumentality. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government-sponsored agencies
or instrumentalities if it is not obligated to do so by law.
The Portfolio purchases primarily fixed rate securities, including but not
limited to high coupon U.S. Government agency mortgage-backed securities, which
provide a higher coupon at the time of purchase than the then prevailing market
rate yield. The prices of high coupon securities do not tend to rise as rapidly
as those of traditional fixed rate securities at times when interest rates are
decreasing, and tend to decline more slowly at times when interest rates are
increasing. The Portfolio may purchase such securities at a premium, which means
that a faster principal prepayment rate than expected will reduce the market
value of and income from such securities, while a slower prepayment rate will
tend to increase the market value of and income from such securities. If the
Portfolio buys mortgage-backed securities at a premium, mortgage foreclosures
and prepayment of principal by mortgagors (which may be made at any time without
penalty) may result in some loss of the Portfolio's principal investment to the
extent of the premium paid.
------------------------------------
INTERNATIONAL FIXED INCOME PORTFOLIO
Under normal market conditions, the Portfolio will invest at least 65% of
its total assets in high quality fixed income obligations of foreign issuers.
The Portfolio's investments may include: (i) debt obligations issued or
guaranteed by foreign sovereign governments or their agencies, authorities,
instrumentalities or political subdivisions, including a foreign state, province
or municipality; (ii) debt obligations of supranational organizations such as
the World Bank, Asian Development Bank, European Investment Bank, and European
Economic Community; (iii) debt obligations of foreign banks and bank holding
companies; (iv) debt obligations of domestic banks and corporations issued in
foreign currencies; (v) debt obligations denominated in the European Currency
Unit (ECU); (vi) foreign corporate debt securities and commercial paper; and
(vii) private placements. Such securities may include loan participations and
assignments, convertible securities and zero-coupon securities. The Portfolio
may invest up to 5% of its net assets in securities rated below investment grade
by nationally recognized statistical rating organizations ("NRSROs") or in
comparable unrated securities. Such securities are commonly referred to as "junk
bonds." The portion of the Portfolio's assets invested in various countries will
vary from time to time depending on the sub-adviser's assessment of market
opportunities. The Portfolio is not restricted to any maximum or minimum time to
maturity in purchasing portfolio securities, and the average maturity of the
Portfolio's assets will vary based upon the sub-adviser's assessment of economic
and market conditions. The Portfolio has no minimum requirements for
diversification of its portfolio securities by country other than being invested
at all times in at least three countries other than the United States.
In determining appropriate investments for the Portfolio, primary emphasis
is placed upon the characteristics of the particular issues, although
significant emphasis is placed on macroeconomic factors. Macroeconomic factors
that ordinarily are considered by the sub-adviser in determining the appropriate
distribution of investments among various countries and geographic regions
include the prospects for relative economic growth among certain foreign
countries, expected levels of inflation, government policies influencing
business conditions, the outlook for currency relationships,
22
<PAGE> 24
and the range of individual investment opportunities available to international
investors. The Portfolio will generally invest in countries where the
combination of fixed income market returns and currency exchange rate movements
is attractive, or, if the currency trend is unfavorable, where the currency risk
can be minimized through hedging. The Portfolio does not trade in securities for
short-term profits but, when circumstances warrant, securities may be sold
without regard to the length of time held.
The Portfolio may use forward foreign currency exchange contracts and enter
into currency futures contracts (or options thereon) to hedge against movements
in the value of foreign currencies relative to the U.S. dollar in connection
with specific portfolio transactions or with respect to portfolio positions. A
forward foreign currency exchange contract involves an obligation to purchase or
sell a specified currency at a future date at a price set at the time of the
contract. Foreign currency exchange contracts do not eliminate fluctuations in
the values of portfolio securities but rather allow the Portfolio to establish a
rate of exchange for a future point in time.
To maintain greater flexibility, the Portfolio may invest in instruments
which have the characteristics of futures securities. Such instruments may take
a variety of forms, such as debt securities with interest or principal payments
determined by reference to the value of a currency or commodity at a future
point in time. The risks of such investments could reflect the risks of
investing in futures, currencies and securities, including volatility and
illiquidity.
The Portfolio may also invest in fixed income securities issued by U.S.
corporations, obligations of the U.S. Government and its agencies and
instrumentalities. The Portfolio may also invest in Brady Bonds, which are
securities issued in various currencies (primarily the U.S. dollar) that have
been created through the exchange of existing commercial bank loans to Latin
American public and private entities for new bonds in connection with debt
restructuring under a debt restructuring plan announced by former U.S. Secretary
of the Treasury Nicholas F. Brady.
During periods in which the sub-adviser believes changes in economic,
financial or political conditions make it advisable, the Portfolio may, for
temporary defensive purposes, reduce its holdings in certain foreign obligations
and invest some or all of its assets in certain short-term and intermediate-term
debt securities or hold cash without limitation. The short-term and
intermediate-term debt securities in which the Portfolio may invest include: (a)
obligations of the United States or foreign governments, their respective
agencies or instrumentalities; (b) bank deposits and bank obligations (including
certificates of deposit, time deposits and bankers' acceptances) of U.S. or
foreign banks denominated in any currency; (c) floating rate securities and
other instruments denominated in any currency issued by international
development agencies; (d) finance company and corporate commercial paper and
other short-term corporate debt obligations of U.S. and foreign corporations;
and (e) repurchase agreements with financial institutions with respect to such
securities. The Portfolio intends to invest only in short-term and medium-term
securities that are rated in one of the two highest rating categories by an
NRSRO or, if unrated, determined to be equivalent in credit quality by the
sub-adviser. See "Investment Policies--Common Investment Policies" for a
description of other investment policies.
SPECIAL RISK CONSIDERATIONS. Investors should realize that investing in
securities of foreign issuers involves considerations not typically associated
with investing in securities of companies organized and operated in the United
States or securities issued by the U.S. Government. Because foreign securities
generally are denominated and pay dividends or interest in foreign currencies
pending their investment in foreign securities or their conversion into U.S.
dollars, the value of the Portfolio's assets as measured in U.S. dollars will be
affected favorably or unfavorably by changes in exchange rates.
Although the Portfolio intends to invest in securities of companies and
governments of developed, stable nations, investors should realize that the
value of the Portfolio's investments may be adversely affected by changes in
political or social conditions, diplomatic relations, confiscatory taxation,
expropriation, limitation on the removal of funds or assets, or imposition of
(or change in) exchange control regulations in those foreign nations. In
addition, changes in
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government administrations or economic or monetary policies in the U.S. or
abroad could positively or negatively affect the performance of portfolio
securities and the Portfolio's operations. Investments in sovereign debt involve
certain risks, including the risk that foreign governments may default on their
obligations and offer only limited recourse, attempt to renegotiate the debt at
a lower rate, or freeze investments of U.S. entities. Furthermore, the economies
of individual foreign nations may differ from that of the United States, whether
favorably or unfavorably, in areas such as growth of gross national product,
rate of inflation, capital reinvestment, resource self-sufficiency and balance
of payments position. Any foreign investments made by the Portfolio must be made
in compliance with U.S. and foreign currency restrictions and tax laws
restricting the amounts and types of foreign investments.
In general, less information is publicly available with respect to foreign
issuers than is available with respect to U.S. companies. Most foreign companies
are also not subject to the uniform accounting and financial reporting
requirements applicable to issuers in the United States. In addition, while the
volume of transactions effected on foreign stock exchanges has increased in
recent years, it remains appreciably below that of the New York Stock Exchange.
Accordingly, the Portfolio's foreign investments may be less liquid and their
prices may be more volatile than comparable investments in securities in U.S.
companies. In buying and selling securities on foreign exchanges, the Portfolio
normally pays fixed commissions that are generally higher than the negotiated
commissions charged in the United States. Moreover, the Portfolio's expenses are
higher than those incurred by investment companies having portfolios of domestic
securities. In addition, there is generally less government supervision and
regulation of securities exchanges, brokers and issuers in foreign countries
than in the United States.
------------------------------------
COMMON INVESTMENT POLICIES
This section describes certain investment policies that are common to
Portfolios. Each Portfolio's investment objective and policies (except for the
80% concentration in Municipal Obligations specified in the first sentence of
the first paragraph of "Investment Policies--Common Investment
Policies--Tax-Free Income, Ohio Tax-Free Income and Pennsylvania Tax-Free Income
Portfolios") may be changed by the Board of Trustees without shareholder
approval. Depending upon prevailing market conditions, a Portfolio may purchase
debt securities at a discount from face value, which produces a yield greater
than the coupon rate. Conversely, if debt securities are purchased at a premium
over face value, the yield will be lower than the coupon rate. An increase in
interest rates will generally reduce the value of the investments in a Portfolio
and a decline in interest rates will generally increase the value of those
investments.
MORTGAGE-RELATED SECURITIES. The Managed Income, Intermediate Government,
Short-Term Bond, Intermediate-Term Bond, Government Income and International
Fixed Income Portfolios may invest in mortgage-related securities. Purchasable
mortgage-related securities are represented by pools of mortgage loans assembled
for sale to investors by various governmental agencies such as the Government
National Mortgage Association and government-related organizations such as the
Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"), as well as by private issuers such as commercial
banks, savings and loan institutions, mortgage bankers and private mortgage
insurance companies. Although certain mortgage-related securities are guaranteed
by a third party or are otherwise similarly secured, the market value of the
security, which may fluctuate, is not so secured. If a Portfolio purchases a
mortgage-related security at a premium, that portion may be lost if there is a
decline in the market value of the security whether resulting from increases in
interest rates or prepayment of the underlying mortgage collateral. As with
other interest-bearing securities, the prices of such securities are inversely
affected by changes in interest rates. However, though the value of a
mortgage-related security may decline when interest rates rise, the converse is
not necessarily true because in periods of declining interest rates mortgages
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underlying securities are prone to prepayment. For this and other reasons, a
mortgage-related security's stated maturity may be shortened by unscheduled
prepayments on underlying mortgages and, therefore, it is not possible to
predict accurately the security's return to a Portfolio. Mortgage-related
securities provide regular payments consisting of interest and principal. No
assurance can be given as to the return a Portfolio will receive when these
amounts are reinvested.
Mortgage-related securities acquired by the Portfolios may include
collateralized mortgage obligations ("CMOs") issued by FNMA, FHLMC or other U.S.
Government agencies or instrumentalities, as well as by private issuers. CMOs
provide an investor with a specified interest in the cash flow of a pool of
underlying mortgages or other mortgage-related securities. Issuers of CMOs
frequently elect to be taxed as pass-through entities known as real estate
mortgage investment conduits ("REMICs"). CMOs are issued in multiple classes,
each with a specified fixed or floating interest rate and a final distribution
date. The relative payment rights of the various CMO classes may be structured
in many ways. Generally, payments of principal are applied to the CMO classes in
the order of their respective stated maturities, so that no principal payments
will be made on a CMO class until all other classes having an earlier stated
maturity date are paid in full. Sometimes, however, CMO classes are "parallel
pay," i.e., payments of principal are made to two or more classes concurrently.
CMOs may exhibit more or less price volatility and interest rate risk than other
types of mortgage-related obligations.
ASSET-BACKED SECURITIES. The Managed Income, Short-Term Bond,
Intermediate-Term Bond and International Fixed Income Portfolios may purchase
asset-backed securities, which represent a participation in, or are secured by
and payable from, a stream of payments generated by particular assets, most
often a pool of assets similar to one another. Assets generating such payments
will consist of such instruments as motor vehicle installment purchase
obligations, credit card receivables and home equity loans. The Portfolios may
also invest in other types of asset-backed securities that may be available in
the future. Payment of principal and interest may be guaranteed up to certain
amounts and for a certain time period by a letter of credit issued by a
financial institution unaffiliated with entities issuing the securities. The
estimated life of an asset-backed security varies with the prepayment experience
with respect to the underlying debt instruments. The rate of such prepayments,
and hence the life of the asset-backed security, will be primarily a function of
current market rates, although other economic and demographic factors will be
involved. In certain circumstances, asset-backed securities may be considered
illiquid securities subject to the percentage limitations described below.
Asset-backed securities may involve certain risks that are not presented by
mortgage-backed securities arising primarily from the nature of the underlying
assets (i.e., credit card and automobile loan receivables as opposed to real
estate mortgages). For example, credit card receivables are generally unsecured
and may require the repossession of personal property upon the default of the
debtor which may be difficult or impracticable in some cases.
OPTIONS AND FUTURES CONTRACTS. Each Portfolio may write covered call
options, buy put options, buy call options and write put options, without
limitation except as noted in this paragraph. Such options may relate to
particular securities or to various indexes and may or may not be listed on a
national securities exchange and issued by the Options Clearing Corporation.
Each Portfolio may also invest in futures contracts and options on futures
contracts (index futures contracts or interest rate futures contracts, as
applicable) for hedging purposes or for other purposes so long as aggregate
initial margins and premiums required for non-hedging positions do not exceed 5%
of its net assets, after taking into account any unrealized profits and losses
on any such contracts it has entered into. However, no Portfolio may write put
options or purchase or sell futures contracts or options on futures contracts to
hedge more than its total assets unless immediately after any such transaction
the aggregate amount of premiums paid for put options and the amount of margin
deposits on its existing futures positions do not exceed 5% of its total assets.
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Options trading is a highly specialized activity which entails greater than
ordinary investment risks. A call option for a particular security gives the
purchaser of the option the right to buy, and a writer the obligation to sell,
the underlying security at the stated exercise price at any time prior to the
expiration of the option, regardless of the market price of the security. The
premium paid to the writer is in consideration for undertaking the obligations
under the option contract. A put option for a particular security gives the
purchaser the right to sell the underlying security at the stated exercise price
at any time prior to the expiration date of the option, regardless of the market
price of the security. In contrast to an option on a particular security, an
option on an index provides the holder with the right to make or receive a cash
settlement upon exercise of the option. The amount of this settlement will be
equal to the difference between the closing price of the index at the time of
exercise and the exercise price of the option expressed in dollars, times a
specified multiple.
A Portfolio will engage in unlisted over-the-counter options only with
broker/dealers deemed creditworthy by the adviser or sub-adviser. Closing
transactions in certain options are usually effected directly with the same
broker/dealer that effected the original option transaction. A Portfolio bears
the risk that the broker/dealer will fail to meet its obligations. There is no
assurance that a Portfolio will be able to close an unlisted option position.
Furthermore, unlisted options are not subject to the protections afforded
purchasers of listed options by the Options Clearing Corporation, which performs
the obligations of its members who fail to do so in connection with the purchase
or sale of options.
To enter into a futures contract, a Portfolio must make a deposit of
initial margin with its custodian in a segregated account in the name of its
futures broker. Subsequent payments to or from the broker, called variation
margin, will be made on a daily basis as the price of the underlying security or
index fluctuates, making the long and short positions in the futures contracts
more or less valuable.
When investing in futures contracts, the Portfolios must satisfy certain
asset segregation requirements to ensure that the use of futures is unleveraged.
When a Portfolio takes a long position in a futures contract, it must maintain a
segregated account containing cash and/or certain liquid assets equal to the
purchase price of the contract, less any margin or deposit. When a Portfolio
takes a short position in a futures contract, the Portfolio must maintain a
segregated account containing cash and/or certain liquid assets in an amount
equal to the market value of the securities underlying such contract (less any
margin or deposit), which amount must be at least equal to the market price at
which the short position was established. Asset segregation requirements are not
applicable when a Portfolio "covers" a futures position generally by entering
into an offsetting position.
The risks related to the use of options and futures contracts include: (i)
the correlation between movements in the market price of the portfolio
investments (held or intended for purchase) being hedged and in the price of the
futures contract or option may be imperfect; (ii) possible lack of a liquid
secondary market for closing out options or futures positions; (iii) the need
for additional portfolio management skills and techniques; and (iv) losses due
to unanticipated market movements. Successful use of options and futures by a
Portfolio is subject to the adviser's or sub-adviser's ability to correctly
predict movements in the direction of the market. For example, if a Portfolio
uses futures contracts as a hedge against the possibility of a decline in the
market adversely affecting securities held by it and securities prices increase
instead, the Portfolio will lose part or all of the benefit of the increased
value of its securities which it has hedged because it will have approximately
equal offsetting losses in its futures positions. The risk of loss in trading
futures contracts in some strategies can be substantial, due both to the low
margin deposits required and the extremely high degree of leverage involved in
futures pricing. As a result, a relatively small price movement in a futures
contract may result in immediate and substantial loss or gain to the investor.
Thus, a purchase or sale of a futures contract may result in losses or gains in
excess of the amount invested in the contract. For a further discussion see
"Investment Policies" in the Statement of Additional Information.
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REPURCHASE AGREEMENTS. Each Portfolio may agree to purchase debt securities
from financial institutions subject to the seller's agreement to repurchase them
at an agreed upon time and price ("repurchase agreements"). Repurchase
agreements are in substance loans. Default by or bankruptcy of the seller would,
however, expose a Portfolio to possible loss because of adverse market action or
delays in connection with the disposition of the underlying obligations.
CASH EQUIVALENTS. Each Portfolio may invest in taxable and tax-free
short-term, interest-bearing instruments or deposits of United States and
foreign issuers to maintain liquidity, pending investment and for temporary
defensive purposes. Such investments may include, but are not limited to,
commercial paper, certificates of deposit, variable or floating rate notes,
bankers' acceptances, time deposits (the Managed Income Portfolio will not
invest more than 5% of its total assets in time deposits with maturities in
excess of seven days which are subject to penalties upon early withdrawal),
government securities and money market deposit accounts.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may purchase
securities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions involve a commitment by a
Portfolio to purchase or sell particular securities with payment and delivery
taking place at a future date (perhaps one or two months later), and permit a
Portfolio to lock-in a price or yield on a security it owns or intends to
purchase, regardless of future changes in interest rates. When-issued and
forward commitment transactions involve the risk, however, that the price or
yield obtained in a transaction may be less favorable than the price or yield
available in the market when the securities delivery takes place. Each
Portfolio's when-issued purchases and forward commitments are not expected to
exceed 25% of the value of its total assets absent unusual market conditions.
The Portfolios do not intend to engage in when-issued purchases and forward
commitments for speculative purposes but only in furtherance of their investment
objectives.
REVERSE REPURCHASE AGREEMENTS. Each Portfolio may enter into reverse
repurchase agreements with respect to portfolio securities for temporary
purposes (such as to obtain cash to meet redemption requests when the
liquidation of portfolio securities is deemed disadvantageous or inconvenient by
the adviser or sub-adviser). A reverse repurchase agreement involves a sale by a
Portfolio of securities that it holds concurrently with an agreement by the
Portfolio to repurchase the same securities at an agreed-upon price and date.
Reverse repurchase agreements involve the risk that the market value of the
securities sold by a Portfolio may decline below the price of the securities the
Portfolio is obligated to repurchase. Reverse repurchase agreements are
considered to be borrowings by a Portfolio under the Investment Company Act of
1940 (the "1940 Act").
The Short-Term Bond, Intermediate-Term Bond, Intermediate Government and
Government Income Portfolios may enter into reverse repurchase agreement
transactions with member banks on the Federal Reserve Bank of New York's list of
reporting dealers. The Portfolios typically will invest the proceeds of a
reverse repurchase agreement in money market instruments or repurchase
agreements maturing not later than the expiration of the reverse repurchase
agreement. This use of the proceeds is known as leverage. The Portfolios will
enter into a reverse repurchase agreement for leverage purposes only when the
interest income to be earned from the investment of the proceeds is greater than
the interest expense of the transaction.
A Portfolio will establish a segregated account with its custodian in which
it will maintain cash, U.S. government securities or other liquid high grade
debt obligations equal in value to its obligations with respect to reverse
repurchase agreements.
INVESTMENT COMPANIES. Each Portfolio may invest in securities issued by
other investment companies within the limits prescribed by the 1940 Act. Each
Portfolio currently intends to limit its investments so that, as determined
immediately after a securities purchase is made: (i) not more than 5% of the
value of its total assets will be invested in the securities of any one
investment company; (ii) not more than 10% of the value of its total assets will
be invested in
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the aggregate in securities of investment companies as a group; and (iii) not
more than 3% of the outstanding voting stock of any one investment company will
be owned by the Portfolio or by the Fund as a whole. As a shareholder of another
investment company, a Portfolio would bear, along with other shareholders, its
pro rata portion of the other investment company's expenses, including advisory
fees. These expenses would be in addition to the advisory and other expenses
that the Portfolio bears directly in connection with its own operations.
TAX-EXEMPT DERIVATIVES AND OTHER MUNICIPAL OBLIGATIONS. The Tax-Free
Income, Ohio Tax-Free Income and Pennsylvania Tax-Free Income Portfolios
(collectively, "Tax-Free Portfolios") may invest in tax-exempt derivative
securities relating to Municipal Obligations, including tender option bonds,
participations, beneficial interests in trusts and partnership interests.
Opinions relating to the validity of Municipal Obligations and to the
exemption of interest thereon from Federal income tax are rendered by bond
counsel to the respective issuers at the time of issuance, and opinions relating
to the validity of and the tax-exempt status of payments received by the
Portfolios from tax-exempt derivative securities are rendered by counsel to the
respective sponsors of such securities. The Fund and its investment adviser will
rely on such opinions and will not review independently the underlying
proceedings relating to the issuance of Municipal Obligations, the creation of
any tax-exempt derivative securities, or the bases for such opinions.
SECURITIES LENDING. To increase income on its investments, each Portfolio
may lend its portfolio securities with an aggregate value of up to 30% of its
total assets to broker/dealers and other institutional investors pursuant to
agreements requiring that the loans be continuously secured by collateral equal
at all times in value to at least the market value of the securities loaned.
Collateral for such loans may include cash, securities of the U.S. Government or
its agencies or instrumentalities or an irrevocable letter of credit issued by a
bank which is deemed creditworthy by the adviser or sub-adviser. Default by or
bankruptcy of a borrower would expose a Portfolio to possible loss because of
adverse market action, expenses and/or delays in connection with the disposition
of the underlying securities.
ILLIQUID SECURITIES. No Portfolio will knowingly invest more than 15% of
the value of its net assets in securities that are illiquid. GICs, variable and
floating rate instruments that cannot be disposed of within seven days, and
repurchase agreements and time deposits that do not provide for payment within
seven days after notice, without taking a reduced price, are subject to this 15%
limit. Each Portfolio may purchase securities which are not registered under the
Securities Act of 1933 (the "1933 Act") but which can be sold to "qualified
institutional buyers" in accordance with Rule 144A under the 1933 Act. Any such
security will not be considered illiquid so long as it is determined by the
adviser or sub-adviser, acting under guidelines approved and monitored by the
Board, that an adequate trading market exists for that security. This investment
practice could have the effect of increasing the level of illiquidity in a
Portfolio during any period that qualified institutional buyers become
uninterested in purchasing these restricted securities.
TAX-FREE INCOME, OHIO TAX-FREE INCOME AND PENNSYLVANIA TAX-FREE INCOME
PORTFOLIOS. During normal market conditions: up to 20% of each of the Tax-Free
Portfolios' net assets may be invested in securities which are not Municipal
Obligations; at least 80% of each Tax-Free Portfolio's net assets will be
invested in Municipal Obligations the interest on which is exempt from regular
Federal income tax and is not an item of tax preference for purposes of the
Federal alternative minimum tax; and at least 65% of the total net assets of
each of Ohio Tax-Free Income and Pennsylvania Tax-Free Income Portfolios will be
invested in Ohio and Pennsylvania Municipal Obligations, respectively. Each
Tax-Free Portfolio may invest up to 20% of its net assets in Municipal
Obligations the interest on which is exempt from regular Federal income tax but
is an item of tax preference for purposes of the Federal alternative minimum
tax. During temporary defensive periods, each Tax-Free Portfolio may invest
without limitation in obligations which are not Municipal Obligations and may
hold without limitation uninvested cash reserves. Such securities may include,
without limitation, bonds, notes, variable rate demand notes and commercial
paper, provided such securities are rated within the relevant categories
applicable to Municipal Obligations set forth above, or if unrated, are of
comparable quality as
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determined by the adviser or sub-adviser, and may also include, without
limitation, other debt obligations, such as bank obligations. Each Tax-Free
Portfolio may acquire "stand-by commitments" with respect to Municipal
Obligations held by it. Under a stand-by commitment, a dealer agrees to purchase
at the Portfolio's option specified Municipal Obligations at a specified price.
The acquisition of a stand-by commitment may increase the cost, and thereby
reduce the yield, of the Municipal Obligation to which such commitment relates.
Each Tax-Free Portfolio will acquire stand-by commitments solely to facilitate
portfolio liquidity and does not intend to exercise its rights thereunder for
trading purposes.
Although each Tax-Free Portfolio may invest 25% or more of its net assets
in Municipal Obligations the interest on which is paid solely from revenues of
similar projects, and may invest up to 20% of its total assets in private
activity bonds when added together with any taxable investments held by the
particular Portfolio, they do not presently intend to do so unless in the
opinion of the adviser or sub-adviser the investment is warranted. To the extent
a Portfolio's assets are invested in Municipal Obligations payable from the
revenues of similar projects or are invested in private activity bonds, the
Portfolio will be subject to the peculiar risks presented by the laws and
economic conditions relating to such projects and bonds to a greater extent than
it would be if its assets were not so invested. The amount of information
regarding the financial condition of issuers of Municipal Obligations may not be
as extensive as that which is made available by public corporations and the
secondary market for Municipal Obligations may be less liquid than that for
taxable fixed-income securities. Accordingly, the ability of a Tax-Free
Portfolio to buy and sell tax-exempt securities may, at any particular time and
with respect to any particular securities, be limited.
The Ohio Tax-Free Income and Pennsylvania Tax-Free Income Portfolios are
classified as non-diversified under the 1940 Act. Investment returns on a
non-diversified portfolio typically are dependent upon the performance of a
smaller number of securities relative to the number held in a diversified
portfolio. Consequently, the change in value of any one security may affect the
overall value of a non-diversified portfolio more than it would a diversified
portfolio. Additionally, a non-diversified portfolio may be more susceptible to
economic, political and regulatory developments than a diversified portfolio
with similar objectives.
INTEREST RATE RISK. The value of fixed income securities in the Portfolios
can be expected to vary inversely with changes in prevailing interest rates.
Fixed income securities with longer maturities, which tend to produce higher
yields, are subject to potentially greater capital appreciation and depreciation
than securities with shorter maturities.
BORROWING. The Short-Term Bond, Intermediate-Term Bond, Intermediate
Government and Government Income Portfolios are authorized to borrow funds and
utilize leverage (including through reverse repurchase agreements and dollar
rolls) in amounts not exceeding 33 1/3% of their respective total assets
(including the amount borrowed) and under current market conditions intend to
borrow or obtain equivalent leverage up to such amount. The use of leverage by
the Portfolios creates an opportunity for increased net income, but, at the same
time, creates special risks. In particular, if a Portfolio borrows on a
short-term basis and invests the proceeds in long-term securities, an increase
in interest rates may (i) reduce or eliminate the interest rate differential
usually available between short-term and long-term rates and (ii) reduce the
value of the Portfolio's long-term securities, thereby exposing the Portfolio to
lower yields and risk of loss on disposition of its long-term securities. A
Portfolio will only borrow or use leverage when the adviser believes that such
activities will benefit the Portfolio. A Portfolio may also borrow up to an
additional 5% of its total assets for temporary purposes without regard to the
foregoing limitation.
As noted above, the Portfolios expect to engage in investment management
techniques such as reverse repurchase agreements and dollar rolls which provide
leverage in much the same manner as borrowings but which are not considered to
be borrowings or senior securities by the SEC subject to the limitations
described above if investments therein are appropriately collateralized by high
grade liquid assets.
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DOLLAR ROLL TRANSACTIONS. To take advantage of attractive financing
opportunities in the mortgage market and to enhance current income, the
Short-Term Bond, Intermediate-Term Bond, Intermediate Government and Government
Income Portfolios may enter into dollar roll transactions. A dollar roll
transaction, which is considered a borrowing by a Portfolio, involves a sale by
the Portfolio of a mortgage-backed or other security to a financial institution,
such as a bank or broker/dealer, concurrently with an agreement by the Portfolio
to repurchase a similar security from the institution at a later date at an
agreed-upon price. The securities that are repurchased will bear the same
interest rate and stated maturity as those sold, but pools of mortgages
collateralizing such securities may have different prepayment histories than
those sold, which may affect the duration of such securities. During the period
between the sale and repurchase, a Portfolio will not be entitled to receive
interest and principal payments on the securities sold. Proceeds of the sale
will be invested in additional instruments for the Portfolio, and the income
from these investments will generate income for the Portfolio. If such income
does not exceed the income, capital appreciation and gain or loss that would
have been realized on the securities sold as part of the dollar roll, the use of
this technique will diminish the investment performance of a Portfolio compared
with what such performance would have been without the use of dollar rolls. At
the time that a Portfolio enters into a dollar roll transaction, it will place
in a segregated account maintained with its custodian cash, U.S. government
securities or other liquid high grade debt obligations having a value equal to
the repurchase price (including accrued interest) and will subsequently monitor
the account to ensure that its value is maintained.
Dollar roll transactions involve the risk that the market value of the
securities a Portfolio is required to purchase may decline below the agreed upon
repurchase price of those securities. If the broker/dealer to whom a Portfolio
sells securities becomes insolvent, the Portfolio's right to purchase or
repurchase securities may be restricted and the instruments which the Portfolio
is required to repurchase may be worth less than an instrument which the
Portfolio originally held when the Portfolio is able to complete the purchase.
Successful use of mortgage dollar rolls may depend upon the investment adviser's
ability to correctly predict interest rates and prepayments. There is no
assurance that dollar rolls can be successfully employed.
PORTFOLIO TURNOVER RATES. Although it may vary from year to year, it is
currently estimated that under normal market conditions the annual portfolio
turnover rate for a Portfolio will not exceed 100%. A Portfolio's annual
portfolio turnover rate will not, however, be a factor preventing a sale or
purchase when the adviser or sub-adviser believes investment considerations
warrant such sale or purchase. Portfolio turnover may vary greatly from year to
year as well as within a particular year. High portfolio turnover rates will
generally result in higher transaction costs to a Portfolio.
INVESTMENT LIMITATIONS
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Each Portfolio is subject to the following fundamental investment
limitations, which may not be changed with respect to a Portfolio except upon
the affirmative vote of the holders of a majority of the Portfolio's outstanding
shares. Each of the Managed Income, Tax-Free Income, Intermediate Government,
Short-Term Bond, Intermediate-Term Bond, Government Income and International
Fixed Income Portfolios may not:
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
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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.
No Portfolio may:
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.
If a percentage limitation is satisfied at the time of investment, a later
increase or decrease in such percentage resulting from a change in the value of
a Portfolio's portfolio securities will not constitute a violation of such
limitation, except that any borrowing by a 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).
In order to permit the sale of the Fund's shares in certain states, the
Fund may make commitments more restrictive than the investment policies and
limitations described in this Prospectus. Should the Fund determine that any
such commitment is no longer in the best interests of the Fund, it will revoke
the commitment by terminating sales of its shares in the state involved.
* * *
For information on additional investment limitations relating to the
Portfolios, see the Fund's Statement of Additional Information.
MANAGEMENT
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BOARD OF TRUSTEES
The business and affairs of the Fund are managed under the direction of the
Fund's Board of Trustees. The Statement of Additional Information contains the
name of each trustee and certain background information.
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ADVISER AND SUB-ADVISERS
PIMC was organized in 1977 by PNC Bank to perform advisory services for
investment companies. The principal business address of: PIMC is 400 Bellevue
Parkway, Wilmington, Delaware 19809; PNC Bank is Broad and Chestnut Streets,
Philadelphia, Pennsylvania 19107; PNC Bank Ohio is 201 East Fifth Street,
Cincinnati, Ohio 45202; and PCM is 1700 Market Street, 27th Floor, Philadelphia,
Pennsylvania 19103.
As adviser, PIMC is responsible for the overall investment management of
the Portfolios. The sub-advisers are responsible for the day-to-day management
of the particular Portfolios, and generally make all purchase and sale decisions
regarding the investments made by such Portfolios. The sub-advisers also provide
research and credit analysis as well as certain other services.
The Tax-Free Income Portfolio's manager, W. Don Simmons, is the person
primarily responsible for the day-to-day management of the Portfolio's
investments. Mr. Simmons has been with PIMC since 1984 and the Portfolio's
manager since its inception.
The Pennsylvania Tax-Free Income Portfolio's manager, Douglas J. Gaylor, is
the person primarily responsible for the day-to-day management of the
Portfolio's investments. Mr. Gaylor has been with PNC Bank since 1993 and the
Portfolio's manager since September 1993. Prior to joining PNC Bank, Mr. Gaylor
was with Wilmington Trust Company for 10 years.
The Ohio Tax-Free Income Portfolio's manager, Kimberly A. Burford, is the
person primarily responsible for the day-to-day management of the Portfolio's
investments. Ms. Burford has been with PNC Bank since 1979 and the Portfolio's
manager since its inception.
The Short-Term Bond, Intermediate-Term Bond, Intermediate Government and
Managed Income Portfolios' manager, Beth A. Coyne, is the person primarily
responsible for the day-to-day management of the Portfolios' investments. Ms.
Coyne has been the Short-Term Bond and Intermediate-Term Bond Portfolios'
manager since their inception and began managing the Intermediate Government and
Managed Income Portfolios in 1994. Ms. Coyne has been with PNC Bank since 1990.
Prior to 1990, Ms. Coyne sold fixed income securities for Kidder Peabody & Co.,
Inc.
The Government Income and International Fixed Income Portfolios' manager,
Charles F. Wills, is the person primarily responsible for the day-to-day
management of the Portfolios' investments. Mr. Wills has been the Government
Income and International Fixed Income Portfolios' manager since their inception.
Mr. Wills has been with PNC Bank since 1983.
For the services provided and expenses assumed by it, PIMC is entitled to
receive fees, computed daily and payable monthly, at the following annual rates
from the specified Portfolios: each of the Managed Income, Tax-Free Income,
Intermediate Government, Ohio Tax-Free Income, Pennsylvania Tax-Free Income,
Short-Term Bond, Intermediate-Term Bond and Government Income Portfolios, .50%
of the first $1 billion of their respective average daily net assets, .45% of
the next $1 billion of their respective average daily net assets, .425% of the
next $1 billion of their respective average daily net assets and .40% of their
respective average daily net assets in excess of $3 billion; and International
Fixed Income Portfolio, .55% of its first $1 billion of average daily net
assets, .50% of its next $1 billion of average daily net assets, .475% of its
next $1 billion of average daily net assets and .45% of its average daily net
assets in excess of $3 billion. The Fund paid PIMC advisory fees at annual rates
of .35%, .20%, .09%, .11% and .19% of the average daily net assets of the
Managed Income, Intermediate Government, Pennsylvania Tax-Free Income,
Short-Term Bond and Intermediate-Term Bond Portfolios, respectively, for the
year ended September 30, 1994, and PIMC waived advisory fees at annual rates of
.15%, .30%, .41%, .39% and .31% of the average daily net assets of such
respective Portfolios for that year. PIMC waived all advisory fees with respect
to the Tax-Free Income and Ohio Tax-Free Income Portfolios for the year ended
September 30, 1994. During that year, PIMC reimbursed expenses at the annual
rates of
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<PAGE> 34
.38%, .50% and .02% of the average daily net assets of the Tax-Free Income, Ohio
Tax-Free Income and Pennsylvania Tax-Free Income Portfolios, respectively. From
time to time PIMC may waive all or any portion of its advisory fees for and may
reimburse expenses of the Portfolios. See "Introduction--Expense Table."
For its sub-advisory services, the sub-adviser for each specified Portfolio
is entitled to receive from PIMC a fee, computed daily and payable monthly, at
the following annual rates: each of the Managed Income, Tax-Free Income,
Intermediate Government, Ohio Tax-Free Income, Pennsylvania Tax-Free Income,
Short-Term Bond, Intermediate-Term Bond and Government Income Portfolios, .35%
of its first $1 billion of average daily net assets, .30% of its next $1 billion
of average daily net assets, .275% of its next $1 billion of average daily net
assets, and .25% of its average daily net assets in excess of $3 billion, and
International Fixed Income Portfolio, .40% of its first $1 billion of average
daily net assets, .35% of its next $1 billion of average daily net assets, .325%
of its next $1 billion of average daily net assets and .30% of its average daily
net assets in excess of $3 billion. Such sub-advisory fees have no effect on the
advisory fees payable by each Portfolio to PIMC. PIMC paid PNC Bank sub-advisory
fees at annual rates of .30%, .15%, .06%, .11% and .14% of the average daily net
assets of the Managed Income, Intermediate Government, Pennsylvania Tax-Free
Income, Short-Term Bond and Intermediate-Term Bond Portfolios, respectively, for
the year ended September 30, 1994, and PNC Bank waived sub-advisory fees at the
annual rates of .05%, .20%, .29%, .24% and .21% of the average daily net assets
of such respective Portfolios for that year. PNC Bank and PNC Bank Ohio waived
all sub-advisory fees with respect to the Tax-Free Income and Ohio Tax-Free
Income Portfolios, respectively, for the year ended September 30, 1994. Each
sub-adviser may from time to time waive all or any portion of its sub-advisory
fee for any Portfolio.
------------------------------------
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 each
Portfolio's average daily net assets, .18% of the next $500 million of each
Portfolio's average daily net assets, .16% of the next $1 billion of each
Portfolio's average daily net assets and .15% of each Portfolio's average daily
net assets in excess of $2 billion. The Fund paid the Administrators combined
administration fees at annual rates of .13%, .10%, .04%, .04% and .08% of the
average daily net assets of the Managed Income, Intermediate Government,
Pennsylvania Tax-Free Income, Short-Term Bond and Intermediate-Term Bond
Portfolios, respectively, for the year ended September 30, 1994, and the
Administrators waived combined administration fees at annual rates of .07%,
.10%, .16%, .16% and .12% of the average daily net assets of such respective
Portfolios for that year. The Administrators waived all combined administration
fees with respect to the Tax-Free Income and Ohio Tax-Free Income Portfolios for
the year ended September 30, 1994. During that year, the Administrators
reimbursed expenses at the annual rates of .15%, .20% and .01% of the average
daily net assets of the Tax-Free Income, Ohio Tax-Free Income and Pennsylvania
Tax-Free Income Portfolios, respectively. From time to time the Administrators
may waive all or any portion of the administration fees for the Portfolios.
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TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND CUSTODIAN
PNC Bank serves as the Fund's custodian and PFPC serves as the Fund's
transfer agent and dividend disbursing agent.
------------------------------------
SHAREHOLDER SERVICING
The Fund intends to enter into service agreements with Institutions
(including PNC Bank, PNC Bank Ohio and their affiliates) pursuant to which
Institutions will render certain support services to Customers who are the
beneficial owners of Service Shares. Such services will be provided to Customers
who are the beneficial owners of Service Shares and are intended to supplement
the services provided by the Fund's Administrators and transfer agent to the
Fund's shareholders of record. In consideration for payment of up to .15% (on an
annualized basis) of the average daily net asset value of Service Shares owned
beneficially by their Customers, Institutions may provide one or more of the
following services to such Customers: processing purchase and redemption
requests from Customers and placing orders with the Fund's transfer agent or the
Distributor; processing dividend payments from the Fund on behalf of Customers;
providing sub-accounting with respect to Service Shares beneficially owned by
Customers or the information necessary for sub-accounting; and other similar
services. In consideration for payment of up to a separate .15% (on an
annualized basis) of the average daily net asset value of Service Shares owned
beneficially by their Customers, Institutions may provide one or more of these
additional services to such Customers: responding to Customer inquiries relating
to the services performed by the Institution and to Customer inquiries
concerning their investments in Service Shares; providing information
periodically to Customers showing their positions in Service Shares; and other
similar shareholder liaison services. Customers who are beneficial owners of
Service Shares should read this Prospectus in light of the terms and fees
governing their accounts with Institutions. These fees are not paid to
Institutions with respect to other classes of shares of the Portfolios ("Series
A Investor Shares," "Series B Investor Shares" and "Institutional Shares"). See
"Description of Shares."
------------------------------------
EXPENSES
Expenses are deducted from the total income of each Portfolio before
dividends and distributions are paid. These expenses include, but are not
limited to, fees paid to PIMC and the Administrators, transfer agency fees, fees
and expenses of officers and trustees who are not affiliated with PIMC or the
Distributor or any of their affiliates, taxes, interest, legal fees, custodian
fees, auditing fees, 12b-1 fees, servicing fees, certain fees and expenses in
registering and qualifying the Portfolio and its Shares for distribution under
Federal and state securities laws, expenses of preparing prospectuses and
statements of additional information and of printing and distributing
prospectuses and statements of additional information to existing shareholders,
the expense of reports to shareholders, shareholders' meetings and proxy
solicitations, fidelity bond and trustees and officers liability insurance
premiums, the expense of using independent pricing services and other expenses
which are not expressly assumed by PIMC or the Administrators under their
respective agreements with the Fund. Any general expenses of the Fund that are
not readily identifiable as belonging to a particular investment portfolio will
be allocated among all investment portfolios by or under the direction of the
Board of Trustees in a manner the Board determines to be fair and equitable. Any
expenses relating only to a particular class of shares within a Portfolio (such
as fees relating to the Fund's Service Plan for Service Shares) will be borne
solely by such Shares.
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<PAGE> 36
If the total expenses borne by any Portfolio in any fiscal year exceed the
expense limitations imposed by applicable state securities regulations, PIMC,
the sub-advisers and the Administrators will bear the amount of such excess to
the extent required by such regulations in proportion to the fees otherwise
payable to them for such year. Such amount, if any, will be estimated and
accrued daily and paid on a monthly basis. See "Introduction--Example,"
"Management-- Adviser and Sub-Advisers" and "Management--Administrators" for
discussions of expense reimbursements and fee waivers.
------------------------------------
BANKING LAWS
Banking laws and regulations currently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered open-end investment company continuously
engaged in the issuance of its shares, and prohibit banks generally from
underwriting securities, but such banking laws and regulations do not prohibit
such a holding company or affiliate or banks generally from acting as investment
adviser, administrator, transfer agent or custodian to such an investment
company, or from purchasing shares of such a company as agent for and upon the
order of customers. PNC Bank, PIMC, PNC Bank Ohio, PFPC and Institutions that
are banks or bank affiliates, are subject to such banking laws and regulations.
In addition, state securities laws on this issue may differ from the
interpretations of Federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
Should future legislative, judicial or administrative action prohibit or
restrict the activities of such companies in connection with the provision of
services on behalf of the Fund and the holders of Service Shares, the Fund might
be required to alter materially or discontinue its arrangements with such
companies and change its method of operations with respect to the Service
Shares. It is not anticipated, however, that any change in the Fund's method of
operations would affect its net asset value per share or result in a financial
loss to any Customer.
------------------------------------
PORTFOLIO TRANSACTIONS
A Portfolio's adviser or sub-adviser will seek the best price and execution
in placing brokerage transactions. In this regard, the adviser or sub-adviser
may consider a number of factors in determining which brokers to use in
purchasing or selling portfolio securities. These factors, which are more fully
discussed in the Statement of Additional Information, include, but are not
limited to, research services, sales of shares of the Fund, the reasonableness
of commissions and quality of services and execution. Brokerage transactions for
the Portfolios may be directed through registered broker/dealers ("Authorized
Dealers") who have entered into dealer agreements with the Distributor, subject
to the requirements of best execution.
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<PAGE> 37
PURCHASE AND REDEMPTION OF SHARES
- --------------------------------------------------------------------------------
DISTRIBUTOR
Shares of each 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 Portfolios next computed after an order is received by PFPC. Shares may be
purchased by Institutions on any Business Day. A "Business Day" is any weekday
that the New York Stock Exchange (the "NYSE") and the Federal Reserve Bank of
Philadelphia (the "FRB") are open for business. Purchase orders may be
transmitted by telephoning PFPC at (800) 441-7379. Orders received by PFPC after
4:00 p.m. (Eastern Time) are priced at the net asset value per share on the
following Business Day. The Fund may in its discretion reject any order for
Shares.
Payment for Service Shares may be made only in Federal funds or other funds
immediately available to the Fund's custodian. The minimum initial investment by
an Institution is $5,000; however, Institutions may set a higher minimum for
their Customers. There is no minimum subsequent investment requirement.
Conflict of interest restrictions may apply to an Institution's receipt of
compensation paid by the Fund in connection with the investment of fiduciary
funds in Shares. Institutions, including banks regulated by the Comptroller of
the Currency and investment advisers and other money managers subject to the
jurisdiction of the SEC, the Department of Labor or state securities
commissions, are urged to consult their legal advisers before investing
fiduciary funds in Service Shares. See also "Management--Shareholder Servicing."
REDEMPTION OF SHARES
A Customer may redeem all or part of his Service Shares in accordance with
the instructions and limitations pertaining to his account at an Institution.
These procedures will vary according to the type of account and the Institution
involved, and Customers should consult their account managers in this regard. It
is the responsibility of Institutions to transmit redemption orders to PFPC and
credit their Customers' accounts with the redemption proceeds on a timely basis.
In the case of shareholders holding share certificates, the certificates must
accompany the redemption request.
Institutions may transmit redemption orders to PFPC by telephone at (800)
441-7379. Shares are redeemed at the net asset value per share of the Service
Shares of the Portfolio next determined after PFPC's receipt of the redemption
order. THE FUND, THE ADMINISTRATORS AND THE DISTRIBUTOR WILL NOT BE LIABLE 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
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<PAGE> 38
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 a 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 any Portfolio
if the balance in such shareholder's account in that 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 Portfolios 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 for each Portfolio is calculated
as of the close of trading on the NYSE (currently 4:00 p.m. Eastern Time) on
each Business Day by adding the value of all its securities, cash and other
assets allocable to its Shares, subtracting the liabilities allocable to its
Shares and dividing by the total number of Shares outstanding. The net asset
value per Share of each Portfolio is determined independently of the Portfolio's
other classes and independently of the Fund's other Portfolios.
Valuation of securities held by each Portfolio is as follows: securities
traded on a national securities exchange or on the NASDAQ National Market System
are valued at the last reported sale price that day; securities traded on a
national securities exchange or on the NASDAQ National Market System for which
there were no sales on that day and securities traded on other over-the-counter
markets for which market quotations are readily available are valued at the mean
of the bid and asked prices; an option or futures contract is valued at the last
sales price prior to 4:00 p.m. (Eastern Time), as quoted on the principal
exchange or board of trade on which such option or contract is traded, or in
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<PAGE> 39
the absence of a sale, the mean between the last bid and asked prices prior to
4:00 p.m. (Eastern Time); and securities for which market quotations are not
readily available are valued at fair market value as determined in good faith by
or under the direction of the Fund's Board of Trustees. The amortized cost
method of valuation will also be used with respect to debt obligations with
sixty days or less remaining to maturity unless the investment adviser and/or
sub-adviser under the supervision of the Board of Trustees determines such
method does not represent fair value.
Valuation of securities of foreign issuers and those held by the
International Fixed Income Portfolio is as follows: to the extent sale prices
are available, securities which are traded on a recognized stock exchange,
whether U.S. or foreign, are valued at the latest sale price on that exchange
prior to the time when assets are valued or prior to the close of regular
trading hours on the NYSE. In the event that there are no sales, the mean
between the last available bid and asked prices will be used. If a security is
traded on more than one exchange, the latest sale price on the exchange where
the security is primarily traded is used. An option or futures contract is
valued at the last sales price prior to 4:00 p.m. (Eastern Time), as quoted on
the principal exchange or board of trade on which such option or contract is
traded, or in the absence of a sale, the mean between the last bid and asked
prices prior to 4:00 p.m. (Eastern Time). In the event that application of these
methods of valuation results in a price for a security which is deemed not to be
representative of the market value of such security, the security will be valued
by, under the direction of or in accordance with a method specified by the Board
of Trustees as reflecting fair value. The amortized cost method of valuation
will be used with respect to debt obligations with sixty days or less remaining
to maturity unless the investment adviser and/or sub-adviser under the
supervision of the Board of Trustees determines such method does not represent
fair value. All other assets and securities held by the Portfolio (including
restricted securities) are valued at fair value as determined in good faith by
the Board of Trustees or by someone under its direction. Any assets which are
denominated in a foreign currency are translated into U.S. dollars at the
prevailing market rates.
A Portfolio may use a pricing service, bank or broker/dealer experienced in
such matters to value the Portfolio's securities. A more detailed discussion of
net asset value and security valuation is contained in the Statement of
Additional Information.
DIVIDENDS AND DISTRIBUTIONS
- --------------------------------------------------------------------------------
Each Portfolio will distribute substantially all of its net investment
income and net realized capital gains, if any, to shareholders. For dividend
purposes, a Portfolio's investment income available for distribution to holders
of Service Shares is reduced by accrued expenses directly attributable to that
Portfolio and the general expenses of the Fund prorated to that Portfolio on the
basis of its relative net assets. A 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 relevant
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 each of the Managed Income, Tax-Free Income, Intermediate Government,
Intermediate-Term Bond and International Fixed Income Portfolios is declared
monthly as a dividend to investors who are Shareholders of such Portfolio at the
close of business on the day of declaration. The net investment income of each
of the Pennsylvania Tax-Free Income, Ohio Tax-Free Income, Government Income and
Short-Term Bond Portfolios is declared daily as a dividend to investors who are
Shareholders of such Portfolio at, and whose payment for Share purchases are
available to the particular Portfolio in Federal funds by, the close of business
on the day of declaration. All such dividends are paid within ten days after the
end of each month and, in the case of the Pennsylvania Tax-Free Income, Ohio
Tax-Free Income, Government Income and Short-
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<PAGE> 40
Term Bond Portfolios, within seven days after redemption of all of a
shareholder's Shares in a Portfolio. Net realized capital gains (including net
short-term capital gains), if any, will be distributed by each Portfolio at
least annually.
TAXES
- --------------------------------------------------------------------------------
The following discussion is only a brief summary of some of the important
tax considerations generally affecting the Portfolios and their 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.
Each Portfolio will elect to be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. So long as
a Portfolio qualifies for this tax treatment, it generally will be relieved of
Federal income tax on amounts distributed to shareholders, but shareholders,
unless otherwise exempt, will pay income or capital gains taxes on amounts so
distributed (except distributions that constitute "exempt interest dividends" or
that are treated as a return of capital), regardless of whether such
distributions are paid in cash or reinvested in additional Shares.
Distributions paid out of the "net capital gain" (the excess of net
long-term capital gain over net short-term capital loss), if any, of any
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.
Each Tax-Free Portfolio intends to pay substantially all of its dividends
as "exempt interest dividends." Investors in these Portfolios should note,
however, that taxpayers are required to report the receipt of tax-exempt
interest and "exempt interest dividends" on their Federal income tax returns and
that in two circumstances such amounts, while exempt from regular Federal income
tax, are taxable to persons subject to alternative minimum and environmental
taxes. First, tax-exempt interest and "exempt interest dividends" derived from
certain private activity bonds issued after August 7, 1986, generally will
constitute an item of tax preference for corporate and noncorporate taxpayers in
determining alternative minimum and environmental tax liability. Although they
do not currently intend to do so, during normal market conditions the Tax-Free
Portfolios may invest up to 20% of their respective net assets in such private
activity bonds. Second, tax-exempt interest and "exempt interest dividends"
derived from all other Municipal Obligations must be taken into account by
corporate taxpayers in determining certain adjustments for alternative minimum
and environmental tax purposes. In addition, investors should be aware of the
possibility of state and local alternative minimum or minimum income tax
liability from such private activity bonds. Shareholders who are recipients of
Social Security Act or Railroad Retirement Act benefits should further note that
tax-exempt interest and "exempt interest dividends" derived from all types of
Municipal Obligations will be taken into account in determining the taxability
of their benefit payments.
Each Tax-Free Portfolio will determine annually the percentages of its net
investment income which are exempt from the regular Federal income tax, which
constitute an item of tax preference for purposes of the Federal alternative
minimum tax, and which are fully taxable. Such percentages will apply uniformly
to all distributions declared from net investment income during that year. These
percentages may differ significantly from the actual percentages for any
particular day.
The Fund will send written notices to shareholders annually regarding the
tax status of distributions made by each 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.
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<PAGE> 41
An investor considering buying shares of a Portfolio on or just before the
record date of a taxable dividend should be aware that the amount of the
forthcoming dividend payment, although in effect a return of capital, will be
taxable to him.
A taxable gain or loss may be realized by a shareholder upon his
redemption, transfer or exchange of Portfolio Shares depending upon the tax
basis of such Shares and their price at the time of redemption, transfer or
exchange.
Any loss upon the sale or exchange of shares of a Portfolio held for six
months or less will be disallowed for Federal income tax purposes to the extent
of any exempt interest dividends received by the shareholder. For the Ohio
Tax-Free Income Portfolio, the loss will be disallowed for Ohio income tax
purposes to the same extent, even though, for Ohio income tax purposes, some
portion of such dividends actually may have been subject to Ohio income tax.
It is expected that dividends and certain interest income earned by the
International Fixed Income Portfolio from foreign securities will be subject to
foreign withholding taxes or other taxes. So long as more than 50% of the value
of the Portfolio's total assets at the close of the taxable year in question
consists of stock or securities of foreign corporations, the Portfolio may
elect, for U.S. Federal income tax purposes, to treat certain foreign taxes paid
by it, including generally any withholding taxes and other foreign income taxes,
as paid by its shareholders. The Portfolio intends to make this election. As a
result, the amount of such foreign taxes paid by the Portfolio will be included
in its shareholders' income pro rata (in addition to taxable distributions
actually received by them), and each shareholder generally will be entitled
either (a) to credit his proportionate amounts of such taxes against his U.S.
Federal income tax liabilities, or (b) if he itemizes his deductions, to deduct
such proportionate amounts from his U.S. income.
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.
OHIO TAX CONSIDERATIONS. Individuals and estates that are subject to Ohio
personal income tax, or municipal income taxes or school district income taxes
in Ohio will not be subject to such taxes on distributions from the Ohio
Tax-Free Income Portfolio to the extent that such distributions consist of
interest on Ohio Municipal Obligations or obligations issued by the U.S.
Government, its agencies, instrumentalities or territories (if the interest on
such obligations is exempt from state income taxation under the laws of the
United States) ("U.S. Obligations"), provided that the Portfolio continues to
qualify as a regulated investment company for federal income tax purposes and
that at all times at least 50% of the value of the total assets of the Ohio
Tax-Free Income Portfolio consists of Ohio Municipal Obligations or similar
obligations of other states or their subdivisions. (It is assumed for purposes
of this discussion of Ohio tax considerations that the regulated investment
company and 50% requirements are satisfied.) Corporations that are subject to
the Ohio corporation franchise tax will not have to include distributions from
the Ohio Tax-Free Income Portfolio in their net income base for purposes of
calculating their Ohio corporation franchise tax liability to the extent that
such distributions either constitute exempt-interest dividends or consist of
interest on Ohio Municipal Obligations or U.S. Obligations. However, Shares of
the Ohio Tax-Free Income Portfolio will be included in a corporation's net worth
base for purposes of calculating the Ohio corporation franchise tax.
Distributions consisting of gain on the sale, exchange or other disposition of
Ohio Municipal Obligations will not be subject to the Ohio personal income tax,
or municipal or school district income taxes in Ohio and will not be included in
the net income base of the Ohio corporation franchise tax. Distributions
attributable to other sources will be subject to the Ohio personal income tax
and the Ohio corporation franchise tax. For additional Ohio tax considerations,
see "Taxes" above.
40
<PAGE> 42
PENNSYLVANIA TAX CONSIDERATIONS. Income received by a shareholder
attributable to interest realized by the Pennsylvania Tax-Free Income Portfolio
from Pennsylvania Municipal Obligations or attributable to insurance proceeds on
account of such interest, is not taxable to individuals, estates or trusts under
the Personal Income Tax imposed by Article III of the Tax Reform Code of 1971
(in the case of insurance proceeds, to the extent they are exempt for Federal
Income Tax purposes); to corporations under the Corporate Net Income tax imposed
by Article IV of the Tax Reform Code of 1971 (in the case of insurance proceeds,
to the extent they are exempt for Federal Income Tax purposes); nor to
individuals under the Philadelphia School District New Income Tax ("School
District Tax") imposed on Philadelphia resident individuals under authority of
the Act of August 9, 1963, P.L. 640.
Income received by a shareholder attributable to gain on the sale or other
disposition by the Pennsylvania Tax-Free Income Portfolio of Pennsylvania
Municipal Obligations is taxable under the Personal Income Tax, the Corporate
Net Income Tax, and, unless these assets were held by the Pennsylvania Tax-Free
Income Portfolio for more than six months, the School District Tax.
To the extent that gain on the disposition of a share represents gain
realized on Pennsylvania Municipal Obligations held by the Pennsylvania Tax-Free
Income Portfolio, such gain may be subject to the Personal Income Tax and
Corporate Net Income Tax. Such gain may also be subject to the School District
Tax, except that gain realized with respect to a share held for more than six
months is not subject to the School District Tax.
No opinion is expressed regarding the extent, if any, to which shares, or
interest and gain thereon, is subject to, or included in the measure of, the
special taxes imposed by the Commonwealth of Pennsylvania on banks and other
financial institutions or with respect to any privilege, excise, franchise or
other tax imposed on business entities not discussed herein (including the
Corporate Capital Stock/Foreign Franchise Tax.)
Shareholders of the Pennsylvania Tax-Free Income Portfolio are not subject
to any of the personal property taxes currently in effect in Pennsylvania to the
extent that the Portfolio is comprised of Pennsylvania Municipal Obligations and
Federal obligations (if the interest on such obligations is exempt from state
and local taxation under the laws of the United States). The taxes referred to
include the County Personal Property Tax imposed on residents of Pennsylvania by
the Act of June 17, 1913, P.L. 507, as amended.
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 94 classes (19 classes of "Series B
Investor Shares" and 25 classes each of "Service Shares," "Series A Investor
Shares" and "Institutional Shares") representing interests in the Fund's
investment portfolios. This Prospectus describes nine Portfolios of the Fund
which, except for the Pennsylvania Tax-Free Income and Ohio Tax-Free Income
Portfolios, are classified as diversified companies under the 1940 Act. The
Managed Income, Tax-Free Income and Intermediate Government Portfolios were each
established with only one class of shares. In each case, 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."
41
<PAGE> 43
Each share of an investment portfolio has a par value of $.001, represents
an equal proportionate interest in the particular portfolio and is entitled to
such dividends and distributions earned on such portfolio's assets as are
declared in the discretion of the Board of Trustees. The Fund's shareholders are
entitled to one vote for each full share held and proportionate fractional votes
for fractional shares held, and will vote in the aggregate and not by class,
except where otherwise required by law or when the Board of Trustees determines
that the matter to be voted upon affects only the interests of the shareholders
of a particular class or investment portfolio. Under Massachusetts law, the
Fund's state of organization, and the Fund's Declaration of Trust and Code of
Regulations, the Fund is not required and does not currently intend to hold
annual meetings of shareholders for the election of trustees (except as required
under the 1940 Act). For a further discussion of the voting rights of
shareholders, see "Additional Information Concerning Shares" in the Statement of
Additional Information.
Holders of Service Shares bear the fees described under
"Management--Shareholder Servicing" that are paid to Institutions under the
Fund's Service Plan. Similarly, holders of a Portfolio's Series A Investor
Shares and Series B Investor Shares (collectively, "Investor Shares") will bear
the payments described in the prospectus for such shares that are paid under the
Fund's Distribution and Service Plan and Series B Distribution Plan,
respectively (collectively, the "Distribution Plans"). Under the Distribution
Plans, the Distributor is entitled to payments by each Portfolio for: (i) direct
out-of-pocket promotional expenses incurred in connection with advertising and
marketing Investor Shares; and (ii) payments to broker/dealers that are not
affiliated with the Distributor ("Service Organizations") for distribution
assistance such as advertising and marketing of Investor Shares. In addition,
payments under the Series B Distribution Plan will be used to pay for or finance
sales commissions and other fees payable to Service Organizations and other
broker/dealers who sell Series B Investor Shares. Service Organizations may also
provide support services such as establishing and maintaining accounts and
records relating to shareholders of Investor Shares for whom the Service
Organizations are the dealer of record or holder of record for shareholders with
whom the Service Organizations have a servicing relationship. The Distribution
and Service Plan provides for payments to the Distributor at an annual rate not
to exceed .55% of the average daily net asset value of each Portfolio's
outstanding Series A Investor Shares. The Series B Distribution Plan provides
for payments to the Distributor at an annual rate not to exceed .75% of the
average daily net asset value of each Portfolio's outstanding Series B Investor
Shares. In addition, holders of Series B Investor Shares bear the expense of
fees described in the prospectus for such shares that are paid under the Fund's
Series B Service Plan. Payments under the Series B Service Plan will cover
expenses relating to the support services provided to the beneficial owners of
Series B Investor Shares by certain Service Organizations and sometimes by the
Distributor. Such services are intended to supplement the services provided by
the Fund's Administrators and transfer agent. In consideration for payments
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 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. Institutional Shares bear no shareholder
42
<PAGE> 44
servicing or distribution fees. As a result of these different fees, the net
asset value and the net yields on the Fund's Institutional Shares will generally
be higher than those on the Fund's Service Shares, the net asset value and the
net yields on the Fund's Service Shares will generally be higher than those on
the Fund's Series A Investor Shares, and the net asset value and the net yields
on the Fund's Series A Investor Shares will generally be higher than those on
the Fund's Series B Investor Shares if payments by the Portfolios under the
Service Plan, the Distribution and Service Plan, the Series B Distribution Plan
and the Series B Service Plan are made at the maximum rates. Standardized total
return and yield quotations will be computed separately for each class of
Shares. Series A and Series B Investor Shares are exchangeable at the option of
the holder for Series A and Series B Investor Shares, respectively, in the
Fund's other investment portfolios. Series B Investor Shares are exchangeable
for Series B Investor Shares in the Fund's Money Market Portfolio, but are not
exchangeable for shares in the Fund's other money market investment portfolios.
Series A Investor Shares of the Portfolios are offered to the public at the net
asset value per share plus a maximum sales charge of 4.50% of the offering price
on single purchases of less than $50,000; the sales charge is reduced on a
graduated scale on single purchases of $50,000 or more and certain exemptions
from the sales charge may apply. The sales charge does not apply to exchanges of
Series A Investor Shares among the Portfolios. Series B Investor Shares are
subject to a maximum contingent deferred sales charge of 5.0%. The deferred
sales charge decreases over time. Series B Investor Shares may be exchanged for
Series B Investor Shares of another investment portfolio of the Fund without the
payment of any deferred sales charge at the time the exchange is made. Because
Service Shares and Institutional Shares are sold without a sales charge, holders
of Service Shares and Institutional Shares have no such exchange privileges.
On January 4, 1995, PNC Bank held of record approximately 80% of the Fund's
outstanding shares, and may be deemed a controlling person of the Fund under the
1940 Act. PNC Bank is a subsidiary of PNC Bank Corp., a multi-bank holding
company.
OTHER INFORMATION
- --------------------------------------------------------------------------------
REPORTS AND INQUIRIES
Shareholders will receive unaudited semi-annual financial statements and
annual financial statements audited by independent accountants. Shareholder
inquiries should be addressed to the Fund c/o PFPC, P.O. Box 8950, Wilmington,
Delaware 19885-9628, toll-free (800) 441-7762 (in Delaware call collect (302)
791-1111).
PERFORMANCE INFORMATION
From time to time, total return and yield data for Shares of the Portfolios
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 a Portfolio over the measuring
period. This method of calculating total return assumes that dividends and
capital gain distributions made by the Portfolio during the period relating to
Shares are reinvested in Shares.
The yields of Shares of the Portfolios are computed based on the net income
of a Portfolio allocated to such Shares during a 30-day (or one month) period,
which period will be identified in connection with the particular yield
quotation. More specifically, the yield of Shares of a Portfolio is computed by
dividing the Portfolio's net income per share allocated to such Shares during a
30-day (or one month) period by the net asset value per share on the last day of
the period and annualizing the result on a semi-annual basis. Each Tax-Free
Portfolio's "tax-equivalent yield" may also be quoted from time to time, which
shows the level of taxable yield needed to produce an after-tax equivalent to
43
<PAGE> 45
such Portfolio's tax-free yield. This is done by increasing such Portfolio's
yield (calculated above) by the amount necessary to reflect the payment of
Federal and/or state income tax at a stated tax rate.
Performance data of Shares of a Portfolio may be compared to those of other
mutual funds with similar investment objectives and to other relevant indexes or
to ratings or rankings prepared by independent services or other financial or
industry publications that monitor the performance of mutual funds. In addition,
certain indexes may be used to illustrate historic performance of select asset
classes. For example, the total return and/or yield of Shares of a Portfolio may
be compared to data prepared by Lipper Analytical Services, Inc., CDA Investment
Technologies, Inc. and Weisenberger Investment Company Service, and with the
performance of the Shearson Lehman GMNA Index, the Shearson Lehman Index of
Baa-rated Corporate Bonds, the T-Bill Index, the "stocks, bonds and inflation
Index" published annually by Ibbotson Associates and the Shearson Lehman Hutton
Government Corporate Bond Index. Performance information may also include
evaluations of the Portfolios and their Shares published by nationally
recognized ranking services and information as reported by financial
publications such as Business Week, Fortune, Institutional Investor, Money
Magazine, Forbes, Barron's, The Wall Street Journal and The New York Times, or
in publications of a local or regional nature.
In addition to providing performance information that demonstrates the
actual yield or returns of Shares of a particular Portfolio over a particular
period of time, a 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 a 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 a 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 a Portfolio cannot necessarily be used to compare an investment in
such Shares with bank deposits, savings accounts and similar investment
alternatives which often provide an agreed or guaranteed fixed yield for a
stated period of time. Shareholders should remember that performance is
generally a function of the kind and quality of the instruments held in a
portfolio, portfolio maturity, operating expenses and market conditions. Any
fees charged by Institutions directly to their customer accounts in connection
with investments in Shares will not be included in the Portfolio's calculations
of yield and total return.
* * *
44
<PAGE> 46
- -----------------------------------------------------
- -----------------------------------------------------
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. 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............................. 5
Investment Policies.............................. 16
Investment Limitations........................... 30
Management....................................... 31
Purchase and Redemption of Shares................ 36
Net Asset Value.................................. 37
Dividends and Distributions...................... 38
Taxes............................................ 39
Description of Shares............................ 41
Other Information................................ 43
</TABLE>
INVESTMENT ADVISER
PNC Institutional Management Corporation
Wilmington, Delaware
SUB-ADVISER TO THE OHIO TAX-FREE INCOME PORTFOLIO
PNC Bank, Ohio, National Association
Cincinnati, Ohio
SUB-ADVISER TO THE MANAGED INCOME, INTERMEDIATE GOVERNMENT, TAX-FREE INCOME,
PENNSYLVANIA TAX-FREE INCOME, SHORT-TERM BOND, INTERMEDIATE-TERM BOND AND
GOVERNMENT INCOME
PORTFOLIOS AND CUSTODIAN
PNC Bank, National Association
Philadelphia, Pennsylvania
SUB-ADVISER TO INTERNATIONAL FIXED INCOME PORTFOLIO
Provident Capital Management, Inc.
Philadelphia, Pennsylvania
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-002M
- -----------------------------------------------------
- -----------------------------------------------------
- -----------------------------------------------------
- -----------------------------------------------------
THE
FIXED INCOME
PORTFOLIOS
SERVICE CLASS
PROSPECTUS
MANAGED INCOME PORTFOLIO
- -----------------------------------------------------
TAX-FREE
INCOME PORTFOLIO
- -----------------------------------------------------
INTERMEDIATE
GOVERNMENT PORTFOLIO
- -----------------------------------------------------
OHIO TAX-FREE
INCOME PORTFOLIO
- -----------------------------------------------------
PENNSYLVANIA TAX-FREE
INCOME PORTFOLIO
- -----------------------------------------------------
SHORT-TERM
BOND PORTFOLIO
- -----------------------------------------------------
INTERMEDIATE-TERM
BOND PORTFOLIO
- -----------------------------------------------------
INTERNATIONAL
FIXED INCOME PORTFOLIO
- -----------------------------------------------------
GOVERNMENT
INCOME PORTFOLIO
- -----------------------------------------------------
JANUARY 30, 1995
- -----------------------------------------------------
- -----------------------------------------------------
<PAGE> 47
THE PNC(R)FUND
THE FIXED INCOME PORTFOLIOS
SUPPLEMENT TO PROSPECTUS DATED JANUARY 30, 1995
The section entitled "Introduction -- Portfolio Management" has been amended to
read as follows:
PNC Institutional Management Corporation ("PIMC") serves as the Fund's
investment adviser. BlackRock Financial Management, Inc. ("BlackRock")
serves as sub-adviser to the Managed Income, Intermediate Government,
Intermediate-Term Bond, Short-Term Bond, Government Income, Pennsylvania
Tax-Free Income and Ohio Tax-Free Income Portfolios; PNC Bank, National
Association ("PNC Bank") serves as sub-adviser to the Tax-Free Income
Portfolio; and Provident Capital Management, Inc. ("PCM") serves as
sub-adviser to the International Fixed Income Portfolio. The investment
adviser and sub-advisers are indirect wholly-owned subsidiaries of PNC Bank
Corp.
The section entitled "Management -- Adviser and Sub-Advisers" has been amended
as follows:
The second sentence of the first paragraph has been amended to read as follows:
The principal business address of: PIMC is 400 Bellevue Parkway, Wilmington,
Delaware 19809; PNC Bank is Broad and Chestnut Streets, Philadelphia,
Pennsylvania 19107; PCM is 1700 Market Street, 27th Floor, Philadelphia,
Pennsylvania 19103; and BlackRock is 345 Park Avenue, New York, New York
10154.
The fourth paragraph has been amended to read as follows:
The Pennsylvania Tax-Free Income and Ohio Tax-Free Income Portfolios'
manager, Kevin Klingert, is the person primarily responsible for the day-
to-day management of the Portfolios' investments. Mr. Klingert has been with
BlackRock since 1991 and the Portfolios' manager since March 1995. Mr.
Klingert was formerly an Assistant Vice-President at Merrill, Lynch, Pierce,
Fenner & Smith.
The fifth paragraph has been deleted.
The sixth paragraph has been amended to read as follows:
The Short-Term Bond, Intermediate-Term Bond, Intermediate Government,
Government Income and Managed Income Portfolios have been managed by a
BlackRock portfolio management team since March 1995. The team is led by
Robert S. Kapito and includes Michael P. Lustig, Scott Amero and Beth A.
Coyne. Mr. Kapito has been with BlackRock since 1988 and serves as Vice
Chairman of BlackRock. Mr. Lustig has been with BlackRock since 1989, prior
to which he was an associate at Pacific Merchant Bank. Mr. Amero joined
BlackRock in 1990 where he is a Managing Director. Prior to 1990, Mr. Amero
was a Vice President at First Boston Company. Ms. Coyne has been with PNC
Bank since 1990 and with BlackRock since April 1995. Prior to 1990, Ms.
Coyne sold fixed income securities for Kidder, Peabody & Co., Inc. Ms. Coyne
was formerly the person primarily responsible for managing the Short-Term
Bond, Intermediate-Term Bond, Managed Income and Intermediate Government
Portfolios for PNC Bank.
The seventh paragraph has been amended to read as follows:
The International Fixed Income Portfolio's Manager, Herve van Caloen, is the
person primarily responsible for the day-to-day management of the
Portfolio's investments. Mr. van Caloen has been a portfolio manager with
PCM since 1992 and currently heads PCM's International Group. Mr. van Caloen
has managed the Portfolio since April 1995. Before joining PCM, Mr. van
Caloen managed international portfolios for Mitchell Hutchins and Scudder,
Stevens and Clark.
The date of this Supplement is April 12, 1995.
<PAGE> 48
THE FIXED INCOME PORTFOLIOS
INSTITUTIONAL CLASS
The PNC(R) Fund (the "Fund") consists of twenty-five investment portfolios.
This Prospectus relates to nine classes of shares ("Institutional Shares" or
"Shares") representing interests in nine of those portfolios (collectively, the
"Portfolios") which offer investors a range of investment opportunities with the
following objectives:
MANAGED INCOME PORTFOLIO--to provide current income consistent with
prudent investment management and preservation of capital. It pursues this
objective by investing primarily in high and medium grade fixed-income
securities.
TAX-FREE INCOME PORTFOLIO--to seek as high a level of current income
exempt from Federal income tax as is consistent with preservation of
capital. It pursues this objective by investing primarily in obligations
issued by or on behalf of states, territories and possessions of the United
States, the District of Columbia, and their political subdivisions,
agencies, instrumentalities and authorities and tax-exempt derivative
securities relating thereto ("Municipal Obligations").
INTERMEDIATE GOVERNMENT PORTFOLIO--to provide current income consistent
with preservation of capital. It pursues this objective by investing
primarily in obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities and repurchase agreements and collateralized
mortgage obligations ("CMOs") relating to such obligations.
OHIO TAX-FREE INCOME PORTFOLIO--to seek as high a level of current
income exempt from Federal and, to the extent possible, from Ohio income tax
as is consistent with preservation of capital. It pursues this objective by
investing primarily in municipal obligations issued by the State of Ohio and
its political subdivisions, agencies, instrumentalities and authorities and
tax-exempt derivative securities relating thereto ("Ohio Municipal
Obligations").
PENNSYLVANIA TAX-FREE INCOME PORTFOLIO--to seek as high a level of
current income exempt from Federal and, to the extent possible, from
Pennsylvania income tax as is consistent with preservation of capital. It
pursues this objective by investing primarily in municipal obligations
issued by the Commonwealth of Pennsylvania and its political subdivisions,
agencies, instrumentalities and authorities and tax-exempt derivative
securities relating thereto ("Pennsylvania Municipal Obligations").
SHORT-TERM BOND PORTFOLIO--to seek a high level of current income
consistent with prudent investment risk. It pursues this objective by
investing primarily in investment grade debt securities. The Portfolio will
generally have a dollar-weighted average portfolio maturity of five years or
less.
INTERMEDIATE-TERM BOND PORTFOLIO--to seek a high level of current income
consistent with prudent investment risk. It pursues this objective by
investing primarily in investment grade debt securities. The Portfolio will
generally have a dollar-weighted average portfolio maturity of five to ten
years.
GOVERNMENT INCOME PORTFOLIO--to seek as high a level of current income
as is consistent with a reasonable concern for safety of principal. It
pursues this objective by investing primarily in debt securities issued,
guaranteed or otherwise backed by the U.S. Government or its agencies or
instrumentalities and repurchase agreements relating to such obligations.
INTERNATIONAL FIXED INCOME PORTFOLIO--to achieve as high a level of
current income as is consistent with prudent investment risk. It pursues
this objective by investing primarily in an internationally diversified
portfolio of high quality government and corporate obligations.
Institutional Shares of the Portfolios ("Shares") are sold at net asset
value to institutional investors ("Institutions"). Shares of the Ohio Tax-Free
Income and Pennsylvania Tax-Free Income Portfolios are intended for residents of
Ohio and Pennsylvania, respectively.
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 January 30, 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 January 30, 1995
<PAGE> 49
INTRODUCTION
- --------------------------------------------------------------------------------
The Fund is an open-end management investment company which has registered
shares in 25 investment portfolios, nine of which are included in this
Prospectus.
PORTFOLIO MANAGEMENT
PNC Institutional Management Corporation ("PIMC") serves as the Fund's
investment adviser. PNC Bank, Ohio, National Association ("PNC Bank Ohio")
serves as sub-adviser to the Ohio Tax-Free Income Portfolio, PNC Bank, National
Association ("PNC Bank") serves as sub-adviser to the Managed Income,
Intermediate Government, Tax-Free Income, Pennsylvania Tax-Free Income,
Short-Term Bond, Intermediate-Term Bond and Government Income Portfolios and
Provident Capital Management, Inc. ("PCM") serves as sub-adviser to the
International Fixed Income Portfolio. The investment adviser and sub-advisers
are indirect wholly-owned subsidiaries of PNC Bank Corp.
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> 50
EXPENSE TABLE
ANNUAL FUND OPERATING EXPENSES FOR INSTITUTIONAL SHARES AFTER FEE WAIVERS AND
EXPENSE
REIMBURSEMENTS AS A PERCENTAGE OF DAILY NET ASSETS
<TABLE>
<CAPTION>
INTER- OHIO PENNSYLVANIA
MANAGED TAX-FREE MEDIATE TAX-FREE TAX-FREE
INCOME INCOME GOVERNMENT INCOME INCOME
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C>
Advisory fees(1)......... .38% 0% .23% 0% .28%
Other operating
expenses............... .20 .53 .20 .53 .25
--- --- --- --- ---
Administration fees(1)... .15 0 .13 0 .09
Other expenses(1)........ .05 .53 .07 .53 .16
--- --- --- --- ---
Total fund operating
expenses............... .58% .53% .43% .53% .53%
=== === === === ===
INTER- INTER-
SHORT- MEDIATE NATIONAL
TERM TERM GOVERNMENT FIXED
BOND BOND INCOME INCOME
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Advisory fees(1)........... .23% .28% .38% .43%
Other operating
expenses................. .20 .20 .20 .35
--- --- --- ---
Administration fees(1)... .09 .10 .10 .10
Other expenses(1)........ .11 .10 .10 .25
--- --- --- ---
Total fund operating
expenses................. .43% .48% .58% .78%
=== === === ===
</TABLE>
- ------------------
(1) Advisory fees are net waivers of .12%, .50%, .27%, .50%, .22%, .27%, .22%,
.12% and .12% and administration fees are net of waivers of .05%, .20%,
.07%, .20%, .11%, .11%, .10%, .10% and .10% for the 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, respectively. In addition, the
Expense Table reflects reimbursements made to the Tax-Free Income Portfolio
by the adviser. PIMC and the Administrators are under no obligation to waive
or continue waiving such fees or reimbursing such expenses, but have
informed the Fund that they expect to waive or continue waiving such fees
and reimbursing such expenses during the current fiscal year as necessary to
maintain the Portfolios' total operating expenses at the levels set forth in
the table. The expenses noted above under "Other expenses" are estimated
based on the level of such expenses for the 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 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>
Managed Income............................................ $6 $19 $ 32 $73
Tax-Free Income........................................... 5 17 30 68
Intermediate Government................................... 4 14 24 54
Ohio Tax-Free Income...................................... 5 17 30 66
Pennsylvania Tax-Free Income.............................. 5 17 30 66
Short-Term Bond........................................... 4 14 24 54
Intermediate-Term Bond.................................... 5 15 27 60
Government Income......................................... 6 19
International Fixed Income................................ 8 25
</TABLE>
The foregoing Expense Table and Example are intended to assist investors in
understanding the Portfolios' estimated operating expenses. Investors bear
these expenses either directly or indirectly. The information in the table for
the Managed Income, Tax-Free Income, Intermediate Government, Ohio Tax-Free
Income, Pennsylvania Tax-Free Income, Short-Term Bond and Intermediate-Term
Bond Portfolios is based on the advisory and administration fees and other
expenses payable after fee waivers for the fiscal year ended September 30,
1994, as restated to reflect revised fee waivers. The table estimates fees,
expenses, waivers and assets for the other Portfolios for the current fiscal
year. Total operating expenses would have been .75%, 1.23%, .77%, 1.23%, .86%,
.81%, .80%, .80% and 1.00% for Institutional Shares of the 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, respectively, 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 and operating expenses.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
INVESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND OPERATING
EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
3
<PAGE> 51
CERTAIN RISK FACTORS TO CONSIDER
An investment in any of the Portfolios is subject to certain investment
considerations, as set forth in detail under "Investment Policies." As with
other mutual funds, there can be no assurance that any Portfolio will achieve
its investment objective. Some or all of the Portfolios may: purchase
mortgage-related securities, foreign securities and illiquid securities; enter
into repurchase and reverse repurchase agreements; lend portfolio securities to
third parties; and enter into futures contracts and options. The Ohio Tax-Free
Income and Pennsylvania Tax-Free Income Portfolios are classified as
non-diversified under the Investment Company Act of 1940 (the "1940 Act"). These
and the other investment practices set forth below and their associated risks
deserve careful consideration by investors. See "Investment Policies."
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
BACKGROUND
The Fund currently offers four classes of shares in each
Portfolio--Service, Series A Investor, Series B Investor and Institutional
Shares. Service, Series A Investor, Series B Investor and Institutional Shares
in a Portfolio represent equal pro rata interests in such Portfolio, except that
they bear different expenses which reflect the difference in the range of
services provided to them. Under the Fund's Service Plan, Service Shares bear
the expense of fees at an annual rate not to exceed .15% of the average daily
net asset value of each Portfolio's outstanding Service Shares. Service Shares
also bear the expense of a service fee at an annual rate not to exceed .15% of
the average daily net asset value of each Portfolio's outstanding Service Shares
for other shareholder support activities provided by service organizations. See
"Description of Shares" for a description of the Service Plan and shareholder
support activities. Series A Investor Shares bear the expense of the Fund's
Distribution and Service Plan at an annual rate not to exceed .55% of the
average daily net asset value of each Portfolio's outstanding Series A Investor
Shares. Series B Investor Shares bear the expense of the Fund's Series B
Distribution Plan and Series B Service Plan at annual rates not to exceed .75%
and .25%, respectively, of the average daily net asset value of each Portfolio's
outstanding Series B Investor Shares. See "Description of Shares" for a
description of the Distribution and Service Plan, the Series B Distribution Plan
and the Series B Service Plan. Institutional Shares bear no shareholder
servicing or distribution fees.
During periods in which fees relating to the Service Plan and shareholder
support activities and to the Distribution and Service Plan were not charged to
a Portfolio's Service Shares or Series A Investor Shares, respectively, the
financial data in the tables below pertaining to Service Shares or Series A
Investor Shares of such Portfolio are identical to the financial data relating
to Institutional Shares of the Portfolio for such periods or to what such
financial data would have been had Institutional Shares in the Portfolio been
outstanding for such periods (except, in each case, for the number of Service
and Series A Investor Shares outstanding).
The SEC requires that this Prospectus contain Financial Highlights for each
class of each Portfolio described herein. Series A Investor Shares of the Ohio
Tax-Free Income Portfolio did not bear any expenses relating to the Distribution
and Service Plan during the year ended September 30, 1994 and during all prior
periods. It is expected that Series A Investor Shares of the Ohio Tax-Free
Income Portfolio will bear such expenses after the date of this Prospectus. No
Series B Investor Shares of the Portfolios and no shares of the Government
Income and International Fixed Income Portfolios were issued during the year
ended September 30, 1994.
The financial data included in the tables 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. Further information about the performance of the
Portfolios 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> 52
THE PNC(R) FUND
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
MANAGED INCOME PORTFOLIO
-----------------------------------------------------------------
INSTITUTIONAL CLASS
-----------------------------------------------------------------
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 11/1/89(1)
ENDED ENDED ENDED ENDED THROUGH
9/30/94 9/30/93 9/30/92 9/30/91 9/30/90
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period..................... $ 11.17 $ 10.74 $ 10.26 $ 9.70 $ 10.00
-------- -------- -------- -------- -------
Income from investment operations
Net investment income.................................. 0.64 0.67 0.69 0.74 0.66
Net gain (loss) on investments
(both realized and unrealized)....................... (1.21) 0.56 0.48 0.63 (0.29)
-------- -------- -------- -------- -------
Total from investment operations................... (0.57) 1.23 1.17 1.37 0.37
-------- -------- -------- -------- -------
Less distributions
Distributions from net investment income............... (0.64) (0.67) (0.69) (0.73) (0.66)
Distribution in excess of net investment income........ (0.02) -- -- (0.08) (0.01)
Distributions from net realized capital gains.......... (0.14) (0.13) -- -- --
Distributions in excess of net realized gains.......... (0.01) -- -- -- --
-------- -------- -------- -------- -------
Total distributions................................ (0.81) (0.80) (0.69) (0.81) (0.67)
-------- -------- -------- -------- -------
Net asset value at end of period........................... $ 9.79 $ 11.17 $ 10.74 $ 10.26 $ 9.70
======== ======== ======== ======== =======
Total return............................................... (5.27)% 12.13% 11.80% 14.74% 3.80%
Ratios/Supplemental data
Net assets at end of period
(in thousands)....................................... $395,060 $341,791 $314,075 $ 52,802 $38,328
Ratios of expenses to average net assets
After advisory/administration fee waivers............ 0.55% 0.74% 0.80% 0.80% 0.80%(2)
Before advisory/administration fee waivers........... 0.77% 0.78% 0.80% 0.84% 0.82%(2)
Ratios of net investment income to average net assets
After advisory/administration fee waivers............ 6.11% 6.25% 6.28% 7.36% 7.31%(2)
Before advisory/administration fee waivers........... 5.89% 6.21% 6.28% 7.32% 7.29%(2)
Portfolio turnover rate................................ 61% 72% 56% 38% 18%
</TABLE>
- -------------
(1) Commencement of operations.
(2) Annualized.
5
<PAGE> 53
THE PNC(R) FUND
FINANCIAL HIGHLIGHTS (Continued)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
MANAGED INCOME PORTFOLIO
----------------------------------------------------------
SERVICE CLASS SERIES A INVESTOR CLASS
------------------- ---------------------------------
FOR THE FOR THE
PERIOD PERIOD
YEAR 7/29/93(1) YEAR YEAR 2/05/92(1)
ENDED THROUGH ENDED ENDED THROUGH
9/30/94 9/30/93 9/30/94 9/30/93 9/30/92
------- ---------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period............................. $ 11.17 $ 10.96 $ 11.18 $10.74 $10.40
------- ------- ------- ------ ------
Income from investment operations
Net investment income.......................................... 0.59 0.11 0.57 0.66 0.46
Net gain (loss) on investments (both realized and
unrealized).................................................. (1.18) .21 (1.19) 0.57 0.34
------- ------- ------- ------ ------
Total from investment operations........................... (0.59) 0.32 (0.62) 1.23 0.80
------- ------- ------- ------ ------
Less distributions
Distributions from net investment income....................... (0.62) (0.11) (0.60) (0.66) (0.46)
Distribution in excess of net investment income................ (0.02) -- (0.02) -- --
Distributions from net realized capital gains.................. (0.14) -- (0.14) (0.13) --
Distributions in excess of net realized gains.................. (0.01) -- (0.01) -- --
------- ------- ------- ------ ------
Total distributions........................................ (0.79) (0.11) (0.77) (0.79) (0.46)
------- ------- ------- ------ ------
Net asset value at end of period................................... $ 9.79 $ 11.17 $ 9.79 $11.18 $10.74
======= ======= ======= ====== ======
Total return....................................................... (5.49)% 2.93% (5.76)%(3) 12.13%(3) 7.86%(3)
Ratios/Supplemental data
Net assets at end of period (in thousands)..................... $67,655 $15,322 $10,921 $7,252 $1,417
Ratios of expenses to average net assets
After advisory/administration fee waivers.................... 0.80% 0.80%(2) 1.00% 0.84% 0.80%(2)
Before advisory/administration fee waivers................... 1.02% 0.84%(2) 1.22% 0.88% 0.80%(2)
Ratios of net investment income to average net assets
After advisory/administration fee waivers.................... 5.95% 5.83%(2) 5.66% 6.09% 6.28%(2)
Before advisory/administration fee waivers................... 5.73% 5.79%(2) 5.44% 6.05% 6.28%(2)
Portfolio turnover rate........................................ 61% 72% 61% 72% 56%
</TABLE>
- -------------
(1) Commencement of operations.
(2) Annualized.
(3) Sales load not reflected in total return.
6
<PAGE> 54
THE PNC(R) FUND
FINANCIAL HIGHLIGHTS (Continued)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
TAX-FREE INCOME PORTFOLIO
------------------------------------------------
INSTITUTIONAL CLASS SERVICE CLASS
---------------------- ----------------------
FOR THE FOR THE
PERIOD PERIOD
YEAR 1/21/93(1) YEAR 7/29/93(1)
ENDED THROUGH ENDED THROUGH
9/30/94 9/30/93 9/30/94 9/30/93
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Net asset value at beginning of period.................................. $11.31 $10.61 $11.31 $10.97
------ ------ ------ ------
Income from investment operations
Net investment income............................................... 0.53 0.42 0.51 0.09
Net gain (loss) on investments (both realized and unrealized)....... (0.93) 0.70 (0.93) 0.34
------ ------ ------ ------
Total from investment operations................................ (0.40) 1.12 (0.42) 0.43
------ ------ ------ ------
Less distributions
Distributions from net investment income............................ (0.53) (0.42) (0.51) (0.09)
Distributions from net realized capital gains....................... (0.34) -- (0.34) --
------ ------ ------ ------
Total distributions............................................. (0.87) (0.42) (0.85) (0.09)
------ ------ ------ ------
Net asset value at end of period........................................ $10.04 $11.31 $10.04 $11.31
====== ====== ====== ======
Total return............................................................ (3.77)% 10.72% (4.02)% 3.92%
Ratios/Supplemental data
Net assets at end of period (in thousands).......................... $ 132 $ 675 $2,109 $ 634
Ratios of expenses to average net assets
After advisory/administration fee waivers......................... 0.50% 0.50%(2) 0.75% 0.71%(2)
Before advisory/administration
fee waivers..................................................... 1.73% 1.28%(2) 1.98% 1.49%(2)
Ratios of net investment income to average net assets
After advisory/administration fee waivers......................... 4.97% 5.14%(2) 4.75% 4.99%(2)
Before advisory/administration fee waivers........................ 3.74% 4.36%(2) 3.52% 4.21%(2)
Portfolio turnover rate............................................. 40% 71% 40% 71%
</TABLE>
- -------------
(1) Commencement of operations.
(2) Annualized.
7
<PAGE> 55
THE PNC(R) FUND
FINANCIAL HIGHLIGHTS (Continued)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
TAX-FREE INCOME PORTFOLIO
--------------------------------------------------------
SERIES A INVESTOR CLASS
--------------------------------------------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
9/30/94 9/30/93 9/30/92 9/30/91
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net asset value at beginning of period..................... $11.31 $10.60 $10.33 $ 9.91
------ ------ ------ ------
Income from investment operations
Net investment income.................................. 0.48 0.55 0.58 0.64
Net gain (loss) on investments (both realized and
unrealized).......................................... (0.93) 0.83 0.49 0.46
------ ------ ------ ------
Total from investment operations................... (0.45) 1.38 1.07 1.10
------ ------ ------ ------
Less distributions
Distributions from net investment income............... (0.48) (0.55) (0.59) (0.66)
Distributions from net realized capital gains.......... (0.34) (0.12) (0.21) (0.02)
------ ------ ------ ------
Total distributions................................ (0.82) (0.67) (0.80) (0.68)
------ ------ ------ ------
Net asset value at end of period........................... $10.04 $11.31 $10.60 $10.33
====== ====== ====== ======
Total return............................................... (4.19)%(3) 13.48%(3) 10.67%(3) 11.40%(3)
Ratios/Supplemental data
Net assets at end of period (in thousands)............. $6,972 $7,831 $7,349 $3,510
Ratios of expenses to average net assets
After advisory/administration fee waivers............ 0.95% 0.57% 0.53% 1.00%
Before advisory/administration fee waivers........... 2.18% 1.36% 1.67% 1.89%
Ratios of net investment income to average net assets
After advisory/administration fee waivers............ 4.53% 5.06% 5.56% 6.23%
Before advisory/administration fee waivers........... 3.30% 4.27% 4.42% 5.34%
Portfolio turnover rate................................ 40% 71% 38% 95%
</TABLE>
<TABLE>
<CAPTION>
TAX-FREE INCOME PORTFOLIO
-------------------------
SERIES A INVESTOR CLASS
-------------------------
FOR THE
PERIOD
5/14/90(1)
THROUGH
9/30/90
----------
<S> <C>
Net asset value at beginning of period..................... $10.00
------
Income from investment operations
Net investment income.................................. 0.25
Net gain (loss) on investments (both realized and
unrealized).......................................... (0.11)
------
Total from investment operations................... 0.14
------
Less distributions
Distributions from net investment income............... (0.23)
Distributions from net realized capital gains.......... --
------
Total distributions................................ (0.23)
------
Net asset value at end of period........................... $ 9.91
======
Total return............................................... 1.40%(3)
Ratios/Supplemental data
Net assets at end of period (in thousands)............. $4,044
Ratios of expenses to average net assets
After advisory/administration fee waivers............ 1.00%(2)
Before advisory/administration fee waivers........... 1.70%(2)
Ratios of net investment income to average net assets
After advisory/administration fee waivers............ 6.56%(2)
Before advisory/administration fee waivers........... 5.86%(2)
Portfolio turnover rate................................ 18%
</TABLE>
- -------------
1 Commencement of operations.
2 Annualized.
3 Sales load not reflected in total return.
8
<PAGE> 56
THE PNC(R) FUND
FINANCIAL HIGHLIGHTS (Continued)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
INTERMEDIATE GOVERNMENT PORTFOLIO
----------------------------------------
INSTITUTIONAL CLASS
----------------------------------------
FOR THE
PERIOD
YEAR YEAR 4/20/92(1)
ENDED ENDED THROUGH
9/30/94 9/30/93 9/30/92
------- ------- ----------
<S> <C> <C> <C>
Net asset value at beginning of period........................................ $ 10.60 $ 10.46 $ 10.00
-------- -------- --------
Income from investment operations
Net investment income..................................................... 0.55 0.54 0.24
Net gain (loss) on investments (both realized and unrealized)............. (0.86) 0.16 0.46
-------- -------- --------
Total from investment operations...................................... (0.31) 0.70 0.70
-------- -------- --------
Less distributions
Distributions from net investment income.................................. (0.55) (0.54) (0.24)
Distributions from net realized capital gains............................. (0.10) (0.02) --
-------- -------- --------
Total distributions................................................... (0.65) (0.56) (0.24)
-------- -------- --------
Net asset value at end of period.............................................. $ 9.64 $ 10.60 $ 10.46
======== ======== ========
Total return.................................................................. (3.08)% 6.88% 7.14%
Ratios/Supplemental data
Net assets at end of period (in thousands)................................ $128,974 $137,065 $105,620
Ratios of expenses to average net assets
After advisory/administration fee waivers............................... 0.40% 0.73% 0.80%(2)
Before advisory/administration fee waivers.............................. 0.80% 0.81% 0.80%(2)
Ratios of net investment income to average net assets
After advisory/administration fee waivers............................... 5.48% 5.23% 5.28%(2)
Before advisory/administration fee waivers.............................. 5.08% 5.15% 5.28%(2)
Portfolio turnover rate....................................................... 9% 80% 38%
</TABLE>
- -------------
(1) Commencement of operations.
(2) Annualized.
9
<PAGE> 57
THE PNC(R) FUND
FINANCIAL HIGHLIGHTS (Continued)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
INTERMEDIATE GOVERNMENT PORTFOLIO
-----------------------------------------------------------------
SERVICE CLASS SERIES A INVESTOR CLASS
---------------------- --------------------------------------
FOR THE FOR THE
PERIOD PERIOD
YEAR 7/29/93(1) YEAR YEAR 5/11/92(1)
ENDED THROUGH ENDED ENDED THROUGH
9/30/94 9/30/93 9/30/94 9/30/93 9/30/92
------- ---------- ------- ------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period..................... $ 10.60 $ 10.45 $10.60 $10.46 $10.05
------- ------- ------ ------ ------
Income from investment operations
Net investment income.................................. 0.53 0.09 0.53 0.54 0.24
Net gain (loss) on investments (both realized and
unrealized).......................................... (0.86) 0.15 (0.87) 0.16 0.41
------- ------ ------ ------ ------
Total from investment operations................... (0.33) 0.24 (0.34) 0.70 0.65
------- ------ ------ ------ ------
Less distributions
Distributions from net investment income............... (0.53) (0.09) (0.52) (0.54) (0.24)
Distributions from net realized capital gains.......... (0.10) -- (0.10) (0.02) --
------- ------- ------ ------ ------
Total distributions................................ (0.63) (0.09) (0.62) (0.56) (0.24)
------- ------- ------ ------ ------
Net asset value at end of period........................... $ 9.64 $ 10.60 $ 9.64 $10.60 $10.46
======= ======= ====== ====== ======
Total return............................................... (3.31)% 2.30% (3.36)%(3) 6.84%(3) 6.64%(3)
Ratios/Supplemental data
Net assets at end of period (in thousands)............. $60,812 $15,035 $8,508 $7,666 $1,484
Ratios of expenses to average net assets
After advisory/administration fee waivers............ 0.65% 0.67%(2) 0.65% 0.76% 0.80%(2)
Before advisory/administration fee waivers........... 1.05% 0.75%(2) 1.05% 0.84% 0.80%(2)
Ratios of net investment income to average net assets
After advisory/administration fee waivers............ 5.30% 5.14%(2) 5.24% 5.19% 5.28%(2)
Before advisory/administration fee waivers........... 4.90% 5.06%(2) 4.84% 5.11% 5.28%(2)
Portfolio turnover rate.................................... 9% 80% 9% 80% 38%
</TABLE>
- -------------
(1) Commencement of operations.
(2) Annualized.
(3) Sales load not reflected in total return.
10
<PAGE> 58
THE PNC(R) FUND
FINANCIAL HIGHLIGHTS (Continued)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
OHIO TAX-FREE INCOME PORTFOLIO
----------------------------------------------------------------------------
SERIES A
INSTITUTIONAL CLASS SERVICE CLASS INVESTOR CLASS
--------------------- --------------------- ------------------------
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
YEAR 12/1/92(1) YEAR 7/29/93(1) YEAR 12/1/92(1)
ENDED THROUGH ENDED THROUGH ENDED THROUGH
9/30/94 9/30/93 9/30/94 9/30/93 9/30/94 9/30/93
------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period.............. $10.53 $10.00 $10.53 $10.24 $10.53 $10.00
------ ------ ------ ------ ------ ------
Income from investment operations
Net investment income........................... 0.53 0.36 0.49 0.09 0.53 0.36
Net gain (loss) on investments (both realized
and unrealized)............................... (0.91) 0.53 (0.91) 0.29 (0.91) 0.53
------ ------ ------ ------ ------ ------
Total from investment operations............ (0.38) 0.89 (0.42) 0.38 (0.38) 0.89
------ ------ ------ ------ ------ ------
Less distributions
Distributions from net investment income........ (0.53) (0.36) (0.49) (0.09) (0.53) (0.36)
Distributions from net realized capital gains... (0.02) -- (0.02) -- (0.02) --
------ ------ ------ ------ ------ ------
Total distributions......................... (0.55) (0.36) (0.51) (0.09) (0.55) (0.36)
------ ------ ------ ------ ------ ------
Net asset value at end of period.................... $ 9.60 $10.53 $ 9.60 $10.53 $ 9.60 $10.53
====== ====== ====== ====== ====== ======
Total return........................................ (3.75)% 9.10% (4.00)% 3.68% (3.75)%(3) 9.10%(3)
Ratios/Supplemental data
Net assets at end of period (in thousands)...... $ 127 $1,676 $4,428 $ 907 $3,825 $2,386
Ratios of expenses to average net assets
After advisory/administration
fee waivers................................. 0.10% 0.08%(2) 0.35% 0.32%(2) 0.10% 0.07%(2)
Before advisory/administration
fee waivers................................. 1.49% 2.59%(2) 1.74% 2.83%(2) 1.49% 2.58%(2)
Ratios of net investment income to average net
assets
After advisory/administration
fee waivers................................. 5.16% 4.99%(2) 5.06% 4.71%(2) 5.18% 4.90%(2)
Before advisory/administration
fee waivers................................. 3.77% 2.48%(2) 3.67% 2.20%(2) 3.79% 2.39%(2)
Portfolio turnover rate............................. 61% 36% 61% 36% 61% 36%
</TABLE>
- -------------
1 Commencement of operations.
2 Annualized.
3 Sales load not reflected in total return.
11
<PAGE> 59
THE PNC(R) FUND
FINANCIAL HIGHLIGHTS (Continued)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
PENNSYLVANIA TAX-FREE INCOME PORTFOLIO
-----------------------------------------------
INSTITUTIONAL
CLASS SERVICE CLASS
--------------------- ---------------------
FOR THE FOR THE
PERIOD PERIOD
YEAR 12/1/92(1) YEAR 7/29/93(1)
ENDED THROUGH ENDED THROUGH
9/30/94 9/30/93 9/30/94 9/30/93
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Net asset value at beginning of period................... $10.70 $10.00 $ 10.70 $10.43
------ ------ ------ ------
Income from investment operations
Net investment income................................ 0.53 0.39 0.51 0.09
Net gain (loss) on investments (both realized and
unrealized)........................................ (0.85) 0.73 (0.85) 0.28
------ ------ ------- ------
Total from investment operations................. (0.32) 1.12 (0.34) 0.37
------ ------ ------- ------
Less distributions
Distributions from net investment income............. (0.53) (0.39) (0.51) (0.09)
Distributions from net realized
capital gains...................................... (0.03) (0.03) (0.03) (0.01)
------ ------ ------- ------
Total distributions.............................. (0.56) (0.42) (0.54) (0.10)
------ ------ ------- ------
Net asset value at end of period......................... $ 9.82 $10.70 $ 9.82 $10.70
====== ====== ======= ======
Total return............................................. (2.96)% 11.69% (3.20)% 3.54%
Ratios/Supplemental data
Net assets at end of period (in thousands)........... $ 639 $ 256 $11,518 $3,894
Ratios of expenses to average net assets
After advisory/administration
fee waivers...................................... 0.39% 0.09%(2) 0.55% 0.34%(2)
Before advisory/administration
fee waivers...................................... 0.99% 0.97%(2) 1.15% 1.22%(2)
Ratios of net investment income to average net assets
After advisory/administration
fee waivers...................................... 5.27% 5.19%(2) 4.97% 4.90%(2)
Before advisory/administration
fee waivers...................................... 4.67% 4.31%(2) 4.37% 4.02%(2)
Portfolio turnover rate.................................. 30% 40% 30% 40%
</TABLE>
<TABLE>
<CAPTION>
PENNSYLVANIA TAX-FREE
INCOME PORTFOLIO
------------------------
SERIES A
INVESTOR CLASS
------------------------
FOR THE
PERIOD
YEAR 12/1/92(1)
ENDED THROUGH
9/30/94 9/30/93
------- ----------
<S> <C> <C>
Net asset value at beginning of period................... $ 10.70 $ 10.00
------- -------
Income from investment operations
Net investment income................................ 0.52 0.42
Net gain (loss) on investments (both realized and
unrealized)........................................ (0.85) 0.73
------- -------
Total from investment operations................. (0.33) 1.15
------- -------
Less distributions
Distributions from net investment income............. (0.52) (0.42)
Distributions from net realized
capital gains...................................... (0.03) (0.03)
------- -------
Total distributions.............................. (0.55) (0.45)
------- -------
Net asset value at end of period......................... $ 9.82 $ 10.70
======= =======
Total return............................................. (3.06)%(3) 11.69%(3)
Ratios/Supplemental data
Net assets at end of period (in thousands)........... $46,563 $35,934
Ratios of expenses to average net assets
After advisory/administration
fee waivers...................................... 0.41% 0.07%(2)
Before advisory/administration
fee waivers...................................... 1.01% 0.95%(2)
Ratios of net investment income to average net assets
After advisory/administration
fee waivers...................................... 5.06% 5.19%(2)
Before advisory/administration
fee waivers...................................... 4.46% 4.31%(2)
Portfolio turnover rate.................................. 30%
</TABLE>
- -------------
1 Commencement of operations.
2 Annualized.
3 Sales load not reflected in total return.
12
<PAGE> 60
THE PNC(R) FUND
FINANCIAL HIGHLIGHTS (Continued)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SHORT-TERM BOND PORTFOLIO
-------------------------------------------------------------------
SERIES A
INSTITUTIONAL CLASS SERVICE CLASS INVESTOR CLASS
-------------------- --------------------- --------------
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
YEAR 9/1/93(1) YEAR 9/1/93(1) 11/17/93(1)
ENDED THROUGH ENDED THROUGH THROUGH
9/30/94 9/30/93 9/30/94 9/30/93 9/30/94
------- --------- ------- --------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period.................... $ 10.00 $10.00 $10.00 $10.00 $ 9.96
------- ------ ------ ------ ------
Income from investment operations
Net investment income................................. 0.42 0.02 0.39 0.02 0.34
Net gain (loss) on investments (both realized and
unrealized)......................................... (0.42) -- (0.42) -- (0.38)
------- ------ ------ ------ ------
Total from investment operations.................. -- 0.02 (0.03) 0.02 (0.04)
------- ------ ------ ------ ------
Less distributions
Distributions from net investment income.............. (0.42) (0.02) (0.39) (0.02) (0.34)
Distributions from net realized capital gains......... -- -- -- -- --
------- ------ ------ ------ ------
Total distributions............................... (0.42) (0.02) (0.39) (0.02) (0.34)
------- ------ ------ ------ ------
Net asset value at end of period.......................... $ 9.58 $10.00 $ 9.58 $10.00 $ 9.58
======= ====== ====== ====== ======
Total return.............................................. (0.02)% 0.23% (0.26)% 0.21% (0.43)%(3)
Ratios/Supplemental data
Net assets at end of period (in thousands)............ $17,619 $3,748 $6,230 $2,811 $ 277
Ratios of expenses to average net assets
After advisory/administration fee waivers........... 0.40% 0.40%(2) 0.65% 0.65%(2) 0.65%(2)
Before advisory/administration fee waivers.......... 0.95% 1.42%(2) 1.20% 1.67% 1.20%(2)
Ratios of net investment income to average
net assets
After advisory/administration fee waivers........... 4.27% 2.92%(2) 4.07% 2.57%(2) 4.19%(2)
Before advisory/administration fee waivers.......... 3.72% 1.90%(2) 3.52% 1.55%(2) 3.64%(2)
Portfolio turnover rate................................... 113% 0% 113% 0% 113%
</TABLE>
- -------------
1 Commencement of operations.
2 Annualized.
3 Sales load not reflected in total return.
13
<PAGE> 61
THE PNC(R) FUND
FINANCIAL HIGHLIGHTS (Continued)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
INTERMEDIATE-TERM BOND PORTFOLIO
-------------------------------------------------------------------
SERIES A
INSTITUTIONAL CLASS SERVICE CLASS INVESTOR CLASS
--------------------- -------------------- --------------
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
YEAR 9/17/93(1) YEAR 9/23/93(1) 5/20/94(1)
ENDED THROUGH ENDED THROUGH THROUGH
9/30/94 9/30/93 9/30/94 9/30/93 9/30/94
------- ---------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period.................. $ 10.01 $ 10.00 $ 10.01 $ 9.99 $ 9.23
------- ------- ------- ------ ------
Income from investment operations
Net investment income............................... 0.54 0.02 0.54 -- 0.20
Net gain (loss) on investments (both realized and
unrealized)....................................... (0.88) (0.01) (0.91) 0.02 (0.17)
------- ------- ------- ------ ------
Total from investment operations................ (0.34) 0.01 (0.37) 0.02 0.03
------- ------- ------- ------ ------
Less distributions
Distributions from net investment income............ (0.56) -- (0.53) -- (0.21)
Distributions from net realized capital gains....... (0.06) -- (0.06) -- --
------- ------- ------- ------ ------
Total distributions............................. (0.62) -- (0.59) -- (0.21)
------- ------- ------- ------ ------
Net asset value at end of period........................ $ 9.05 $ 10.01 $ 9.05 $10.01 $ 9.05
======= ======= ======= ====== ======
Total return............................................ (3.52)% 0.10% (3.80)% 0.20% 0.31%(3)
Ratios/Supplemental data
Net assets at end of period (in thousands).......... $71,896 $56,713 $35,764 $ 91 $ 87
Ratios of expenses to average net assets
After advisory/administration fee waivers......... 0.45% 0.45%(2) 0.70% 0.70%(2) 0.85%(2)
Before advisory/administration fee waivers........ 0.88% 0.84%(2) 1.13% 1.09%(2) 1.28%(2)
Ratios of net investment income to average net
assets
After advisory/administration fee waivers......... 5.54% 4.72%(2) 5.33% 4.35%(2) 5.35%(2)
Before advisory/administration fee waivers........ 5.11% 4.33%(2) 4.90% 3.96%(2) 4.92%(2)
Portfolio turnover rate................................. 92% 4% 92% 4% 92%
</TABLE>
- -------------
1 Commencement of operations.
2 Annualized.
3 Sales load not reflected in total return.
14
<PAGE> 62
INVESTMENT POLICIES
- --------------------------------------------------------------------------------
MANAGED INCOME PORTFOLIO
The Portfolio will normally invest at least 80% of the value of its total
assets in debt securities of all types, although up to 20% of the value of its
total assets may be invested in preferred stocks. Debt securities may include,
without limitation, bonds, debentures, notes, equipment lease and trust
certificates, mortgage-related securities, Municipal Obligations (other than
tax-exempt derivative securities), guaranteed investment contracts (GICs) and
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. The sub-adviser uses a number of factors in selecting
securities, including without limitation as applicable, debt to equity and
capital ratios, pre-tax fixed charge coverage, return on equity, the issuance's
size, current yield, general economic analysis, preservation of capital,
potential for realizing capital appreciation, maturity and yield to maturity.
Purchasable debt securities and preferred stock are rated at the time of
purchase within the four highest ratings assigned by Moody's Investors Service,
Inc. ("Moody's") (i.e., Aaa, Aa, A, Baa for bonds and preferred stock) or by
Standard & Poor's Corporation ("S&P") (i.e., AAA, AA, A, BBB for bonds and
preferred stock) or, if unrated, are determined by sub-adviser at the time of
purchase to be of comparable quality. Securities rated "Baa" by Moody's or "BBB"
by S&P, respectively, are generally considered to be investment grade although
they have speculative characteristics and changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case for higher grade bonds. If a
portfolio security is reduced below Baa by Moody's or BBB by S&P, the
Portfolio's sub-adviser will dispose of the security in an orderly fashion as
soon as practicable. See Appendix A to the Statement of Additional Information
for a description of Moody's and S&P's rating symbols.
The Portfolio may invest up to 10% of the value of its total assets in debt
securities of foreign issuers. Investors should realize that investing in
securities of foreign issuers involves considerations not typically associated
with investing in securities of companies organized and operated in the United
States. Because foreign securities generally are denominated and pay dividends
or interest in foreign currencies, and the Portfolio may hold from time to time
various foreign currencies pending their investment in foreign securities or
their conversion into U.S. dollars, the value of the Portfolio's assets as
measured in U.S. dollars may be affected favorably or unfavorably by changes in
exchange rates. Although the Portfolio intends to invest in securities of
companies and governments of developed, stable nations, investors should realize
that the value of the Portfolio's investments may be adversely affected by
changes in political or social conditions, diplomatic relations, confiscatory
taxation, expropriation, limitation on the removal of funds or assets, or
imposition of (or change in) exchange control regulations in those foreign
nations. In addition, changes in government administrations or economic or
monetary policies in the U.S. or abroad could result in appreciation or
depreciation of portfolio securities and could favorably or adversely affect the
Portfolio's operations. Furthermore, the economies of individual foreign nations
may differ from that of the United States, whether favorably or unfavorably, in
areas such as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position. Any
foreign investments made by the Portfolio must be made in compliance with U.S.
and foreign currency restrictions and tax laws restricting the amounts and types
of foreign investments.
In general, less information is publicly available with respect to foreign
issuers than is available with respect to U.S. companies. Most foreign companies
are also not subject to the uniform accounting and financial reporting
requirements applicable to issuers in the United States. The Portfolio's foreign
investments may be less liquid and their prices may be more volatile than
comparable investments in securities in U.S. companies. Expenses relating to
foreign investments are higher than those relating to domestic securities. In
addition, there is generally less government supervision and regulation of
securities exchanges, brokers and issuers in foreign countries than in the
United States.
15
<PAGE> 63
The two principal classifications of Municipal Obligations are "general
obligation" securities and "revenue" securities. General obligation securities
are secured by the issuer's pledge of its full faith, credit and taxing power
for the payment of principal and interest. Revenue securities are payable only
from the revenues derived from a particular facility or class of facilities or,
in some cases, from the proceeds of a special excise tax or other specific
revenue source such as the user of the facility being financed. Revenue
securities include private activity bonds which are not payable from the
unrestricted revenues of the issuer. Consequently, the credit quality of private
activity bonds is usually directly related to the credit standing of the
corporate user of the facility involved. Municipal Obligations may also include
"moral obligation" bonds, which are normally issued by special purpose public
authorities. If the issuer of moral obligation bonds is unable to meet its debt
service obligations from current revenues, it may draw on a reserve fund, the
restoration of which is a moral commitment but not a legal obligation of the
state or municipality which created the issuer.
Purchasable Municipal Obligations include debt obligations issued by
governmental entities to obtain funds for various public purposes, including the
construction of a wide range of public facilities, the refunding of outstanding
obligations, the payment of general operating expenses and the extension of
loans to public institutions and facilities. Private activity bonds issued by or
on behalf of public authorities to finance various privately operated facilities
are considered Municipal Obligations. Dividends paid by the Portfolio that are
derived from interest on such Municipal Obligations would be taxable to the
Portfolio's shareholders for Federal income tax purposes.
When investing in GICs, the Portfolio makes cash contributions to a deposit
fund of an insurance company's general account. The insurance company then
credits to the deposit fund on a monthly basis guaranteed interest which is
based on an index (in most cases this index is expected to be the Salomon
Brothers CD Index). GICs provide that this guaranteed interest will not be less
than a certain minimum rate. A GIC is a general obligation of the issuing
insurance company and not a separate account. The purchase price paid for a GIC
becomes part of the general assets of the insurance company, and the contract is
paid from the general assets of the insurance company. The Portfolio will only
purchase GICs from insurance companies which, at the time of purchase, are rated
"A+" by A.M. Best Company, have assets of $1 billion or more and meet quality
and credit standards established by the sub-adviser pursuant to guidelines
approved by the Board of Trustees. Generally, GICs are not assignable or
transferable without the permission of the issuing insurance companies, and an
active secondary market in GICs does not currently exist.
Also included within the general category of Municipal Obligations are
participation certificates in a lease, an installment purchase contract, or a
conditional sales contract ("lease obligations") entered into by a state or
political subdivision to finance the acquisition or construction of equipment,
land, or facilities. Although lease obligations do not constitute general
obligations of the issuer for which the lessee's unlimited taxing power is
pledged, certain lease obligations are backed by the lessee's covenant to
appropriate money to make the lease obligation payments. However, under certain
lease obligations, the lessee has no obligation to make these payments in future
years unless money is appropriated on a yearly basis. Although
"non-appropriation" lease obligations are secured by the leased property,
disposition of the property in the event of foreclosure might prove difficult.
These securities represent a relatively new type of financing that is not yet as
marketable as more conventional securities. Moreover, certain investments in
lease obligations may be illiquid and subject to the investment limitations
described below. The Portfolio does not currently intend to invest in such lease
obligations. See "Investment Policies--Common Investment Policies" for a
description of other investment policies.
Under normal market conditions, the Managed Income Portfolio's
average-weighted maturity will generally be between 5 and 15 years.
16
<PAGE> 64
------------------------------------
TAX-FREE INCOME PORTFOLIO
Purchasable Municipal Obligations are rated within the four highest
categories assigned by Moody's (Aaa, Aa, A or Baa) or by S&P (AAA, AA, A or BBB)
in the case of bonds, rated SP-2 or higher by S&P or MIG-2 or higher by Moody's
in the case of notes, rated A-2 or higher by S&P or Prime-2 or higher by Moody's
in the case of tax-exempt commercial paper or VMIG-2 or higher by Moody's in the
case of variable rate demand notes or are unrated securities determined at the
time of purchase to be of comparable quality by the sub-adviser. In the event
that the rating of a Portfolio security is reduced below Baa by Moody's or BBB
by S&P, the security will be disposed of in an orderly fashion as soon as
practicable. See "Investment Policies--Managed Income Portfolio" for a
description of Municipal Obligations and certain considerations relating to
securities rated Baa or BBB by Moody's or S&P, respectively, "Investment
Policies--Common Investment Policies" for a description of other investment
policies and Appendix A to the Statement of Additional Information for a
description of Moody's and S&P's ratings.
Under normal market conditions, the Tax-Free Income Portfolio's
average-weighted maturity will generally be between 10 and 25 years.
------------------------------------
INTERMEDIATE GOVERNMENT PORTFOLIO
Treasury obligations differ in their interest rates, maturities and times
of issuance. Some obligations issued or guaranteed by U.S. Government agencies
and instrumentalities such as Government National Mortgage Association
pass-through certificates are supported by the United States' full faith and
credit; others such as those of the Federal Home Loan Banks are supported by the
right of the issuer to borrow from the Treasury; others such as those issued by
the Federal National Mortgage Association and the Student Loan Marketing
Association are supported by the U.S. Government's discretionary authority to
purchase certain obligations of the agency or instrumentality; and others are
supported only by the credit of the agency or instrumentality. While the U.S.
Government provides financial support to such U.S. Government-sponsored agencies
or instrumentalities, no assurance can be given that it always will do so
because it is not so obligated by law. The Portfolio may invest in CMOs rated at
the time of purchase within the four highest ratings assigned by Moody's (i.e.,
Aaa, Aa, A, Baa) or by S&P (i.e., AAA, AA, A, BBB) or, if unrated, are
determined by sub-adviser at the time of purchase to be of comparable quality.
CMOs are not government securities. During normal market conditions, at least
65% of the Portfolio's total assets will be invested in U.S. Government
obligations or repurchase agreements relating to such obligations. See
"Investment Policies--Managed Income Portfolio" for a description of certain
considerations relating to securities rated Baa or BBB by Moody's or S&P,
respectively, "Investment Policies--Common Investment Policies" for a
description of other investment policies and Appendix A to the Statement of
Additional Information for a description of Moody's and S&P's ratings.
Under normal market conditions, the Intermediate Government Portfolio's
average-weighted maturity will generally be between three and ten years.
------------------------------------
OHIO TAX-FREE INCOME PORTFOLIO
Purchasable Municipal Obligations are rated within the four highest ratings
assigned by Moody's (i.e., Aaa, Aa, A, Baa) or by S&P (AAA, AA, A, BBB) in the
case of bonds, rated SP-2 or higher by S&P or MIG-2 or higher by Moody's
17
<PAGE> 65
in the case of notes, rated A-2 or higher by S&P or Prime-2 or higher by Moody's
in the case of tax-exempt commercial paper or VMIG-2 or higher by Moody's in the
case of variable rate demand notes or are unrated securities determined at the
time of purchase to be of comparable quality by the sub-adviser. If a portfolio
security is reduced below Baa by Moody's or BBB by S&P, the Portfolio's
sub-adviser will dispose of the security in an orderly fashion as soon as
practicable. The Portfolio will not trade its securities for the purpose of
seeking profits. For purposes of this policy, the Portfolio may vary its
portfolio securities if (i) there has been an adverse change in a security's
credit rating or in that of its issuer or in the adviser's or sub-adviser's
credit analysis of the security or its issuer; (ii) there has been, in the
opinion of the adviser and sub-adviser, a deterioration or anticipated
deterioration in general economic or market conditions affecting issuers of Ohio
Municipal Obligations, or a change or anticipated change in interest rates;
(iii) adverse changes or anticipated changes in market conditions or economic or
other factors temporarily affecting the issuers of one or more portfolio
securities make necessary or desirable the sale of such security or securities
in anticipation of the Portfolio's repurchase of the same or comparable
securities at a later date; or (iv) the adviser or sub-adviser engages in
temporary defensive investment strategies. See "Investment Policies--Managed
Income Portfolio" for a description of Municipal Obligations and certain
considerations relating to securities rated Baa or BBB by Moody's or S&P,
respectively, and Appendix A to the Statement of Additional Information for a
description of Moody's and S&P's ratings.
The concentration of investments in Ohio Municipal Obligations raises
special investment considerations. While diversifying more into the service and
other non-manufacturing areas, the economy of Ohio 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 in Ohio, 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 Ohio 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 national figure of 5.5%. However,
for 1991, 1992 and 1993 the State rates (6.4%, 7.2% and 6.5%) were below the
national rates (6.7%, 7.4% and 6.8%). The unemployment rate and its effects vary
among particular 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 will not adversely affect the
market value of Ohio Municipal Obligations held in the Portfolio or the ability
of the respective obligors to make timely payments of debt service on (or lease
payments relating to) these obligations. See the Statement of Additional
Information for further discussions of investment considerations associated with
Ohio Municipal Obligations and see "Investment Policies--Common Investment
Policies" for a description of other investment policies.
Under normal market conditions, the Ohio Tax-Free Income Portfolio's
average-weighted maturity will generally be between 10 and 25 years.
------------------------------------
PENNSYLVANIA TAX-FREE INCOME PORTFOLIO
Purchasable Municipal Obligations are rated within the four highest ratings
assigned by Moody's (i.e., Aaa, Aa, A, Baa) or by S&P (AAA, AA, A, BBB) in the
case of bonds, rated SP-2 or higher by S&P or MIG-2 or higher by Moody's in the
case of notes, rated A-2 or higher by S&P or Prime-2 or higher by Moody's in the
case of tax-exempt commercial paper or VMIG-2 or higher by Moody's in the case
of variable rate demand notes or are unrated securities determined at the time
of purchase to be of comparable quality by the sub-adviser. If a portfolio
security is reduced below Baa by
18
<PAGE> 66
Moody's or BBB by S&P, the Portfolio's sub-adviser will dispose of the security
in an orderly fashion as soon as practicable. See "Investment Policies--Managed
Income Portfolio" for a description of Municipal Obligations and certain
considerations relating to securities rated Baa or BBB by Moody's or S&P,
respectively, and Appendix A to the Statement of Additional Information for a
description of Moody's and S&P's ratings.
The concentration of investments in Pennsylvania Municipal Obligations
raises special investment considerations. In particular, changes in the economic
condition and governmental policies of the Commonwealth of Pennsylvania and its
political subdivisions, agencies, instrumentalities and authorities could
adversely affect the value of the Portfolio and its portfolio securities.
Although the General Fund of the Commonwealth (the principal operating fund of
the Commonwealth) experienced deficits in 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. Rising
unemployment, a relatively high proportion of persons 65 and older in the
Commonwealth and court ordered increases in healthcare reimbursement rates place
increased pressures on the tax resources of the Commonwealth and its
municipalities. See the Statement of Additional Information for further
discussion of investment considerations associated with Pennsylvania Municipal
Obligations and see "Investment Policies--Common Investment Policies" for a
description of other investment policies.
The Commonwealth has sold a substantial amount of bonds over the past
several years, but the debt burden remains moderate. The recession has affected
Pennsylvania's economic base, with income and job growth at levels below
national averages. Employment growth has shifted to the trade and service
sectors, with losses in more high-paid manufacturing positions. A new governor
took office in January, but the Commonwealth is likely to continue to show
fiscal restraint.
Under normal market conditions, the Pennsylvania Tax-Free Income
Portfolio's average-weighted maturity will generally be between 10 and 25 years.
------------------------------------
SHORT-TERM BOND PORTFOLIO
The Portfolio will invest up to 100% of the value of its total assets in
debt securities rated at the time of purchase within the four highest ratings
assigned by Moody's (Aaa, Aa, A, Baa) or by S&P (AAA, AA, A, BBB), or if
unrated, are determined by the sub-adviser at the time of purchase to be of
comparable quality. Debt securities may include, without limitation, bonds,
debentures, notes, equipment lease and trust certificates, mortgage-related
securities, structured rate notes and obligations issued or guaranteed by the
U.S. Government or its agencies or instrumentalities. See "Investment
Policies--Managed Income Portfolio" for a discussion of mortgage-backed
securities. See "Investment Policies--Intermediate Government Portfolio" for
examples of the types of U.S. Government Obligations that the Portfolio may
purchase.
The Portfolio may purchase bank obligations, such as certificates of
deposit, bankers' acceptances and demand and time deposits, including U.S.
dollar-denominated 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 Portfolio may invest substantially in
obligations of foreign banks or foreign branches of U.S. banks where the adviser
deems the instrument to present minimal credit risks. Such investments may
include Eurodollar Certificates of Deposit ("ECDs") which are U.S.
dollar-denominated certificates of deposit issued by foreign and domestic banks
located outside the United States; Eurodollar Time Deposits ("ETDs") which are
U.S. dollar-denominated deposits in a foreign branch of a U.S. bank or a
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foreign bank; Canadian Time Deposits ("CTDs") which are essentially the same as
ETDs except they are issued by Canadian offices of major Canadian banks; and
Yankee Certificates of Deposit ("Yankee CDs") which are U.S. dollar-denominated
certificates of deposit issued by a U.S. branch of a foreign bank and held in
the United States. The Portfolio may also make interest-bearing savings deposits
in commercial and savings banks.
Investments in obligations issued by foreign banks and foreign branches of
U.S. banks may involve risks that are different from investments in obligations
of domestic branches of U.S. banks. These risks may include future unfavorable
political and economic developments, possible withholding taxes on interest
income, seizure or nationalization of foreign deposits, currency controls,
interest limitations, or other governmental restrictions which might affect the
payment of principal or interest on the securities held by the Portfolio.
Additionally, these institutions may be subject to less stringent reserve
requirements and to different accounting, auditing, reporting and recordkeeping
requirements than those applicable to domestic branches of U.S. banks.
The Portfolio may purchase rated and unrated variable and floating rate
instruments. 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. Issuers of unrated variable and
floating rate instruments must satisfy the same criteria as set forth above for
the Portfolio and will be determined to present minimal credit risks by the
sub-adviser. The absence of an active secondary market with respect to
particular variable and floating rate instruments, however, could make it
difficult for the Portfolio to dispose of a variable or floating rate instrument
if the issuer defaulted on its payment obligation or during periods when 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. See "Investment Policies--Common Investment Policies" for a
description of other investment policies.
Under normal market conditions, the Short-Term Bond Portfolio's
average-weighted maturity is expected to be five years or less.
------------------------------------
INTERMEDIATE-TERM BOND PORTFOLIO
The Intermediate-Term Bond Portfolio will invest up to 100% of its total
assets in debt securities similar to those of the Short-Term Bond Portfolio. See
"Investment Policies--Short-Term Bond Portfolio" for a discussion of the types
of securities in which the Portfolio may invest. See "Investment
Policies--Common Investment Policies" for a discussion of other investment
policies.
Under normal market conditions, the Intermediate-Term Bond Portfolio's
average-weighted maturity is expected to be between five and ten years.
------------------------------------
GOVERNMENT INCOME PORTFOLIO
The Portfolio is designed primarily for investors seeking current income
through a professionally-managed diversified portfolio of U.S. Government
securities. During normal market periods, at least 65% of the Portfolio's assets
will be invested in U.S. Government obligations (or repurchase agreements
relating to such obligations). The composition and dollar-weighted average
portfolio maturity of the Portfolio will vary from time to time based upon the
sub-adviser's assessment of relative yields available on U.S. Government
securities of different maturities, its
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expectations of future changes in interest rates and the determination of the
sub-adviser of how best to further the Portfolio's investment objective. The
Portfolio may invest in securities of all maturities--short-term,
intermediate-term and long-term. Treasury obligations differ only in their
interest rates, maturities and times of issuance. Obligations of certain
agencies and instrumentalities of the U.S. Government such as the Government
National Mortgage Association are supported by the United States' full faith and
credit; others such as those of the Federal National Mortgage Association and
the Student Loan Marketing Association are supported by the right of the issuer
to borrow from the Treasury; others such as those of the Federal Farm Credit
Banks or the Federal Home Loan Mortgage Corporation are supported only by the
credit of the instrumentality. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government-sponsored agencies
or instrumentalities if it is not obligated to do so by law.
The Portfolio purchases primarily fixed rate securities, including but not
limited to high coupon U.S. Government agency mortgage-backed securities, which
provide a higher coupon at the time of purchase than the then prevailing market
rate yield. The prices of high coupon securities do not tend to rise as rapidly
as those of traditional fixed rate securities at times when interest rates are
decreasing, and tend to decline more slowly at times when interest rates are
increasing. The Portfolio may purchase such securities at a premium, which means
that a faster principal prepayment rate than expected will reduce the market
value of and income from such securities, while a slower prepayment rate will
tend to increase the market value of and income from such securities. If the
Portfolio buys mortgage-backed securities at a premium, mortgage foreclosures
and prepayment of principal by mortgagors (which may be made at any time without
penalty) may result in some loss of the Portfolio's principal investment to the
extent of the premium paid.
------------------------------------
INTERNATIONAL FIXED INCOME PORTFOLIO
Under normal market conditions, the Portfolio will invest at least 65% of
its total assets in high quality fixed income obligations of foreign issuers.
The Portfolio's investments may include: (i) debt obligations issued or
guaranteed by foreign sovereign governments or their agencies, authorities,
instrumentalities or political subdivisions, including a foreign state, province
or municipality; (ii) debt obligations of supranational organizations such as
the World Bank, Asian Development Bank, European Investment Bank, and European
Economic Community; (iii) debt obligations of foreign banks and bank holding
companies; (iv) debt obligations of domestic banks and corporations issued in
foreign currencies; (v) debt obligations denominated in the European Currency
Unit (ECU); (vi) foreign corporate debt securities and commercial paper; and
(vii) private placements. Such securities may include loan participations and
assignments, convertible securities and zero-coupon securities. The Portfolio
may invest up to 5% of its net assets in securities rated below investment grade
by nationally recognized statistical rating organizations ("NRSROs") or in
comparable unrated securities. Such securities are commonly referred to as "junk
bonds." The portion of the Portfolio's assets invested in various countries will
vary from time to time depending on the sub-adviser's assessment of market
opportunities. The Portfolio is not restricted to any maximum or minimum time to
maturity in purchasing portfolio securities, and the average maturity of the
Portfolio's assets will vary based upon the sub-adviser's assessment of economic
and market conditions. The Portfolio has no minimum requirements for
diversification of its portfolio securities by country other than being invested
at all times in at least three countries other than the United States.
In determining appropriate investments for the Portfolio, primary emphasis
is placed upon the characteristics of the particular issues, although
significant emphasis is placed on macroeconomic factors. Macroeconomic factors
that ordinarily are considered by the sub-adviser in determining the appropriate
distribution of investments among various countries and geographic regions
include the prospects for relative economic growth among certain foreign
countries, expected levels of inflation, government policies influencing
business conditions, the outlook for currency relationships,
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and the range of individual investment opportunities available to international
investors. The Portfolio will generally invest in countries where the
combination of fixed income market returns and currency exchange rate movements
is attractive, or, if the currency trend is unfavorable, where the currency risk
can be minimized through hedging. The Portfolio does not trade in securities for
short-term profits but, when circumstances warrant, securities may be sold
without regard to the length of time held.
The Portfolio may use forward foreign currency exchange contracts and enter
into currency futures contracts (or options thereon) to hedge against movements
in the value of foreign currencies relative to the U.S. dollar in connection
with specific portfolio transactions or with respect to portfolio positions. A
forward foreign currency exchange contract involves an obligation to purchase or
sell a specified currency at a future date at a price set at the time of the
contract. Foreign currency exchange contracts do not eliminate fluctuations in
the values of portfolio securities but rather allow the Portfolio to establish a
rate of exchange for a future point in time.
To maintain greater flexibility, the Portfolio may invest in instruments
which have the characteristics of futures securities. Such instruments may take
a variety of forms, such as debt securities with interest or principal payments
determined by reference to the value of a currency or commodity at a future
point in time. The risks of such investments could reflect the risks of
investing in futures, currencies and securities, including volatility and
illiquidity.
The Portfolio may also invest in fixed income securities issued by U.S.
corporations, obligations of the U.S. Government and its agencies and
instrumentalities. The Portfolio may also invest in Brady Bonds, which are
securities issued in various currencies (primarily the U.S. dollar) that have
been created through the exchange of existing commercial bank loans to Latin
American public and private entities for new bonds in connection with debt
restructuring under a debt restructuring plan announced by former U.S. Secretary
of the Treasury Nicholas F. Brady.
During periods in which the sub-adviser believes changes in economic,
financial or political conditions make it advisable, the Portfolio may, for
temporary defensive purposes, reduce its holdings in certain foreign obligations
and invest some or all of its assets in certain short-term and intermediate-term
debt securities or hold cash without limitation. The short-term and
intermediate-term debt securities in which the Portfolio may invest include: (a)
obligations of the United States or foreign governments, their respective
agencies or instrumentalities; (b) bank deposits and bank obligations (including
certificates of deposit, time deposits and bankers' acceptances) of U.S. or
foreign banks denominated in any currency; (c) floating rate securities and
other instruments denominated in any currency issued by international
development agencies; (d) finance company and corporate commercial paper and
other short-term corporate debt obligations of U.S. and foreign corporations;
and (e) repurchase agreements with financial institutions with respect to such
securities. The Portfolio intends to invest only in short-term and medium-term
securities that are rated in one of the two highest rating categories by an
NRSRO or, if unrated, determined to be equivalent in credit quality by the
sub-adviser. See "Investment Policies--Common Investment Policies" for a
description of other investment policies.
SPECIAL RISK CONSIDERATIONS. Investors should realize that investing in
securities of foreign issuers involves considerations not typically associated
with investing in securities of companies organized and operated in the United
States or securities issued by the U.S. Government. Because foreign securities
generally are denominated and pay dividends or interest in foreign currencies
pending their investment in foreign securities or their conversion into U.S.
dollars, the value of the Portfolio's assets as measured in U.S. dollars will be
affected favorably or unfavorably by changes in exchange rates.
Although the Portfolio intends to invest in securities of companies and
governments of developed, stable nations, investors should realize that the
value of the Portfolio's investments may be adversely affected by changes in
political or social conditions, diplomatic relations, confiscatory taxation,
expropriation, limitation on the removal of funds or assets, or imposition of
(or change in) exchange control regulations in those foreign nations. In
addition, changes in
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government administrations or economic or monetary policies in the U.S. or
abroad could positively or negatively affect the performance of portfolio
securities and the Portfolio's operations. Investments in sovereign debt involve
certain risks, including the risk that foreign governments may default on their
obligations and offer only limited recourse, attempt to renegotiate the debt at
a lower rate, or freeze investments of U.S. entities. Furthermore, the economies
of individual foreign nations may differ from that of the United States, whether
favorably or unfavorably, in areas such as growth of gross national product,
rate of inflation, capital reinvestment, resource self-sufficiency and balance
of payments position. Any foreign investments made by the Portfolio must be made
in compliance with U.S. and foreign currency restrictions and tax laws
restricting the amounts and types of foreign investments.
In general, less information is publicly available with respect to foreign
issuers than is available with respect to U.S. companies. Most foreign companies
are also not subject to the uniform accounting and financial reporting
requirements applicable to issuers in the United States. In addition, while the
volume of transactions effected on foreign stock exchanges has increased in
recent years, it remains appreciably below that of the New York Stock Exchange.
Accordingly, the Portfolio's foreign investments may be less liquid and their
prices may be more volatile than comparable investments in securities in U.S.
companies. In buying and selling securities on foreign exchanges, the Portfolio
normally pays fixed commissions that are generally higher than the negotiated
commissions charged in the United States. Moreover, the Portfolio's expenses are
higher than those incurred by investment companies having portfolios of domestic
securities. In addition, there is generally less government supervision and
regulation of securities exchanges, brokers and issuers in foreign countries
than in the United States.
------------------------------------
COMMON INVESTMENT POLICIES
This section describes certain investment policies that are common to
Portfolios. Each Portfolio's investment objective and policies (except for the
80% concentration in Municipal Obligations specified in the first sentence of
the first paragraph of "Investment Policies--Common Investment
Policies--Tax-Free Income, Ohio Tax-Free Income and Pennsylvania Tax-Free Income
Portfolios") may be changed by the Board of Trustees without shareholder
approval. Depending upon prevailing market conditions, a Portfolio may purchase
debt securities at a discount from face value, which produces a yield greater
than the coupon rate. Conversely, if debt securities are purchased at a premium
over face value, the yield will be lower than the coupon rate. An increase in
interest rates will generally reduce the value of the investments in a Portfolio
and a decline in interest rates will generally increase the value of those
investments.
MORTGAGE-RELATED SECURITIES. The Managed Income, Intermediate Government,
Short-Term Bond, Intermediate-Term Bond, Government Income and International
Fixed Income Portfolios may invest in mortgage-related securities. Purchasable
mortgage-related securities are represented by pools of mortgage loans assembled
for sale to investors by various governmental agencies such as the Government
National Mortgage Association and government-related organizations such as the
Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"), as well as by private issuers such as commercial
banks, savings and loan institutions, mortgage bankers and private mortgage
insurance companies. Although certain mortgage-related securities are guaranteed
by a third party or are otherwise similarly secured, the market value of the
security, which may fluctuate, is not so secured. If a Portfolio purchases a
mortgage-related security at a premium, that portion may be lost if there is a
decline in the market value of the security whether resulting from increases in
interest rates or prepayment of the underlying mortgage collateral. As with
other interest-bearing securities, the prices of such securities are inversely
affected by changes in interest rates. However, though the value of a
mortgage-related security may decline when interest rates rise, the converse is
not necessarily true because in periods of declining interest rates mortgages
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underlying securities are prone to prepayment. For this and other reasons, a
mortgage-related security's stated maturity may be shortened by unscheduled
prepayments on underlying mortgages and, therefore, it is not possible to
predict accurately the security's return to a Portfolio. Mortgage-related
securities provide regular payments consisting of interest and principal. No
assurance can be given as to the return a Portfolio will receive when these
amounts are reinvested.
Mortgage-related securities acquired by the Portfolios may include
collateralized mortgage obligations ("CMOs") issued by FNMA, FHLMC or other U.S.
Government agencies or instrumentalities, as well as by private issuers. CMOs
provide an investor with a specified interest in the cash flow of a pool of
underlying mortgages or other mortgage-related securities. Issuers of CMOs
frequently elect to be taxed as pass-through entities known as real estate
mortgage investment conduits ("REMICs"). CMOs are issued in multiple classes,
each with a specified fixed or floating interest rate and a final distribution
date. The relative payment rights of the various CMO classes may be structured
in many ways. Generally, payments of principal are applied to the CMO classes in
the order of their respective stated maturities, so that no principal payments
will be made on a CMO class until all other classes having an earlier stated
maturity date are paid in full. Sometimes, however, CMO classes are "parallel
pay," i.e., payments of principal are made to two or more classes concurrently.
CMOs may exhibit more or less price volatility and interest rate risk than other
types of mortgage-related obligations.
ASSET-BACKED SECURITIES. The Managed Income, Short-Term Bond,
Intermediate-Term Bond and International Fixed Income Portfolios may purchase
asset-backed securities, which represent a participation in, or are secured by
and payable from, a stream of payments generated by particular assets, most
often a pool of assets similar to one another. Assets generating such payments
will consist of such instruments as motor vehicle installment purchase
obligations, credit card receivables and home equity loans. The Portfolios may
also invest in other types of asset-backed securities that may be available in
the future. Payment of principal and interest may be guaranteed up to certain
amounts and for a certain time period by a letter of credit issued by a
financial institution unaffiliated with entities issuing the securities. The
estimated life of an asset-backed security varies with the prepayment experience
with respect to the underlying debt instruments. The rate of such prepayments,
and hence the life of the asset-backed security, will be primarily a function of
current market rates, although other economic and demographic factors will be
involved. In certain circumstances, asset-backed securities may be considered
illiquid securities subject to the percentage limitations described below.
Asset-backed securities may involve certain risks that are not presented by
mortgage-backed securities arising primarily from the nature of the underlying
assets (i.e., credit card and automobile loan receivables as opposed to real
estate mortgages). For example, credit card receivables are generally unsecured
and may require the repossession of personal property upon the default of the
debtor which may be difficult or impracticable in some cases.
OPTIONS AND FUTURES CONTRACTS. Each Portfolio may write covered call
options, buy put options, buy call options and write put options, without
limitation except as noted in this paragraph. Such options may relate to
particular securities or to various indexes and may or may not be listed on a
national securities exchange and issued by the Options Clearing Corporation.
Each Portfolio may also invest in futures contracts and options on futures
contracts (index futures contracts or interest rate futures contracts, as
applicable) for hedging purposes or for other purposes so long as aggregate
initial margins and premiums required for non-hedging positions do not exceed 5%
of its net assets, after taking into account any unrealized profits and losses
on any such contracts it has entered into. However, no Portfolio may write put
options or purchase or sell futures contracts or options on futures contracts to
hedge more than its total assets unless immediately after any such transaction
the aggregate amount of premiums paid for put options and the amount of margin
deposits on its existing futures positions do not exceed 5% of its total assets.
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Options trading is a highly specialized activity which entails greater than
ordinary investment risks. A call option for a particular security gives the
purchaser of the option the right to buy, and a writer the obligation to sell,
the underlying security at the stated exercise price at any time prior to the
expiration of the option, regardless of the market price of the security. The
premium paid to the writer is in consideration for undertaking the obligations
under the option contract. A put option for a particular security gives the
purchaser the right to sell the underlying security at the stated exercise price
at any time prior to the expiration date of the option, regardless of the market
price of the security. In contrast to an option on a particular security, an
option on an index provides the holder with the right to make or receive a cash
settlement upon exercise of the option. The amount of this settlement will be
equal to the difference between the closing price of the index at the time of
exercise and the exercise price of the option expressed in dollars, times a
specified multiple.
A Portfolio will engage in unlisted over-the-counter options only with
broker/dealers deemed creditworthy by the adviser or sub-adviser. Closing
transactions in certain options are usually effected directly with the same
broker/dealer that effected the original option transaction. A Portfolio bears
the risk that the broker/dealer will fail to meet its obligations. There is no
assurance that a Portfolio will be able to close an unlisted option position.
Furthermore, unlisted options are not subject to the protections afforded
purchasers of listed options by the Options Clearing Corporation, which performs
the obligations of its members who fail to do so in connection with the purchase
or sale of options.
To enter into a futures contract, a Portfolio must make a deposit of
initial margin with its custodian in a segregated account in the name of its
futures broker. Subsequent payments to or from the broker, called variation
margin, will be made on a daily basis as the price of the underlying security or
index fluctuates, making the long and short positions in the futures contracts
more or less valuable.
When investing in futures contracts, the Portfolios must satisfy certain
asset segregation requirements to ensure that the use of futures is unleveraged.
When a Portfolio takes a long position in a futures contract, it must maintain a
segregated account containing cash and/or certain liquid assets equal to the
purchase price of the contract, less any margin or deposit. When a Portfolio
takes a short position in a futures contract, the Portfolio must maintain a
segregated account containing cash and/or certain liquid assets in an amount
equal to the market value of the securities underlying such contract (less any
margin or deposit), which amount must be at least equal to the market price at
which the short position was established. Asset segregation requirements are not
applicable when a Portfolio "covers" a futures position generally by entering
into an offsetting position.
The risks related to the use of options and futures contracts include: (i)
the correlation between movements in the market price of the portfolio
investments (held or intended for purchase) being hedged and in the price of the
futures contract or option may be imperfect; (ii) possible lack of a liquid
secondary market for closing out options or futures positions; (iii) the need
for additional portfolio management skills and techniques; and (iv) losses due
to unanticipated market movements. Successful use of options and futures by a
Portfolio is subject to the adviser's or sub-adviser's ability to correctly
predict movements in the direction of the market. For example, if a Portfolio
uses futures contracts as a hedge against the possibility of a decline in the
market adversely affecting securities held by it and securities prices increase
instead, the Portfolio will lose part or all of the benefit of the increased
value of its securities which it has hedged because it will have approximately
equal offsetting losses in its futures positions. The risk of loss in trading
futures contracts in some strategies can be substantial, due both to the low
margin deposits required and the extremely high degree of leverage involved in
futures pricing. As a result, a relatively small price movement in a futures
contract may result in immediate and substantial loss or gain to the investor.
Thus, a purchase or sale of a futures contract may result in losses or gains in
excess of the amount invested in the contract. For a further discussion see
"Investment Policies" in the Statement of Additional Information.
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REPURCHASE AGREEMENTS. Each Portfolio may agree to purchase debt securities
from financial institutions subject to the seller's agreement to repurchase them
at an agreed upon time and price ("repurchase agreements"). Repurchase
agreements are in substance loans. Default by or bankruptcy of the seller would,
however, expose a Portfolio to possible loss because of adverse market action or
delays in connection with the disposition of the underlying obligations.
CASH EQUIVALENTS. Each Portfolio may invest in taxable and tax-free
short-term, interest-bearing instruments or deposits of United States and
foreign issuers to maintain liquidity, pending investment and for temporary
defensive purposes. Such investments may include, but are not limited to,
commercial paper, certificates of deposit, variable or floating rate notes,
bankers' acceptances, time deposits (the Managed Income Portfolio will not
invest more than 5% of its total assets in time deposits with maturities in
excess of seven days which are subject to penalties upon early withdrawal),
government securities and money market deposit accounts.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may purchase
securities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions involve a commitment by a
Portfolio to purchase or sell particular securities with payment and delivery
taking place at a future date (perhaps one or two months later), and permit a
Portfolio to lock-in a price or yield on a security it owns or intends to
purchase, regardless of future changes in interest rates. When-issued and
forward commitment transactions involve the risk, however, that the price or
yield obtained in a transaction may be less favorable than the price or yield
available in the market when the securities delivery takes place. Each
Portfolio's when-issued purchases and forward commitments are not expected to
exceed 25% of the value of its total assets absent unusual market conditions.
The Portfolios do not intend to engage in when-issued purchases and forward
commitments for speculative purposes but only in furtherance of their investment
objectives.
REVERSE REPURCHASE AGREEMENTS. Each Portfolio may enter into reverse
repurchase agreements with respect to portfolio securities for temporary
purposes (such as to obtain cash to meet redemption requests when the
liquidation of portfolio securities is deemed disadvantageous or inconvenient by
the adviser or sub-adviser). A reverse repurchase agreement involves a sale by a
Portfolio of securities that it holds concurrently with an agreement by the
Portfolio to repurchase the same securities at an agreed-upon price and date.
Reverse repurchase agreements involve the risk that the market value of the
securities sold by a Portfolio may decline below the price of the securities the
Portfolio is obligated to repurchase. Reverse repurchase agreements are
considered to be borrowings by a Portfolio under the Investment Company Act of
1940 (the "1940 Act").
The Short-Term Bond, Intermediate-Term Bond, Intermediate Government and
Government Income Portfolios may enter into reverse repurchase agreement
transactions with member banks on the Federal Reserve Bank of New York's list of
reporting dealers. The Portfolios typically will invest the proceeds of a
reverse repurchase agreement in money market instruments or repurchase
agreements maturing not later than the expiration of the reverse repurchase
agreement. This use of the proceeds is known as leverage. The Portfolios will
enter into a reverse repurchase agreement for leverage purposes only when the
interest income to be earned from the investment of the proceeds is greater than
the interest expense of the transaction.
A Portfolio will establish a segregated account with its custodian in which
it will maintain cash, U.S. government securities or other liquid high grade
debt obligations equal in value to its obligations with respect to reverse
repurchase agreements.
INVESTMENT COMPANIES. Each Portfolio may invest in securities issued by
other investment companies within the limits prescribed by the 1940 Act. Each
Portfolio currently intends to limit its investments so that, as determined
immediately after a securities purchase is made: (i) not more than 5% of the
value of its total assets will be invested in the securities of any one
investment company; (ii) not more than 10% of the value of its total assets will
be invested in
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the aggregate in securities of investment companies as a group; and (iii) not
more than 3% of the outstanding voting stock of any one investment company will
be owned by the Portfolio or by the Fund as a whole. As a shareholder of another
investment company, a Portfolio would bear, along with other shareholders, its
pro rata portion of the other investment company's expenses, including advisory
fees. These expenses would be in addition to the advisory and other expenses
that the Portfolio bears directly in connection with its own operations.
TAX-EXEMPT DERIVATIVES AND OTHER MUNICIPAL OBLIGATIONS. The Tax-Free
Income, Ohio Tax-Free Income and Pennsylvania Tax-Free Income Portfolios
(collectively, "Tax-Free Portfolios") may invest in tax-exempt derivative
securities relating to Municipal Obligations, including tender option bonds,
participations, beneficial interests in trusts and partnership interests.
Opinions relating to the validity of Municipal Obligations and to the
exemption of interest thereon from Federal income tax are rendered by bond
counsel to the respective issuers at the time of issuance, and opinions relating
to the validity of and the tax-exempt status of payments received by the
Portfolios from tax-exempt derivative securities are rendered by counsel to the
respective sponsors of such securities. The Fund and its investment adviser will
rely on such opinions and will not review independently the underlying
proceedings relating to the issuance of Municipal Obligations, the creation of
any tax-exempt derivative securities, or the bases for such opinions.
SECURITIES LENDING. To increase income on its investments, each Portfolio
may lend its portfolio securities with an aggregate value of up to 30% of its
total assets to broker/dealers and other institutional investors pursuant to
agreements requiring that the loans be continuously secured by collateral equal
at all times in value to at least the market value of the securities loaned.
Collateral for such loans may include cash, securities of the U.S. Government or
its agencies or instrumentalities or an irrevocable letter of credit issued by a
bank which is deemed creditworthy by the adviser or sub-adviser. Default by or
bankruptcy of a borrower would expose a Portfolio to possible loss because of
adverse market action, expenses and/or delays in connection with the disposition
of the underlying securities.
ILLIQUID SECURITIES. No Portfolio will knowingly invest more than 15% of
the value of its net assets in securities that are illiquid. GICs, variable and
floating rate instruments that cannot be disposed of within seven days, and
repurchase agreements and time deposits that do not provide for payment within
seven days after notice, without taking a reduced price, are subject to this 15%
limit. Each Portfolio may purchase securities which are not registered under the
Securities Act of 1933 (the "1933 Act") but which can be sold to "qualified
institutional buyers" in accordance with Rule 144A under the 1933 Act. Any such
security will not be considered illiquid so long as it is determined by the
adviser or sub-adviser, acting under guidelines approved and monitored by the
Board, that an adequate trading market exists for that security. This investment
practice could have the effect of increasing the level of illiquidity in a
Portfolio during any period that qualified institutional buyers become
uninterested in purchasing these restricted securities.
TAX-FREE INCOME, OHIO TAX-FREE INCOME AND PENNSYLVANIA TAX-FREE INCOME
PORTFOLIOS. During normal market conditions: up to 20% of each of the Tax-Free
Portfolios' net assets may be invested in securities which are not Municipal
Obligations; at least 80% of each Tax-Free Portfolio's net assets will be
invested in Municipal Obligations the interest on which is exempt from regular
Federal income tax and is not an item of tax preference for purposes of the
Federal alternative minimum tax; and at least 65% of the total net assets of
each of Ohio Tax-Free Income and Pennsylvania Tax-Free Income Portfolios will be
invested in Ohio and Pennsylvania Municipal Obligations, respectively. Each
Tax-Free Portfolio may invest up to 20% of its net assets in Municipal
Obligations the interest on which is exempt from regular Federal income tax but
is an item of tax preference for purposes of the Federal alternative minimum
tax. During temporary defensive periods, each Tax-Free Portfolio may invest
without limitation in obligations which are not Municipal Obligations and may
hold without limitation uninvested cash reserves. Such securities may include,
without limitation, bonds, notes, variable rate demand notes and commercial
paper, provided such securities are rated within the relevant categories
applicable to Municipal Obligations set forth above, or if unrated, are of
comparable quality as
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determined by the adviser or sub-adviser, and may also include, without
limitation, other debt obligations, such as bank obligations. Each Tax-Free
Portfolio may acquire "stand-by commitments" with respect to Municipal
Obligations held by it. Under a stand-by commitment, a dealer agrees to purchase
at the Portfolio's option specified Municipal Obligations at a specified price.
The acquisition of a stand-by commitment may increase the cost, and thereby
reduce the yield, of the Municipal Obligation to which such commitment relates.
Each Tax-Free Portfolio will acquire stand-by commitments solely to facilitate
portfolio liquidity and does not intend to exercise its rights thereunder for
trading purposes.
Although each Tax-Free Portfolio may invest 25% or more of its net assets
in Municipal Obligations the interest on which is paid solely from revenues of
similar projects, and may invest up to 20% of its total assets in private
activity bonds when added together with any taxable investments held by the
particular Portfolio, they do not presently intend to do so unless in the
opinion of the adviser or sub-adviser the investment is warranted. To the extent
a Portfolio's assets are invested in Municipal Obligations payable from the
revenues of similar projects or are invested in private activity bonds, the
Portfolio will be subject to the peculiar risks presented by the laws and
economic conditions relating to such projects and bonds to a greater extent than
it would be if its assets were not so invested. The amount of information
regarding the financial condition of issuers of Municipal Obligations may not be
as extensive as that which is made available by public corporations and the
secondary market for Municipal Obligations may be less liquid than that for
taxable fixed-income securities. Accordingly, the ability of a Tax-Free
Portfolio to buy and sell tax-exempt securities may, at any particular time and
with respect to any particular securities, be limited.
The Ohio Tax-Free Income and Pennsylvania Tax-Free Income Portfolios are
classified as non-diversified under the 1940 Act. Investment returns on a
non-diversified portfolio typically are dependent upon the performance of a
smaller number of securities relative to the number held in a diversified
portfolio. Consequently, the change in value of any one security may affect the
overall value of a non-diversified portfolio more than it would a diversified
portfolio. Additionally, a non-diversified portfolio may be more susceptible to
economic, political and regulatory developments than a diversified portfolio
with similar objectives.
INTEREST RATE RISK. The value of fixed income securities in the Portfolios
can be expected to vary inversely with changes in prevailing interest rates.
Fixed income securities with longer maturities, which tend to produce higher
yields, are subject to potentially greater capital appreciation and depreciation
than securities with shorter maturities.
BORROWING. The Short-Term Bond, Intermediate-Term Bond, Intermediate
Government and Government Income Portfolios are authorized to borrow funds and
utilize leverage (including through reverse repurchase agreements and dollar
rolls) in amounts not exceeding 33 1/3% of their respective total assets
(including the amount borrowed) and under current market conditions intend to
borrow or obtain equivalent leverage up to such amount. The use of leverage by
the Portfolios creates an opportunity for increased net income, but, at the same
time, creates special risks. In particular, if a Portfolio borrows on a
short-term basis and invests the proceeds in long-term securities, an increase
in interest rates may (i) reduce or eliminate the interest rate differential
usually available between short-term and long-term rates and (ii) reduce the
value of the Portfolio's long-term securities, thereby exposing the Portfolio to
lower yields and risk of loss on disposition of its long-term securities. A
Portfolio will only borrow or use leverage when the adviser believes that such
activities will benefit the Portfolio. A Portfolio may also borrow up to an
additional 5% of its total assets for temporary purposes without regard to the
foregoing limitation.
As noted above, the Portfolios expect to engage in investment management
techniques such as reverse repurchase agreements and dollar rolls which provide
leverage in much the same manner as borrowings but which are not considered to
be borrowings or senior securities by the SEC subject to the limitations
described above if investments therein are appropriately collateralized by high
grade liquid assets.
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DOLLAR ROLL TRANSACTIONS. To take advantage of attractive financing
opportunities in the mortgage market and to enhance current income, the
Short-Term Bond, Intermediate-Term Bond, Intermediate Government and Government
Income Portfolios may enter into dollar roll transactions. A dollar roll
transaction, which is considered a borrowing by a Portfolio, involves a sale by
the Portfolio of a mortgage-backed or other security to a financial institution,
such as a bank or broker/dealer, concurrently with an agreement by the Portfolio
to repurchase a similar security from the institution at a later date at an
agreed-upon price. The securities that are repurchased will bear the same
interest rate and stated maturity as those sold, but pools of mortgages
collateralizing such securities may have different prepayment histories than
those sold, which may affect the duration of such securities. During the period
between the sale and repurchase, a Portfolio will not be entitled to receive
interest and principal payments on the securities sold. Proceeds of the sale
will be invested in additional instruments for the Portfolio, and the income
from these investments will generate income for the Portfolio. If such income
does not exceed the income, capital appreciation and gain or loss that would
have been realized on the securities sold as part of the dollar roll, the use of
this technique will diminish the investment performance of a Portfolio compared
with what such performance would have been without the use of dollar rolls. At
the time that a Portfolio enters into a dollar roll transaction, it will place
in a segregated account maintained with its custodian cash, U.S. government
securities or other liquid high grade debt obligations having a value equal to
the repurchase price (including accrued interest) and will subsequently monitor
the account to ensure that its value is maintained.
Dollar roll transactions involve the risk that the market value of the
securities a Portfolio is required to purchase may decline below the agreed upon
repurchase price of those securities. If the broker/dealer to whom a Portfolio
sells securities becomes insolvent, the Portfolio's right to purchase or
repurchase securities may be restricted and the instruments which the Portfolio
is required to repurchase may be worth less than an instrument which the
Portfolio originally held when the Portfolio is able to complete the purchase.
Successful use of mortgage dollar rolls may depend upon the investment adviser's
ability to correctly predict interest rates and prepayments. There is no
assurance that dollar rolls can be successfully employed.
PORTFOLIO TURNOVER RATES. Although it may vary from year to year, it is
currently estimated that under normal market conditions the annual portfolio
turnover rate for a Portfolio will not exceed 100%. A Portfolio's annual
portfolio turnover rate will not, however, be a factor preventing a sale or
purchase when the adviser or sub-adviser believes investment considerations
warrant such sale or purchase. Portfolio turnover may vary greatly from year to
year as well as within a particular year. High portfolio turnover rates will
generally result in higher transaction costs to a Portfolio.
INVESTMENT LIMITATIONS
- --------------------------------------------------------------------------------
Each Portfolio is subject to the following fundamental investment
limitations, which may not be changed with respect to a Portfolio except upon
the affirmative vote of the holders of a majority of the Portfolio's outstanding
shares. Each of the Managed Income, Tax-Free Income, Intermediate Government,
Short-Term Bond, Intermediate-Term Bond, Government Income and International
Fixed Income Portfolios may not:
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
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<PAGE> 77
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.
No Portfolio may:
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.
If a percentage limitation is satisfied at the time of investment, a later
increase or decrease in such percentage resulting from a change in the value of
a Portfolio's portfolio securities will not constitute a violation of such
limitation, except that any borrowing by a 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).
In order to permit the sale of the Fund's shares in certain states, the
Fund may make commitments more restrictive than the investment policies and
limitations described in this Prospectus. Should the Fund determine that any
such commitment is no longer in the best interests of the Fund, it will revoke
the commitment by terminating sales of its shares in the state involved.
* * *
For information on additional investment limitations relating to the
Portfolios, see the Fund's Statement of Additional Information.
MANAGEMENT
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES
The business and affairs of the Fund are managed under the direction of the
Fund's Board of Trustees. The Statement of Additional Information contains the
name of each trustee and certain background information.
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ADVISER AND SUB-ADVISERS
PIMC was organized in 1977 by PNC Bank to perform advisory services for
investment companies. The principal business address of: PIMC is 400 Bellevue
Parkway, Wilmington, Delaware 19809; PNC Bank is Broad and Chestnut Streets,
Philadelphia, Pennsylvania 19107; PNC Bank Ohio is 201 East Fifth Street,
Cincinnati, Ohio 45202; and PCM is 1700 Market Street, 27th Floor, Philadelphia,
Pennsylvania 19103.
As adviser, PIMC is responsible for the overall investment management of
the Portfolios. The sub-advisers are responsible for the day-to-day management
of the particular Portfolios, and generally make all purchase and sale decisions
regarding the investments made by such Portfolios. The sub-advisers also provide
research and credit analysis as well as certain other services.
The Tax-Free Income Portfolio's manager, W. Don Simmons, is the person
primarily responsible for the day-to-day management of the Portfolio's
investments. Mr. Simmons has been with PIMC since 1984 and the Portfolio's
manager since its inception.
The Pennsylvania Tax-Free Income Portfolio's manager, Douglas J. Gaylor, is
the person primarily responsible for the day-to-day management of the
Portfolio's investments. Mr. Gaylor has been with PNC Bank since 1993 and the
Portfolio's manager since September 1993. Prior to joining PNC Bank, Mr. Gaylor
was with Wilmington Trust Company for 10 years.
The Ohio Tax-Free Income Portfolio's manager, Kimberly A. Burford, is the
person primarily responsible for the day-to-day management of the Portfolio's
investments. Ms. Burford has been with PNC Bank since 1979 and the Portfolio's
manager since its inception.
The Short-Term Bond, Intermediate-Term Bond, Intermediate Government and
Managed Income Portfolios' manager, Beth A. Coyne, is the person primarily
responsible for the day-to-day management of the Portfolios' investments. Ms.
Coyne has been the Short-Term Bond and Intermediate-Term Bond Portfolios'
manager since their inception and began managing the Intermediate Government and
Managed Income Portfolios in 1994. Ms. Coyne has been with PNC Bank since 1990.
Prior to 1990, Ms. Coyne sold fixed income securities for Kidder Peabody & Co.,
Inc.
The Government Income and International Fixed Income Portfolios' manager,
Charles F. Wills, is the person primarily responsible for the day-to-day
management of the Portfolios' investments. Mr. Wills has been the Government
Income and International Fixed Income Portfolios' manager since their inception.
Mr. Wills has been with PNC Bank since 1983.
For the services provided and expenses assumed by it, PIMC is entitled to
receive fees, computed daily and payable monthly, at the following annual rates
from the specified Portfolios: each of the Managed Income, Tax-Free Income,
Intermediate Government, Ohio Tax-Free Income, Pennsylvania Tax-Free Income,
Short-Term Bond, Intermediate-Term Bond and Government Income Portfolios, .50%
of the first $1 billion of their respective average daily net assets, .45% of
the next $1 billion of their respective average daily net assets, .425% of the
next $1 billion of their respective average daily net assets and .40% of their
respective average daily net assets in excess of $3 billion; and International
Fixed Income Portfolio, .55% of its first $1 billion of average daily net
assets, .50% of its next $1 billion of average daily net assets, .475% of its
next $1 billion of average daily net assets and .45% of its average daily net
assets in excess of $3 billion. The Fund paid PIMC advisory fees at annual rates
of .35%, .20%, .09%, .11% and .19% of the average daily net assets of the
Managed Income, Intermediate Government, Pennsylvania Tax-Free Income,
Short-Term Bond and Intermediate-Term Bond Portfolios, respectively, for the
year ended September 30, 1994, and PIMC waived advisory fees at the annual rates
of .15%, .30%, .41%, .39% and .31% of the average daily net assets of such
respective Portfolios for that year. PIMC waived all advisory fees with respect
to the Tax-Free Income and Ohio Tax-Free Income Portfolios for the year ended
September 30, 1994. During that year, PIMC reimbursed expenses at the annual
rates of
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.38%, .50% and .02% of the average daily net assets of the Tax-Free Income, Ohio
Tax-Free Income and Pennsylvania Tax-Free Income Portfolios, respectively. From
time to time PIMC may waive all or any portion of its advisory fees for and may
reimburse expenses of the Portfolios. See "Introduction--Expense Table."
For its sub-advisory services, the sub-adviser for each specified Portfolio
is entitled to receive from PIMC a fee, computed daily and payable monthly, at
the following annual rates: each of the Managed Income, Tax-Free Income,
Intermediate Government, Ohio Tax-Free Income, Pennsylvania Tax-Free Income,
Short-Term Bond, Intermediate-Term Bond and Government Income Portfolios, .35%
of its first $1 billion of average daily net assets, .30% of its next $1 billion
of average daily net assets, .275% of its next $1 billion of average daily net
assets, and .25% of its average daily net assets in excess of $3 billion, and
International Fixed Income Portfolio, .40% of its first $1 billion of average
daily net assets, .35% of its next $1 billion of average daily net assets, .325%
of its next $1 billion of average daily net assets, and .30% of its average
daily net assets in excess of $3 billion. Such sub-advisory fees have no effect
on the advisory fees payable by each Portfolio to PIMC. PIMC paid PNC Bank
sub-advisory fees at annual rates of .30%, 15%, .06%, .11% and .14% of the
average daily net assets of the Managed Income, Intermediate Government,
Pennsylvania Tax-Free Income, Short-Term Bond and Intermediate-Term Bond
Portfolios, respectively, for the year ended September 30, 1994, and PNC Bank
waived sub-advisory fees at the annual rates of .05%, .20%, .29%, .24% and .21%
of the average daily net assets of such respective Portfolios for that year. PNC
Bank and PNC Bank Ohio waived all sub-advisory fees with respect to the Tax-Free
Income and Ohio Tax-Free Income Portfolios, respectively, for the year ended
September 30, 1994. Each sub-adviser may from time to time waive all or any
portion of its sub-advisory fee for any Portfolio.
------------------------------------
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 each
Portfolio's average daily net assets, .18% of the next $500 million of each
Portfolio's average daily net assets, .16% of the next $1 billion of each
Portfolio's average daily net assets and .15% of each Portfolio's average daily
net assets in excess of $2 billion. The Fund paid the Administrators combined
administration fees at annual rates of .13%, .10%, .04%, .04%, and .08% of the
average daily net assets of the Managed Income, Intermediate Government,
Pennsylvania Tax-Free Income, Short-Term Bond and Intermediate-Term Bond
Portfolios, respectively, for the year ended September 30, 1994, and the
Administrators waived combined administration fees at annual rates of .07%,
.10%, .16%, .16%, and .12% of the average daily net assets of such respective
Portfolios for that year. The Administrators waived all combined administration
fees with respect to the Tax-Free Income and Ohio Tax-Free Income Portfolios for
the year ended September 30, 1994. During that year, the Administrators
reimbursed expenses at the annual rates of .15%, .20% and .01% of the average
daily net assets of the Tax-Free Income, Ohio Tax-Free Income and Pennsylvania
Tax-Free Income Portfolios, respectively. From time to time the Administrators
may waive all or any portion of the administration fees for the Portfolios.
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TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND CUSTODIAN
PNC Bank serves as the Fund's custodian and PFPC serves as the Fund's
transfer agent and dividend disbursing agent.
------------------------------------
EXPENSES
Expenses are deducted from the total income of each Portfolio before
dividends and distributions are paid. These expenses include, but are not
limited to, fees paid to PIMC and the Administrators, transfer agency fees, fees
and expenses of officers and trustees who are not affiliated with PIMC or the
Distributor or any of their affiliates, taxes, interest, legal fees, custodian
fees, auditing fees, 12b-1 fees, servicing fees, certain fees and expenses in
registering and qualifying the Portfolio and its Shares for distribution under
Federal and state securities laws, expenses of preparing prospectuses and
statements of additional information and of printing and distributing
prospectuses and statements of additional information to existing shareholders,
the expense of reports to shareholders, shareholders' meetings and proxy
solicitations, fidelity bond and trustees and officers liability insurance
premiums, the expense of using independent pricing services and other expenses
which are not expressly assumed by PIMC or the Administrators under their
respective agreements with the Fund. Any general expenses of the Fund that are
not readily identifiable as belonging to a particular investment portfolio will
be allocated among all investment portfolios by or under the direction of the
Board of Trustees in a manner the Board determines to be fair and equitable. Any
expenses relating only to a particular class of shares within a Portfolio will
be borne solely by such Shares.
If the total expenses borne by any Portfolio in any fiscal year exceed the
expense limitations imposed by applicable state securities regulations, PIMC,
the sub-advisers and the Administrators will bear the amount of such excess to
the extent required by such regulations in proportion to the fees otherwise
payable to them for such year. Such amount, if any, will be estimated and
accrued daily and paid on a monthly basis. See "Introduction--Example,"
"Management--Adviser and Sub-Advisers" and "Management--Administrators" for
discussions of expense reimbursements and fee waivers.
------------------------------------
PORTFOLIO TRANSACTIONS
A Portfolio's adviser or sub-adviser will seek the best price and execution
in placing brokerage transactions. In this regard, the adviser or sub-adviser
may consider a number of factors in determining which brokers to use in
purchasing or selling portfolio securities. These factors, which are more fully
discussed in the Statement of Additional Information, include, but are not
limited to, research services, sales of shares of the Fund, the reasonableness
of commissions and quality of services and execution. Brokerage transactions for
the Portfolios may be directed through registered broker/dealers ("Authorized
Dealers") who have entered into dealer agreements with the Distributor, subject
to the requirements of best execution.
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------------------------------------
BANKING LAWS
Banking laws and regulations currently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered open-end investment company continuously
engaged in the issuance of its shares, and prohibit banks generally from
underwriting securities, but such banking laws and regulations do not prohibit
such a holding company or affiliate or banks generally from acting as investment
adviser, administrator, transfer agent or custodian to such an investment
company, or from purchasing shares of such company as agent for and upon the
order of customers. PNC Bank, PIMC, PNC Bank Ohio, PFPC and Institutions that
are banks or bank affiliates, are subject to such banking laws and regulations.
In addition, state securities laws on this issue may differ from the
interpretations of Federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
Should future legislative, judicial or administrative action prohibit or
restrict the activities of such companies in connection with the provision of
services on behalf of the Fund and the holders of Institutional Shares, the Fund
might be required to alter materially or discontinue its arrangements with such
companies and change its method of operations with respect to the Institutional
Shares. It is not anticipated, however, that any change in the Fund's method of
operations would affect its net asset value per share or result in a financial
loss to any investor.
PURCHASE AND REDEMPTION OF SHARES
- --------------------------------------------------------------------------------
DISTRIBUTOR
Shares of each 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 Portfolios 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
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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 a Portfolio. No charge for
wiring redemption payments is imposed by the Fund.
During periods of substantial economic or market change, telephone
redemptions may be difficult to complete. If an Institution is unable to contact
PFPC by telephone, the Institution may also deliver the redemption request to
PFPC by mail at 400 Bellevue Parkway, Wilmington, DE 19809.
An Institution may be required to redeem Shares in any Portfolio if the
balance in its account in that 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 for each Portfolio is
calculated as of the close of trading on the NYSE (currently 4:00 p.m. Eastern
Time) on each Business Day by adding the value of all its securities, cash and
other assets allocable to its Shares, subtracting the liabilities allocable to
its Shares and dividing by the total number of Shares outstanding. The net asset
value per Share of each Portfolio is determined independently of the Portfolio's
other classes and independently of the Fund's other portfolios.
Valuation of securities held by each Portfolio is as follows: securities
traded on a national securities exchange or on the NASDAQ National Market System
are valued at the last reported sale price that day; securities traded on a
national securities exchange or on the NASDAQ National Market System for which
there were no sales on that day and securities traded on other over-the-counter
markets for which market quotations are readily available are valued at the mean
of the bid and asked prices; an option or futures contract is valued at the last
sales price prior to 4:00 p.m. (Eastern Time), as quoted on the principal
exchange or board of trade on which such option or contract is traded, or in the
absence of a sale, the mean between the last bid and asked prices prior to 4:00
p.m. (Eastern Time); and securities for which market quotations are not readily
available are valued at fair market value as determined in good faith by or
under the direction of the Fund's Board of Trustees. The amortized cost method
of valuation will also be used with respect to debt obligations with sixty days
or less remaining to maturity unless the investment adviser and/or sub-adviser
under the supervision of the Board of Trustees determines such method does not
represent fair value.
Valuation of securities of foreign issuers and those held by the
International Fixed Income Portfolio is as follows: to the extent sale prices
are available, securities which are traded on a recognized stock exchange,
whether U.S. or
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foreign, are valued at the latest sale price on that exchange prior to the time
when assets are valued or prior to the close of regular trading hours on the
NYSE. In the event that there are no sales, the mean between the last available
bid and asked prices will be used. If a security is traded on more than one
exchange, the latest sale price on the exchange where the security is primarily
traded is used. An option or futures contract is valued at the last sales price
prior to 4:00 p.m. (Eastern Time), as quoted on the principal exchange or board
of trade on which such option or contract is traded, or in the absence of a
sale, the mean between the last bid and asked prices prior to 4:00 p.m. (Eastern
Time). In the event that application of these methods of valuation results in a
price for a security which is deemed not to be representative of the market
value of such security, the security will be valued by, under the direction of
or in accordance with a method specified by the Board of Trustees as reflecting
fair value. The amortized cost method of valuation will be used with respect to
debt obligations with sixty days or less remaining to maturity unless the
investment adviser and/or sub-adviser under the supervision of the Board of
Trustees determines such method does not represent fair value. All other assets
and securities held by the Portfolio (including restricted securities) are
valued at fair value as determined in good faith by the Board of Trustees or by
someone under its direction. Any assets which are denominated in a foreign
currency are translated into U.S. dollars at the prevailing market rates.
A Portfolio may use a pricing service, bank or broker/dealer experienced in
such matters to value the Portfolio's securities. A more detailed discussion of
net asset value and security valuation is contained in the Statement of
Additional Information.
DIVIDENDS AND DISTRIBUTIONS
- --------------------------------------------------------------------------------
Each Portfolio will distribute substantially all of its net investment
income and net realized capital gains, if any, to shareholders. For dividend
purposes, a Portfolio's investment income available for distribution to holders
of Institutional Shares is reduced by accrued expenses directly attributable to
that Portfolio and the general expenses of the Fund prorated to that 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 relevant
Portfolio unless an Institution elects otherwise. Such election, or any
revocation thereof, must be made in writing to PFPC, and will become effective
with respect to dividends paid after its receipt by PFPC. The net investment
income of each of the Managed Income, Tax-Free Income, Intermediate Government,
Intermediate-Term Bond and International Fixed Income Portfolios is declared
monthly as a dividend to investors who are Shareholders of such Portfolio at the
close of business on the day of declaration. The net investment income of each
of the Pennsylvania Tax-Free Income, Ohio Tax-Free Income, Government Income and
Short-Term Bond Portfolios is declared daily as a dividend to investors who are
Shareholders of such Portfolio at, and whose payment for Share purchases are
available to the particular Portfolio in Federal funds by, the close of business
on the day of declaration. All such dividends are paid within ten days after the
end of each month and, in the case of the Pennsylvania Tax-Free Income, Ohio
Tax-Free Income, Government Income and Short-Term Bond Portfolios, within seven
days after redemption of all of a shareholder's Shares in a Portfolio. Net
realized capital gains (including net short-term capital gains), if any, will be
distributed by each Portfolio at least annually.
TAXES
- --------------------------------------------------------------------------------
The following discussion is only a brief summary of some of the important
tax considerations generally affecting the Portfolios and their 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.
36
<PAGE> 84
Each Portfolio will elect to be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. So long as
a Portfolio qualifies for this tax treatment, it generally will be relieved of
Federal income tax on amounts distributed to shareholders, but shareholders,
unless otherwise exempt, will pay income or capital gains taxes on amounts so
distributed (except distributions that constitute "exempt interest dividends" or
that are treated as a return of capital), regardless of whether such
distributions are paid in cash or reinvested in additional Shares.
Distributions paid out of the "net capital gain" (the excess of net
long-term capital gain over net short-term capital loss), if any, of any
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.
Each Tax-Free Portfolio intends to pay substantially all of its dividends
as "exempt interest dividends." Investors in these Portfolios should note,
however, that taxpayers are required to report the receipt of tax-exempt
interest and "exempt interest dividends" on their Federal income tax returns and
that in two circumstances such amounts, while exempt from regular Federal income
tax, are taxable to persons subject to alternative minimum and environmental
taxes. First, tax-exempt interest and "exempt interest dividends" derived from
certain private activity bonds issued after August 7, 1986, generally will
constitute an item of tax preference for corporate and noncorporate taxpayers in
determining alternative minimum and environmental tax liability. Although they
do not currently intend to do so, during normal market conditions the Tax-Free
Portfolios may invest up to 20% of their respective net assets in such private
activity bonds. Second, tax-exempt interest and "exempt interest dividends"
derived from all other Municipal Obligations must be taken into account by
corporate taxpayers in determining certain adjustments for alternative minimum
and environmental tax purposes. In addition, investors should be aware of the
possibility of state and local alternative minimum or minimum income tax
liability from such private activity bonds. Shareholders who are recipients of
Social Security Act or Railroad Retirement Act benefits should further note that
tax-exempt interest and "exempt interest dividends" derived from all types of
Municipal Obligations will be taken into account in determining the taxability
of their benefit payments.
Each Tax-Free Portfolio will determine annually the percentages of its net
investment income which are exempt from the regular Federal income tax, which
constitute an item of tax preference for purposes of the Federal alternative
minimum tax, and which are fully taxable. Such percentages will apply uniformly
to all distributions declared from net investment income during that year. These
percentages may differ significantly from the actual percentages for any
particular day.
The Fund will send written notices to shareholders annually regarding the
tax status of distributions made by each 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 a Portfolio on or just before the
record date of a taxable dividend should be aware that the amount of the
forthcoming dividend payment, although in effect a return of capital, will be
taxable to him.
A taxable gain or loss may be realized by a shareholder upon his
redemption, transfer or exchange of Portfolio Shares depending upon the tax
basis of such Shares and their price at the time of redemption, transfer or
exchange.
Any loss upon the sale or exchange of shares of a Portfolio held for six
months or less will be disallowed for Federal income tax purposes to the extent
of any exempt interest dividends received by the shareholder. For the Ohio
37
<PAGE> 85
Tax-Free Income Portfolios, the loss will be disallowed for Ohio income tax
purposes to the same extent, even though, for Ohio income tax purposes, some
portion of such dividends actually may have been subject to Ohio income tax.
It is expected that dividends and certain interest income earned by the
International Fixed Income Portfolio from foreign securities will be subject to
foreign withholding taxes or other taxes. So long as more than 50% of the value
of the Portfolio's total assets at the close of the taxable year in question
consists of stock or securities of foreign corporations, the Portfolio may
elect, for U.S. Federal income tax purposes, to treat certain foreign taxes paid
by it, including generally any withholding taxes and other foreign income taxes,
as paid by its shareholders. The Portfolio intends to make this election. As a
result, the amount of such foreign taxes paid by the Portfolio will be included
in its shareholders' income pro rata (in addition to taxable distributions
actually received by them), and each shareholder generally will be entitled
either (a) to credit his proportionate amounts of such taxes against his U.S.
Federal income tax liabilities, or (b) if he itemizes his deductions, to deduct
such proportionate amounts from his U.S. income.
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.
OHIO TAX CONSIDERATIONS. Individuals and estates that are subject to Ohio
personal income tax, municipal taxes or school district income taxes in Ohio
will not be subject to such taxes on distributions from the Ohio Tax-Free Income
Portfolio to the extent that such distributions consist of interest on Ohio
Municipal Obligations or obligations issued by the U.S. Government, its
agencies, instrumentalities or territories (if the interest on such obligations
is exempt from state income taxation under the laws of the United States) ("U.S.
Obligations"), provided that the Portfolio continues to qualify as a regulated
investment company for federal income tax purposes and that at all times at
least 50% of the value of the total assets of the Ohio Tax-Free Income Portfolio
consists of Ohio Municipal Obligations or similar obligations of other states or
their subdivisions. (It is assumed for purposes of this discussion of Ohio tax
considerations that the regulated investment company and 50% requirements are
satisfied.) Corporations that are subject to the Ohio corporation franchise tax
will not have to include distributions from the Ohio Tax-Free Income Portfolio
in their net income base for purposes of calculating their Ohio corporation
franchise tax liability to the extent that such distributions either constitute
exempt-interest dividends or consist of interest on Ohio Municipal Obligations
or U.S. Obligations. However, Shares of the Ohio Tax-Free Income Portfolio will
be included in a corporation's net worth base for purposes of calculating the
Ohio corporation franchise tax. Distributions consisting of gain on the sale,
exchange or other disposition of Ohio Municipal Obligations will not be subject
to the Ohio personal income tax, or municipal or school district income taxes in
Ohio and will not be included in the net income base of the Ohio corporation
franchise tax. Distributions attributable to other sources will be subject to
the Ohio personal income tax and the Ohio corporation franchise tax. For
additional Ohio tax considerations, see "Taxes" above.
PENNSYLVANIA TAX CONSIDERATIONS. Income received by a shareholder
attributable to interest realized by the Pennsylvania Tax-Free Income Portfolio
from Pennsylvania Municipal Obligations or attributable to insurance proceeds on
account of such interest, is not taxable to individuals, estates or trusts under
the Personal Income Tax imposed by Article III of the Tax Reform Code of 1971
(in the case of insurance proceeds, to the extent they are exempt for Federal
Income Tax purposes); to corporations under the Corporate Net Income tax imposed
by Article IV of the Tax Reform Code of 1971 (in the case of insurance proceeds,
to the extent they are exempt for Federal Income Tax purposes); nor to
individuals under the Philadelphia School District New Income Tax ("School
District Tax") imposed on Philadelphia resident individuals under authority of
the Act of August 9, 1963, P.L. 640.
38
<PAGE> 86
Income received by a shareholder attributable to gain on the sale or other
disposition by the Pennsylvania Tax-Free Income Portfolio of Pennsylvania
Municipal Obligations is taxable under the Personal Income Tax, the Corporate
Net Income Tax, and, unless these assets were held by the Pennsylvania Tax-Free
Income Portfolio for more than six months, the School District Tax.
To the extent that gain on the disposition of a share represents gain
realized on Pennsylvania Municipal Obligations held by the Pennsylvania Tax-Free
Income Portfolio, such gain may be subject to the Personal Income Tax and
Corporate Net Income Tax. Such gain may also be subject to the School District
Tax, except that gain realized with respect to a share held for more than six
months is not subject to the School District Tax.
No opinion is expressed regarding the extent, if any, to which shares, or
interest and gain thereon, is subject to, or included in the measure of, the
special taxes imposed by the Commonwealth of Pennsylvania on banks and other
financial institutions or with respect to any privilege, excise, franchise or
other tax imposed on business entities not discussed herein (including the
Corporate Capital Stock/Foreign Franchise Tax.)
Shareholders of the Pennsylvania Tax-Free Income Portfolio are not subject
to any of the personal property taxes currently in effect in Pennsylvania to the
extent that the Portfolio is comprised of Pennsylvania Municipal Obligations and
Federal obligations (if the interest on such obligations is exempt from state
and local taxation under the laws of the United States). The taxes referred to
include the County Personal Property Tax imposed on residents of Pennsylvania by
the Act of June 17, 1913, P.L. 507, as amended.
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 94 classes (19 classes of "Series B
Investor Shares" and 25 classes each of "Institutional Shares," "Service Shares"
and "Series A Investor Shares") representing interests in the Fund's investment
portfolios. This Prospectus describes nine Portfolios of the Fund which, except
for the Ohio and Pennsylvania Tax-Free Income Portfolios, are classified as
diversified companies under the 1940 Act. The Managed Income, Tax-Free Income
and Intermediate Government Portfolios were each established with only one class
of shares. In each case, 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.
39
<PAGE> 87
Institutional Shares bear no servicing or distribution fees. Holders of a
Portfolio's Service Shares bear the expense of fees described in the prospectus
for such shares that will be paid under the Fund's Service Plan. Payments under
the Service Plan will cover expenses relating to the support services provided
to beneficial owners of Service Shares by certain institutions. Such services
are intended to supplement the services provided by the Fund's Administrators
and transfer agent to the Fund's shareholders of record. In consideration for
payment of up to .15% (on an annualized basis) of the average daily net asset
value of Service Shares owned beneficially by their customers, institutions may
provide one or more of the following services to such customers: processing
purchase and redemption requests from customers and placing orders with the
Fund's transfer agent or the Distributor; processing dividend payments from the
Fund on behalf of customers; providing sub-accounting with respect to Service
Shares beneficially owned by customers or the information necessary for
sub-accounting; and other similar services. In consideration for payment of a
service fee of up to a separate .15% (on an annualized basis) of the average
daily net asset value of Service Shares owned beneficially by their customers,
institutions may provide one or more of these additional services to such
customers: responding to customer inquiries relating to the services performed
by the institution and to customer inquiries concerning their investments in
Service Shares; providing information periodically to customers showing their
positions in Service Shares; and other similar shareholder liaison services.
Similarly, holders of a Portfolio's Series A Investor Shares and Series B
Investor Shares (collectively, "Investor Shares") bear the payments described in
the prospectus for such shares that are paid under the Fund's Distribution and
Service Plan and Series B Distribution Plan, respectively (the "Distribution
Plans"). Under the Distribution Plans, the Distributor is entitled to payments
by each Portfolio for: (i) direct out-of-pocket promotional expenses incurred in
connection with advertising and marketing Investor Shares; and (ii) payments to
broker/dealers that are not affiliated with the Distributor ("Service
Organizations") for distribution assistance such as advertising and marketing of
Investor Shares. In addition, payments under the Series B Distribution Plan will
be used to pay for or finance sales commissions and other fees payable to
Service Organizations and other broker/dealers who sell Series B Investor
Shares. Service Organizations may also provide support services such as
establishing and maintaining accounts and records relating to shareholders of
Investor Shares for whom the Service Organizations are the dealer of record or
holder of record for shareholders with whom the Service Organizations have a
servicing relationship. The Distribution and Service Plan provides for payments
to the Distributor at an annual rate not to exceed .55% of the average daily net
asset value of each Portfolio's outstanding Series A Investor Shares. The Series
B Distribution Plan provides for payments to the Distributor at an annual rate
not to exceed .75% of the average daily net asset value of each Portfolio's
outstanding Series B Investor Shares. In addition, holders of Series B Investor
Shares bear the expense of fees described in the prospectus for such shares that
are paid under the Fund's Series B Service Plan. Payments under the Series B
Service Plan will cover expenses relating to the support services provided to
the beneficial owners of Series B Investor Shares by certain Service
Organizations and sometimes by the Distributor. Such services are intended to
supplement the services provided by the Fund's Administrators and transfer
agent. In consideration for payments 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 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
subaccounting; 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
40
<PAGE> 88
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. As a result of these different fees, the
net asset value and the net yields on the Fund's Institutional Shares will
generally be higher than those on the Fund's Service Shares, the net asset value
and the net yields on the Fund's Service Shares will generally be higher than
those on the Fund's Series A Investor Shares, and the net asset value and the
net yields on the Fund's Series A Investor Shares will generally be higher than
those on the Fund's Series B Investor Shares if payments by the Portfolios under
the Service Plan, the Distribution and Service Plan, the Series B Distribution
Plan and the Series B Service Plan are made at the maximum rates. Standardized
total return and yield quotations will be computed separately for each class of
Shares. Series A and Series B Investor Shares are exchangeable at the option of
the holder for Series A and Series B Investor Shares, respectively, in the
Fund's other investment portfolios. Series B Investor Shares are exchangeable
for Series B Investor Shares in the Fund's Money Market Portfolio, but are not
exchangeable for shares in the Fund's other money market investment portfolios.
Series A Investor Shares of the Portfolios are offered to the public at the net
asset value per share plus a maximum sales charge of 4.50% of the offering price
on single purchases of less than $50,000; the sales charge is reduced on a
graduated scale on single purchases of $50,000 or more and certain exemptions
from the sales charge may apply. The sales charge does not apply to exchanges of
Series A Investor Shares among the Portfolios. Series B Investor Shares are
subject to a maximum contingent deferred sales charge of 5.0%. The deferred
sales charge decreases over time. Series B Investor Shares may be exchanged for
Series B Investor Shares of another investment portfolio of the Fund without the
payment of any deferred sales charge at the time the exchange is made. Because
Service Shares and Institutional Shares are sold without a sales charge, holders
of Service Shares and Institutional Shares have no such exchange privileges.
On January 4, 1995, PNC Bank held of record approximately 80% of the Fund's
outstanding shares, and may be deemed a controlling person of the Fund under the
1940 Act. PNC Bank is a subsidiary of PNC Bank Corp., a multi-bank holding
company.
OTHER INFORMATION
- --------------------------------------------------------------------------------
REPORTS AND INQUIRIES
Shareholders will receive unaudited semi-annual financial statements and
annual financial statements audited by independent accountants. Shareholder
inquiries should be addressed to the Fund c/o PFPC, P.O. Box 8950, Wilmington,
Delaware 19885-9628, toll-free (800) 441-7764 (in Delaware call collect (302)
791-1104).
PERFORMANCE INFORMATION
From time to time, total return and yield data for Shares of the Portfolios
may be quoted in advertisements or in communications to Institutions. Total
return will be calculated on an average annual total return basis for various
periods. Average annual total return reflects the average annual percentage
change in value of an investment in Shares of a Portfolio over the measuring
period. This method of calculating total return assumes that dividends and
capital gain distributions made by the Portfolio during the period relating to
Shares are reinvested in Shares.
The yields of Shares of the Portfolios are computed based on the net income
of a Portfolio allocated to such Shares during a 30-day (or one month) period,
which period will be identified in connection with the particular yield
quotation. More specifically, the yield of Shares of a Portfolio is computed by
dividing the Portfolio's net income per share allocated to such Shares during a
30-day (or one month) period by the net asset value per share on the last day of
the period and annualizing the result on a semi-annual basis. Each Tax-Free
Portfolio's "tax-equivalent yield" may also be quoted from time to time, which
shows the level of taxable yield needed to produce an after-tax equivalent to
41
<PAGE> 89
such Portfolio's tax-free yield. This is done by increasing such Portfolio's
yield (calculated above) by the amount necessary to reflect the payment of
Federal and/or state income tax at a stated tax rate.
Performance data of Shares of a Portfolio may be compared to those of other
mutual funds with similar investment objectives and to other relevant indexes or
to ratings or rankings prepared by independent services or other financial or
industry publications that monitor the performance of mutual funds. In addition,
certain indexes may be used to illustrate historic performance of select asset
classes. For example, the total return and/or yield of Shares of a Portfolio may
be compared to data prepared by Lipper Analytical Services, Inc., CDA Investment
Technologies, Inc. and Weisenberger Investment Company Service, and with the
performance of the Shearson Lehman GMNA Index, the Shearson Lehman Index of
Baa-rated Corporate Bonds, the T-Bill Index, the "stocks, bonds and inflation
Index" published annually by Ibbotson Associates and the Shearson Lehman Hutton
Government Corporate Bond Index. Performance information may also include
evaluations of the Portfolios and their Shares published by nationally
recognized ranking services and information as reported by financial
publications such as Business Week, Fortune, Institutional Investor, Money
Magazine, Forbes, Barron's, The Wall Street Journal and The New York Times, or
in publications of a local or regional nature.
In addition to providing performance information that demonstrates the
actual yield or returns of Shares of a particular Portfolio over a particular
period of time, a 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 a 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 a Portfolio will
fluctuate so that a shareholder's Shares, when redeemed, may be worth more or
less than their original cost. Since performance will fluctuate, performance
data for Shares of a Portfolio cannot necessarily be used to compare an
investment in such Shares with bank deposits, savings accounts and similar
investment alternatives which often provide an agreed or guaranteed fixed yield
for a stated period of time. Shareholders should remember that performance is
generally a function of the kind and quality of the instruments held in a
portfolio, portfolio maturity, operating expenses and market conditions. Any
fees charged by Service Organizations directly to their customer accounts in
connection with investments in Shares will not be included in the Portfolio's
calculations of yield and total return.
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<PAGE> 90
================================================================================
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. 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.............................. 15
Investment Limitations........................... 29
Management....................................... 30
Purchase and Redemption of Shares................ 34
Net Asset Value.................................. 35
Dividends and Distributions...................... 36
Taxes............................................ 36
Description of Shares............................ 39
Other Information................................ 41
</TABLE>
INVESTMENT ADVISER
PNC Institutional Management Corporation
Wilmington, Delaware
SUB-ADVISER TO THE OHIO TAX-FREE INCOME PORTFOLIO
PNC Bank, Ohio, National Association
Cincinnati, Ohio
SUB-ADVISER TO THE MANAGED INCOME, INTERMEDIATE GOVERNMENT, TAX-FREE INCOME,
PENNSYLVANIA TAX-FREE INCOME, SHORT-TERM BOND, INTERMEDIATE-TERM BOND AND
GOVERNMENT INCOME
PORTFOLIOS AND CUSTODIAN
PNC Bank, National Association
Philadelphia, Pennsylvania
SUB-ADVISER TO INTERNATIONAL FIXED INCOME PORTFOLIO
Provident Capital Management, Inc.
Philadelphia, Pennsylvania
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-002M
================================================================================
THE FIXED
INCOME PORTFOLIOS
INSTITUTIONAL
CLASS
PROSPECTUS
MANAGED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
TAX-FREE
INCOME PORTFOLIO
- --------------------------------------------------------------------------------
INTERMEDIATE
GOVERNMENT PORTFOLIO
- --------------------------------------------------------------------------------
OHIO TAX-FREE
INCOME PORTFOLIO
- --------------------------------------------------------------------------------
PENNSYLVANIA TAX-FREE
INCOME PORTFOLIO
- --------------------------------------------------------------------------------
SHORT-TERM
BOND PORTFOLIO
- --------------------------------------------------------------------------------
INTERMEDIATE-TERM
BOND PORTFOLIO
- --------------------------------------------------------------------------------
INTERNATIONAL
FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
GOVERNMENT
INCOME PORTFOLIO
- --------------------------------------------------------------------------------
JANUARY 30, 1995
================================================================================
<PAGE> 91
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, 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 and Virginia 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 those Portfolios,
dated January 30, 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 January 30,
1995. Capitalized terms used herein and not otherwise defined have the same
meanings as are given to them in the Prospectuses.
CONTENTS
<TABLE>
<S> <C>
Page
----
Investment Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Trustees and Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Investment Advisory, Administration,
Distribution and Servicing Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Portfolio Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Purchase and Redemption Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Valuation of Portfolio Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Performance Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Additional Information Concerning Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
Appendix B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
</TABLE>
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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.
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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.
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 and Virginia Municipal
Money Market Portfolios (the "Municipal Portfolios") 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 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
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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.
MORTGAGE-RELATED SECURITIES. There are a number of important
differences among the agencies and instrumentalities of the U.S. Government
that issue mortgage-related securities and among the securities that they
issue. Mortgage-related securities guaranteed by the Government National
Mortgage Association ("GNMA") include GNMA Mortgage Pass-Through Certificates
(also known as "Ginnie Maes") which are guaranteed as to the timely payment of
principal and interest by GNMA and such guarantee is backed by the full faith
and credit of the United States. GNMA is a wholly-owned U.S. Government
corporation within the Department of Housing and Urban Development. GNMA
certificates also are supported by the authority of GNMA to borrow funds from
the U.S. Treasury to make payments under its guarantee. Mortgage-related
securities issued by the Federal National Mortgage Association ("FNMA") include
FNMA guaranteed Mortgage Pass-Through Certificates (also known as "Fannie
Maes") which are solely the obligations of the FNMA, are not backed by or
entitled to the full faith and credit of the United States and are supported by
the right of the issuer to borrow from the Treasury. FNMA is a
government-sponsored organization owned entirely by private stockholders.
Fannie Maes are guaranteed as to timely payment of principal and interest by
FNMA. Mortgage-related securities issued by the Federal Home Loan Mortgage
Corporation ("FHLMC") include FHLMC Mortgage Participation Certificates (also
known as "Freddie Macs" or "Pcs"). FHLMC is a corporate instrumentality of the
United States, created pursuant to an Act of Congress, which is owned entirely
by Federal Home Loan Banks. Freddie Macs are not guaranteed by the United
States or by any Federal Home Loan Banks and do not constitute a debt or
obligation of the 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
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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. 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
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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.
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."
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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.
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, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Federal National Mortgage Association,
Government National Mortgage Association, General Services Administration,
Student Loan Marketing Association, Central Bank for Cooperatives, Federal Home
Loan Mortgage Corporation, Federal Intermediate Credit Banks, Maritime
Administration, International Bank for Reconstruction and Development (the
"World Bank"), the Asian-American Development Bank and the Inter-American
Development Bank.
LEASE OBLIGATIONS. The Municipal Money Market, Pennsylvania
Municipal Money Market, Ohio Municipal Money Market, North Carolina Municipal
Money Market, Virginia Municipal Money Market, Managed Income, Tax-Free Income,
Pennsylvania Tax-Free Income, Ohio Tax-Free Income, Short-Term Bond,
Intermediate-Term Bond and
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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 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 and Virginia
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
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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 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 the two highest rating categories of a nationally recognized
statistical rating organization ("NRSRO"). The Non-Money Market Portfolios may
purchase commercial paper rated (at the time of purchase) "A-1" by S&P or
"Prime-1" by Moody's or, when deemed advisable by the Portfolio's adviser or
sub-adviser, "high quality" issues rated "A-2" or "Prime-2" by S&P or Moody's,
respectively. These ratings symbols are described in Appendix A. Commercial
paper purchasable by 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 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
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Portfolio's adviser or sub-adviser will continue to monitor creditworthiness of
the seller under a repurchase agreement, and will require the seller to
maintain during the term of the agreement the value of the securities subject
to the agreement at not less than the repurchase price (including accrued
interest). In addition, the Portfolio's adviser or sub-adviser will
mark-to-market daily the value of the securities, and will, if necessary,
require the seller to maintain additional securities to ensure that the value
is not less than the repurchase price. Securities subject to repurchase
agreements will be held by the Fund's custodian (or sub-custodian) in the
Federal Reserve/Treasury book-entry system or by another authorized securities
depository. Repurchase agreements are considered to be loans by the Portfolios
under the 1940 Act.
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 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.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. When a Portfolio
agrees to purchase securities on a when-issued or forward commitment basis, the
custodian will set aside cash or liquid portfolio securities equal to the
amount of the commitment in a separate account. Normally, the custodian will
set aside portfolio securities to satisfy a purchase commitment, and in such a
case the Portfolio may be required subsequently to place additional assets in
the separate account in order to ensure that the value of the account remains
equal to the amount of the Portfolio 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
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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, Index 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 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
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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 the 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
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
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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 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
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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 may invest in futures contracts and options thereon (interest rate
futures contracts or index futures contracts, as applicable). Positions in
futures contracts may be closed out only on an exchange which provides a
secondary market for such futures. However, there can be no assurance that a
liquid secondary market will exist for any particular futures contract at any
specific time. Thus, it may not be possible to close a futures position. In
the event of adverse price movements, 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
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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 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
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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.
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
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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.
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
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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.
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
(6.5% versus 6.8% in 1993). 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
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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 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 to respond to lower receipts and higher expenditures in
certain categories than earlier estimated. Those steps included selected
reductions in appropriations spending and the transfer of $64 million from the
BSF to the GRF. Reported June 30, 1991 ending fund balances were $135.3
million (GRF) and $300 million (BSF).
To allow time to resolve certain budget differences for the latest
complete biennium, 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. Pursuant to the general appropriations act for the entire biennium,
passed on July 11, 1991, $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 came in certain areas,
particularly human services including Medicaid. 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. As authorized by the General Assembly,
the $100.4
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million BSF balance and additional amounts from certain other funds were
transferred late in the FY to the GRF, and adjustments made in the timing of
certain tax payments. Other administrative revenue and spending actions
resolved the remaining imbalance.
A significant GRF shortfall (approximately $520 million) was then
projected for FY 1993. It was addressed by appropriate legislative and
administrative actions. The Governor ordered, effective July 1, 1992, $300
million in selected GRF spending reductions. Subsequent executive and
legislative action in December 1992 -- a combination of tax revisions and
additional spending reductions -- resulted in a balance of GRF resources and
expenditures for the 1992-93 biennium. The June 30, 1993 ending GRF fund
balance was approximately $111 million, of which, as a first step to BSF
replenishment, $21 million was deposited in the BSF. (Based on June 30, 1994
balances, an additional $260 million has been deposited in the BSF, which has a
current balance of $281 million.)
No spending reductions were applied to appropriations needed for debt
service on or lease rentals relating to any State obligations.
The GRF appropriations act for the current 1994-95 biennium was passed
and signed by the Governor on July 1, 1993. It included all necessary GRF
appropriations for State debt service and lease rental payments then projected
for the biennium.
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 January 25, 1995, $794.4 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 ($38.9 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 or
awaiting delivery); and (c) up to $200
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million in general obligation bonds for parks, recreation and natural resources
purposes which may be outstanding at any one time (no more than $50 million to
be issued in any one year).
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 or awaiting delivery at January 25,
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, a part from a "guarantee fund" approach funded
essentially from program revenues.)
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 46% in recent years) of their operating moneys from
State subsidies, but are dependent on local property taxes, and in 107
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. The trial court
recently concluded that aspects of the system (including basic operating
assistance) are
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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. Borrowings under this
program totalled $68.6 million for 44 districts (including $46.6 million for
one district) in FY 1992, $94.5 million for 27 districts (including $75 million
for one)in FY 1993, and $15.6 million for 28 districts in FY 1994.
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 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
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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.
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
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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 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)
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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 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
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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.
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, soft drink tax and intangible personal property 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
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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 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 1993 sessions of the General Assembly reduced departmental
operating requirements by $357.6 million for fiscal year 1995 and authorized
continuation funding of $8,603.4 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 during
the 1993 and 1994 sessions of the General Assembly. In addition to the
transfers to the Savings Reserve from the fiscal year-end credit balance, the
General Assembly in 1993
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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.
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 May 1994, North Carolina
ranked tenth among the states in non-agricultural employment and eighth in
manufacturing employment. The Commission estimated North Carolina's seasonally
adjusted unemployment rate in December 1994 to be 3.3% of the labor force, as
compared with an unemployment rate of 5.4% nationwide. As part of its 1993-95
budget, the General Assembly provided major funding for economic initiatives in
an effort to create additional jobs.
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
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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. On December 12, 1994, the United States Supreme Court announced that
it would not hear the case. 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. No date for oral argument has been set. The North Carolina
Attorney General's Office believes that sound legal arguments support the
State's position.
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. 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 1992. The case is now pending in
Superior Court. Defendants' motion to dismiss as a matter of law has been
denied. The North Carolina Attorney General's Office believes that sound legal
arguments support the State's position.
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 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
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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 has announced it intends to
petition the United States Supreme Court for review of that decision. 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 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 offering
of the remaining $280 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 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.
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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 of number of
jobs, followed by wholesale and retail trade, government employment and
manufacturing. Because of Virginia's proximity in 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 grater
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 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 for review by the Governor, the Advisory Board of
Economists and the Advisory Council on Revenue
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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 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 total revenues anticipated 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, in part, 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% of the 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 2% 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% 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% of total tax revenues was
derived from five major taxes imposed by the Commonwealth on individual and
fiduciary income, sales and
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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% 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 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 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 contract
general obligation debt to meet certain types of emergencies, subject to
limitations on amount and duration; to
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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% 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). 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.
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,
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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 $921,305
===============
(maximum amount that could be authorized
by the General Assembly)
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 finance costs related to its
Route 28 Project. In 1989, CTB issued its $200,000,000 Transportation Revenue
Bonds, Series 1989
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(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 1993 B (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 approximately 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 for such moral obligation debt. To date, none of these
authorities has advised the Commonwealth that any such deficiencies exist.
Local Government. Local government in the Commonwealth is comprised
of 95 counties, 41 incorporated cities, and 190
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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 1985-1988. 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 occurs first.
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.
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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 the taxpayers
opting out of the settlement exceeds $20 million, the entire settlement shall
be 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
the foregoing actions 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.
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").
No Portfolio may:
1. Purchase or sell real estate, except that each
Portfolio may purchase securities of issuers which deal in real
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estate and may purchase securities which are secured by interests in real
estate.
2. Acquire any other investment company or investment
company security except in connection with a merger, consolidation,
reorganization or acquisition of assets or where otherwise permitted by the
1940 Act.
3. Act as an underwriter of securities within the
meaning of the Securities Act of 1933 except to the extent that the purchase of
obligations directly from the issuer thereof, or the disposition of securities,
in accordance with the Portfolio's investment objective, policies and
limitations may be deemed to be underwriting.
4. Write or sell put options, call options, straddles,
spreads, or any combination thereof, except for transactions in options on
securities, securities indices, futures contracts and options on futures
contracts.
5. Purchase securities of companies for the purpose of
exercising control.
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.
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 such
investments, a Money Market Portfolio would notify its
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shareholders and add appropriate descriptions concerning the instruments and
transactions to its Prospectus.
TRUSTEES AND OFFICERS
The trustees and executive officers of the Fund, and their business
addresses and principal occupations during the past five years, are:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH FUND DURING PAST FIVE YEARS
- ---------------- ------------------ ----------------------
<S> <C> <C>
Philip E. Coldwell Trustee Economic Consultant;
Coldwell Financial Consultants Chairman, Coldwell
3330 Southwestern Blvd. Financial Consultants;
Dallas, TX 75225 Director, Maxus Energy
Corporation (energy
products) from 1989 to 1993;
Director or Trustee of
Temporary Investment Fund, Inc.,
Trust for Federal Securities,
Municipal Fund for Temporary
Investment and Portfolios for
Diversified Investment.
Robert R. Fortune Trustee Financial consultant;
2920 Ritter Lane Chairman, President and
Allentown, PA 18104 Chief Executive Officer,
Associated Electric & Gas
Insurance Services Limited
from 1984 to 1993; Member of
the Financial Executives
Institute and American
Institute of Certified
Public Accountants; Director,
Trustee or Managing General
Partner of a number of
investment companies advised
by PIMC; Director, Prudential
Utility Fund, Inc., Prudential
Structured Maturity Fund, Inc.
and Prudential IncomeVertible
Fund, Inc.
Rodney D. Johnson Trustee President, Fairmount
</TABLE>
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<PAGE> 131
<TABLE>
<S> <C> <C>
Fairmont Capital Advisers, Capital Advisors, Inc.
Inc. (financial advisers)
1435 Walnut St. since 1987; Treasurer,
Philadelphia, PA 19102 North Philadelphia Health
System (formerly Girard
Medical Center) from 1988
to 1992; Member, Board of
Education, School District
of Philadelphia, 1983 to
1988; Treasurer, Cascade
Aphasia Center, 1984 to
1988; Director or Trustee of
Temporary Investment Fund,
Inc., Trust for Federal
Securities, Municipal Fund
for Temporary Investment,
Portfolios for Diversified
Investment, Municipal Fund
for California Investors,
Inc. and Municipal Fund for
New York Investors, Inc.
G. Willing Pepper(1) Chairman of Retired; Chairman of the
128 Springton the Board Board, Specialty
Lake Road and President Composites Corporation
Media, PA 19063 until May 1984;
Chairman of the Board, The
Institute for Cancer
Research until 1979;
Director, Philadelphia
National Bank until 1978;
President, Scott Paper
Company from 1971 to
1973; Director, Marmon
Group, Inc. until April
1986; Director, Trustee
or Managing General
Partner of a number
of investment companies
advised by PIMC.
</TABLE>
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(1) This trustee may be deemed an "interested person" of the Fund as
defined in the 1940 Act.
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<PAGE> 132
<TABLE>
<S> <C> <C>
Anthony M. Santomero Trustee Deputy Dean from
310 Keithwood Road 1990 to 1994, Richard
Wynnewood, PA 19096 K. Mellon Professor
of Finance since April 1984,
and Dean's Advisory
Council Member since
July 1984, The Wharton
School, University of
Pennsylvania; Associate
Editor, Journal of Banking
and Finance since June 1978;
Associate Editor, Journal of
Economics and Business since
October 1979; Associate Editor,
Journal of Money, Credit and
Banking since January 1980;
Research Associate, New York
University Center for Japan-U.S.
Business and Economic Studies
since July 1989; Editorial
Advisory Board, Open Economics
Review since November 1990;
Director, The Zweig Fund and
The Zweig Total Return Fund;
Director or Trustee of Temporary
Investment Fund, Inc., Trust
for Federal Securities, Municipal
Fund for Temporary Investment,
Portfolios for Diversified
Investment and Municipal Fund
for California Investors, Inc.
David R. Wilmerding, Jr. Vice-Chairman President, Gates,
One Aldwyn Center of the Board Wilmerding, Carper &
Villanova, PA 19085 Rawlings, Inc.
(investment advisers)
since February 1989;
Director, Beaver Management
Corporation; Until September
1988, President, Treasurer
and Trustee, The Mutual
</TABLE>
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<TABLE>
<S> <C> <C>
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; Vice
Chairman of the Board, Fox
Chase Cancer Center; Trustee
Emeritus, Pennsylvania School
for the Deaf; Trustee Emeritus,
Immaculata College; President,
Vice President and/or Treasurer
of a number of investment
companies advised by PIMC.
Morgan R. Jones Secretary Partner in the law
Philadelphia National firm of Drinker Biddle &
Bank Building Reath, Philadelphia,
1345 Chestnut Street Pennsylvania.
Philadelphia, PA 19107-3496
</TABLE>
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
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<PAGE> 134
("PNC Bank"), 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.
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, 1994:
<TABLE>
<CAPTION>
PENSION OR TOTAL COMPENSATION
AGGREGATE RETIREMENT BENEFITS ESTIMATED ANNUAL FROM REGISTRANT AND
NAME OF PERSON, COMPENSATION FROM ACCRUED AS PART OF BENEFITS UPON FUND COMPLEX (1)
POSITION REGISTRANT FUND EXPENSES RETIREMENT PAID TO TRUSTEES
--------------- ----------------- ------------------- ---------------- --------------------
<S> <C> <C> <C> <C>
Philip E. Coldwell, Trustee $7,625 n/a n/a (4)(2) $44,025.00
Robert R. Fortune, Trustee $7,625 n/a n/a (6)(2) $56,725.00
Rodney D. Johnson, Trustee $7,625 n/a n/a (6)(2) $54,775.00
G. Willing Pepper, Chairman $11,625 n/a n/a (7)(2) $98,275.00
of the Board and President
Anthony M. Santomero, Trustee $7,625 n/a n/a (5)(2) $44,025.00
Henry M. Watts, Jr.,(1) Trustee $2,675 n/a n/a (8)(2) $61,875.00
David R. Wilmerding, Jr., $7,625 n/a n/a (6)(2) $61,025.00
Trustee
</TABLE>
- -------------------------------
(1) A Fund Complex means two or more investment companies that hold
themselves out to investors as related companies for purposes of
investment and investor services, or have a common investment adviser
or have an investment adviser that is an affiliated person of the
investment adviser of any of the other investment companies.
(2) Total number of investment companies trustee serves on within the
Fund Complex.
(3) Mr. Watts resigned as trustee on May 5, 1994.
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<PAGE> 135
SHAREHOLDER AND TRUSTEE LIABILITY. Under Massachusetts law,
shareholders of a business trust may, under certain circumstances, be held
personally liable as partners for the obligations of the trust. However, the
Fund's Declaration of Trust provides that shareholders shall not be subject to
any personal liability in connection with the assets of the Fund for the acts
or obligations of the Fund, and that every note, bond, contract, order or other
undertaking made by the Fund shall contain a provision to the effect that the
shareholders are not personally liable thereunder. The Declaration of Trust
provides for indemnification out of the trust property of any shareholder held
personally liable solely by reason of his being or having been a shareholder
and not because of his acts or omissions or 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, PNC Bank Ohio, PCM and PNC Bank and the fees
received by each of them for such services are described in the Prospectuses.
As stated in 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,
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<PAGE> 136
PIMC and the Administrators will bear the amount of such excess to the extent
required by such regulations in proportion to the fees otherwise payable to
them for such year. Such amount, if any, will be estimated and accrued daily
and paid on a monthly basis. As of the date of this Statement of Additional
Information, to the knowledge of the Fund, there were no state expense
limitations more restrictive than the following: 2 1/2% of the first $30
million of average annual net assets, 2% of the next $70 million of average
annual net assets, and 1 1/2% of average annual net assets in excess of $100
million.
PIMC renders advisory services to each of the Portfolios pursuant to
an Investment Advisory Agreement. PNC Bank Ohio renders sub-advisory services
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. served as
sub-adviser to the Index Equity Portfolio. PCM renders sub-advisory services
to the Value Equity, Small Cap Value Equity, International Equity,
International Fixed Income and International Emerging Markets Portfolios and
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, Small Cap Growth Equity, Core Equity, Growth Equity,
Index Equity, Balanced, Managed Income, Intermediate Government, Tax-Free
Income, Pennsylvania Tax-Free Income, Short-Term Bond, Intermediate-Term Bond
and Government Income Portfolios pursuant to Sub-Advisory Agreements. From
April 20, 1992 to September 10, 1993, PCM served as sub-adviser to the
Intermediate Government Portfolio. These Advisory and Sub-Advisory Agreements
are collectively referred to as the "Advisory Contracts."
Under the Advisory Contracts, PIMC, PCM, PNC Bank and PNC Bank Ohio
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, except a loss resulting from willful misfeasance, bad faith
or gross negligence on the part of PIMC, PCM, PNC Bank or PNC Bank Ohio in the
performance of their respective duties or from reckless disregard of their
respective duties and obligations thereunder. Each of the Advisory Contracts
is terminable as to a Portfolio by vote of the 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, PNC Bank or PNC Bank Ohio, as the case may be. PIMC, PCM, PNC Bank or PNC
Bank Ohio may also terminate their advisory
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<PAGE> 137
relationship with respect to a Portfolio, on 60 days' written notice to the
Fund. 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, $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
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<PAGE> 138
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 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,
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<PAGE> 139
$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, 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-
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<PAGE> 140
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 $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.
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 their respective duties or from
reckless disregard of their respective duties and obligations thereunder.
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
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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 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
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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.
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,
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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.
PFPC, an affiliate of PNC Bank, serves as the transfer and dividend
disbursing agent for the Fund pursuant to a Transfer Agency Agreement (the
"Transfer Agency Agreement"), under which PFPC (i) issues and redeems Service,
Investor, and Institutional classes of shares in 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 to the Fund
under the Transfer Agency Agreement, PFPC receives a per account fee, with
minimum monthly fees of $1,250 for each Portfolio. PFPC is also entitled to
out-of-pocket expenses.
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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. A message from the
Distributor has been attached to this Statement of Additional Information as
Appendix B.
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 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.
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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, 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.
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<PAGE> 146
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 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
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<PAGE> 147
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 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
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<PAGE> 148
"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 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 and 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 affiliated persons of such persons) will
be made in accordance with Rule 17e-1 under the 1940 Act.
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 and sub-advisers 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 adviser or sub-adviser determines in good faith
that such commission is reasonable in terms either of the transaction or the
overall responsibility of 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. 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
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<PAGE> 149
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 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 commission. 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.
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
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<PAGE> 150
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 money market instruments. In
seeking to implement this policy of the Portfolios, 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 is believed to 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, PNC Bank Ohio, PNC
Bank, PCM, the Administrators,
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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, PNC Bank Ohio, PNC Bank, PCM, 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 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.
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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>
Net Assets . . . . . . . . . . . . . $10,412,074 $5,049,054 $1,620,407 $601,053 $2,631,836
Outstanding
Shares . . . . . . . . . . . . . . . 895,820 496,922 160,040 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 . . . . . . . . . . . . . $16,814,283 $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>
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<PAGE> 153
<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 $277,387 $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
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 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
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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 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 Ohio Tax-Free Income and Pennsylvania Tax-Free Income
Portfolios had not commenced operations as of September 30, 1992.
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
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<PAGE> 155
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 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.
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
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<PAGE> 156
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.
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
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<PAGE> 157
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 each Money Market Portfolio.
NON-MONEY MARKET PORTFOLIOS. The valuation of securities held by the
Non-Money Market Portfolios is discussed in their respective Prospectuses.
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. For the seven-day period ended September 30, 1994,
the annualized yield for Service Shares of each of the Money Market Portfolios
was as follows: Money Market Portfolio, 4.43%; Municipal Money Market
Portfolio, 2.90%; Government Money Market Portfolio, 4.40%; Ohio Municipal
Money Market Portfolio, 2.85%; and Pennsylvania Municipal Money Market
Portfolio, 2.92%.(1) For the seven-day period ended September 30, 1994, the
annualized yield for Series
- ----------------------------------
(1) No Service Shares of the North Carolina Municipal Money Market
Portfolio were outstanding at September 30, 1994.
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<PAGE> 158
A Investor Shares of each of the Money Market Portfolios was as follows: Money
Market Portfolio, 4.23%; Municipal Money Market Portfolio, 2.69%; Government
Money Market Portfolio, 4.20%; Ohio Municipal Money Market Portfolio, 2.65%;
and Pennsylvania Municipal Money Market Portfolio, 2.72%. For the seven-day
period ended September 30, 1994, the annualized yield for Institutional Shares
of each of the Money Market Portfolios was as follows: Money Market Portfolio,
4.73%; Municipal Money Market Portfolio, 3.20%; Government Money Market
Portfolio, 4.70%; Ohio Municipal Money Market Portfolio, 3.15%; Pennsylvania
Municipal Money Market Portfolio, 3.22%; North Carolina Municipal Money Market
Portfolio, 3.26%; and Virginia Municipal Money Market Portfolio, 3.35%. For
the seven-day period ended September 30, 1994, the annualized effective yield
for Service Shares of each of the Money Market Portfolios was as follows: Money
Market Portfolio, 4.52%; Municipal Money Market Portfolio, 2.94%; Government
Money Market Portfolio, 4.49%; Ohio Municipal Money Market Portfolio, 2.89%;
and Pennsylvania Municipal Money Market Portfolio, 2.96%.(1) For the seven-day
period ended September 30, 1994, the annualized effective yield for Series A
Investor Shares of each of the Money Market Portfolios was as follows: Money
Market Portfolio, 4.31%; Municipal Money Market Portfolio, 2.73%; Government
Money Market Portfolio, 4.28%; Ohio Municipal Money Market Portfolio, 2.68%;
and Pennsylvania Municipal Money Market Portfolio, 2.76%. For the seven-day
period ended September 30, 1994, the annualized effective yield for
Institutional Shares of each of the Money Market Portfolios was as follows:
Money Market Portfolio, 4.84%; Municipal Money Market Portfolio, 3.25%;
Government Money Market Portfolio, 4.81%; Ohio Municipal Money Market
Portfolio, 3.20%; Pennsylvania Municipal Money Market Portfolio, 3.27%; North
Carolina Municipal Money Market Portfolio, 3.31%; and Virginia Municipal Money
Market Portfolio, 3.41%. 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 and Virginia 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. For the seven-day period ended September 30, 1994, the annualized
tax-equivalent yield for Service Shares of each of the Money Market Portfolios
was as follows: Municipal Money Market Portfolio, 4.08%; Ohio Municipal Money
Market Portfolio, 4.01%; and Pennsylvania Municipal Money Market
- ----------------------------------
(1) No Service Shares of the North Carolina Municipal Money Market
Portfolio were outstanding at September 30, 1994.
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<PAGE> 159
Portfolio, 4.11%.(1) For the seven-day period ended September 30, 1994, the
annualized tax-equivalent yield for Series A Investor Shares of each of the
Money Market Portfolios was as follows: Municipal Money Market Portfolio,
3.79%; Ohio Municipal Money Market Portfolio, 3.72%; and Pennsylvania Municipal
Money Market Portfolio, 3.83%. For the seven-day period ended September 30,
1994, the annualized tax-equivalent yield for Institutional Shares of each of
the Money Market Portfolios was as follows: Municipal Money Market Portfolio,
4.51%; Ohio Municipal Money Market Portfolio, 4.44%; Pennsylvania Municipal
Money Market Portfolio, 4.54%; North Carolina Municipal Money Market Portfolio,
4.60%; and Virginia Municipal Money Market Portfolio, 4.74%. 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 Service Shares of
the Virginia Municipal Money Market Portfolio, no Series A Investor Shares of
the North Carolina Municipal Money Market and Virginia Municipal Money Market
Portfolios and no Series B Investor Shares of the Money Market Portfolio had
been issued prior to September 30, 1994. 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
Service 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. 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
- ----------------------------------
(1) No Service Shares of the North Carolina Municipal Money Market
Portfolio were outstanding at September 30, 1994.
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<PAGE> 160
Portfolio. Under the rules of the SEC, funds advertising performance must
include total return quotes calculated according to the following formula:
ERV 1/n
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 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:
(i) the average annual total return for Service Shares of the Non-Money Market
Portfolios for the year ended September 30, 1994 was as follows: Managed
Income Portfolio, -5.49%; Tax-Free Income Portfolio, -4.02%; Intermediate
Government Portfolio, -3.31%; Ohio Tax-Free Income Portfolio, -4.00%;
Pennsylvania Tax-Free Income Portfolio, -3.20%; Short-Term Bond Portfolio,
- -0.26%; Intermediate-Term Bond Portfolio, -3.80%; Value Equity Portfolio,
3.51%; Growth Equity Portfolio, -11.20%; Small Cap Growth Equity Portfolio,
- -3.12%; Core Equity Portfolio, 1.55%; Index Equity Portfolio, 2.78%; Small Cap
Value Equity Portfolio, 5.96%; International Equity Portfolio, 10.36%; and
Balanced Portfolio, -0.36%.
(ii) the average annual total return for Series A Investor Shares of the
Non-Money Market Portfolios for the year ended
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<PAGE> 161
September 30, 1994 was as follows: Managed Income Portfolio, -10.03%; Tax-Free
Income Portfolio, -8.48%; Intermediate Government Portfolio, -7.71%; Ohio
Tax-Free Income Portfolio, -8.27%; Pennsylvania Tax-Free Income Portfolio,
- -7.39%; Value Equity Portfolio, - 1.32%; Growth Equity Portfolio, -15.79%;
Small Cap Growth Equity Portfolio, -7.66%; Index Equity Portfolio, -1.96%;
Small Cap Value Equity Portfolio, 1.13%; International Equity Portfolio, 5.26%;
and Balanced Portfolio, -5.01%.
(iii) the average annual total return for Institutional Shares of the Non-Money
Market Portfolios for the year ended September 30, 1994 was as follows:
Managed Income Portfolio, -5.27%; Tax-Free Income Portfolio, -3.77%;
Intermediate Government Portfolio, -3.08%; Ohio Tax-Free Income Portfolio,
- -3.75%; Pennsylvania Tax-Free Income Portfolio, -2.96%; Short-Term Bond
Portfolio, -0.02%; Intermediate-Term Bond Portfolio, -3.52%; Value Equity
Portfolio, 3.76%; Growth Equity Portfolio, -11.14%; Small Cap Growth Equity
Portfolio, -2.89%; Core Equity Portfolio, 1.79%; Index Equity Portfolio, 3.07%;
Small Cap Value Equity Portfolio, 6.28%; International Equity Portfolio,
10.71%; and Balanced Portfolio, -0.11%.
(iv) the average annual total return for Service Shares of the Non-Money Market
Portfolios for the period from commencement of operations (July 28, 1993 for
the Growth Equity Portfolio; July 29, 1993 for each of the Managed Income,
Tax-Free Income, Intermediate Government, Ohio Tax-Free Income, Pennsylvania
Tax-Free Income, Value Equity, Index Equity, Small Cap Value Equity,
International Equity and Balanced Portfolios; September 1, 1993 for the
Short-Term Bond Portfolio; September 15, 1993 for each of the Small Cap Growth
Equity and Core Equity Portfolios; September 23, 1993 for the Intermediate-Term
Bond Portfolio; and June 17, 1994 for the International Emerging Markets
Portfolio) to September 30, 1994 was as follows: Managed Income Portfolio,
- -1.91%; Tax-Free Income Portfolio, 0.16%; Intermediate Government Portfolio,
- -0.92%; Ohio Tax-Free Income Portfolio, -0.40%; Pennsylvania Tax-Free Income
Portfolio, 0.06%; Short-Term Bond Portfolio, -0.05%; Intermediate-Term Bond
Portfolio, -3.53%; Value Equity Portfolio, 7.04%; Growth Equity Portfolio,
2.15%; Small Cap Growth Equity Portfolio, 1.76%; Core Equity Portfolio, 1.19%;
Index Equity Portfolio, 5.11%; Small Cap Value Equity Portfolio, 10.84%;
International Equity Portfolio, 14.31%; International Emerging Markets
Portfolio, 5.50%; and Balanced Portfolio, 2.79%.
(v) the average annual total return for Series A Investor Shares of the
Non-Money Market Portfolios for the period from commencement of operations (May
14, 1990 for each of the Tax-Free Income and Balanced Portfolios; February 5,
1992 for the Managed Income Portfolio; March 14, 1992 for the Growth Equity
Portfolio; May 2, 1992 for the Value Equity Portfolio; May 11, 1992 for the
Intermediate Government Portfolio; June 2, 1992 for each of the
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<PAGE> 162
Index Equity, Small Cap Value Equity and International Equity Portfolios;
December 1, 1992 for each of the Ohio Tax-Free Income and Pennsylvania Tax-Free
Income Portfolios; September 15, 1993 for the Small Cap Growth Equity
Portfolio; October 13, 1993 for the Core Equity Portfolio; November 17, 1993
for the Short-Term Bond Portfolio; May 20, 1994 for the Intermediate-Term Bond
Portfolio; and June 17, 1994 for the International Emerging Markets Portfolio)
to September 30, 1994 was as follows: Managed Income Portfolio, 3.26%;
Tax-Free Income Portfolio, 6.14%; Intermediate Government Portfolio, 1.92%;
Ohio Tax-Free Income Portfolio, 0.06%; Pennsylvania Tax-Free Income Portfolio,
1.86%; Short-Term Bond Portfolio, -4.92%; Intermediate-Term Bond Portfolio,
- -4.15%; Value Equity Portfolio, 7.73%; Growth Equity Portfolio, 0.98%; Small
Cap Growth Equity Portfolio, -2.84%; Core Equity Portfolio, -3.03%; Index
Equity Portfolio, 4.65%; Small Cap Value Equity Portfolio, 13.01%;
International Equity Portfolio, 10.16%; International Emerging Markets
Portfolio, 0.67%; and Balanced Portfolio, 7.90%.
(vi) the average annual total return for Institutional Shares of the Non-Money
Market Portfolios for the period from commencement of operations (November 1,
1989 for each of the Managed Income and Growth Equity Portfolios; April 13,
1992 for the Small Cap Value Equity Portfolio; April 20, 1992 for each of the
Intermediate Government, Value Equity and Index Equity Portfolios; April 27,
1992 for the International Equity Portfolio; May 1, 1992 for the Balanced
Portfolio; December 1, 1992 for each of the Ohio Tax-Free Income and
Pennsylvania Tax-Free Income 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; September 17, 1993 for the
Intermediate-Term Bond Portfolio; and June 17, 1994 for the International
Emerging Markets Portfolio) to September 30, 1994 was as follows: Managed
Income Portfolio, 7.31%; Tax-Free Income Portfolio, 3.86%; Intermediate
Government Portfolio, 4.35%; Ohio Tax-Free Income Portfolio, 2.66%;
Pennsylvania Tax-Free Income Portfolio, 4.27%; Short-Term Bond Portfolio,
0.22%; Intermediate-Term Bond Portfolio, -3.30%; Value Equity Portfolio, 9.54%;
Growth Equity Portfolio, 6.54%; Small Cap Growth Equity Portfolio, 1.60%; Core
Equity Portfolio, 1.42%; Index Equity Portfolio, 6.39%; Small Cap Value Equity
Portfolio, 14.81%; International Equity Portfolio, 15.03%; International
Emerging Markets Portfolio, 5.6%; and Balanced Portfolio, 7.40%.
No Series B Investor Shares of any Portfolio and no shares of any
class of the Government Income and International Fixed Income Portfolio had
been issued prior to September 30, 1994.
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
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<PAGE> 163
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:
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.
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<PAGE> 164
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 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
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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.
For the 30-day period ended September 30, 1994, the annualized yield
on Service Shares of the Portfolios referenced below was as follows: Managed
Income Portfolio, 6.66%; Tax-Free Income Portfolio, 5.18%; Intermediate
Government Portfolio, 6.69%; Ohio Tax-Free Income Portfolio, 5.88%;
Pennsylvania Tax-Free Income Portfolio, 5.55%; Short-Term Bond Portfolio,
5.60%; and Intermediate- Term Bond Portfolio, 6.29%. For the 30-day period
ended on September 30, 1994, the annualized yield on Series A Investor Shares
of the Portfolios referenced below was as follows: Managed Income Portfolio,
6.17%; Tax-Free Income Portfolio, 4.76%; Intermediate Government Portfolio,
6.38%; Ohio Tax-Free Income Portfolio, 5.83%; Pennsylvania Tax-Free Income
Portfolio, 5.13%; Short-Term Bond Portfolio, 5.34%; and Intermediate-Term Bond
Portfolio, 6.08%. For the 30-day period ended on September 30, 1994, the
annualized yield on Institutional Shares of the Portfolios referenced below was
as follows: Managed Income Portfolio, 6.91%; Tax-Free Income Portfolio, 5.44%;
Intermediate Government Portfolio, 6.95%; Ohio Tax-Free Income Portfolio,
6.11%; Pennsylvania Tax-Free Income Portfolio, 5.78%; Short-Term Bond
Portfolio, 5.75%; and Intermediate-Term Bond Portfolio, 6.55%.
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. For the 30-day
period ended on September 30, 1994, the annualized tax-equivalent yield on
Service Shares of the Portfolios referenced below was as follows (assuming a
Federal income tax rate of 28%): Tax-Free Income Portfolio, 7.19%; Ohio Tax-
Free Income Portfolio, 8.17%; and Pennsylvania Tax-Free
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Income Portfolio, 7.71%. For the 30-day period ended on September 30, 1994,
the annualized tax-equivalent yield on Series A Investor Shares of the
Portfolios referenced below was as follows (assuming a Federal income tax rate
of 28%): Tax-Free Income Portfolio, 6.61%; Ohio Tax-Free Income Portfolio,
8.10%; and Pennsylvania Tax-Free Income Portfolio, 7.13%. For the 30-day
period ended on September 30, 1994, the annualized tax-equivalent yield on
Institutional Shares of the Portfolios referenced below was as follows
(assuming a Federal income tax rate of 28%): Tax-Free Income Portfolio, 7.56%;
Ohio Tax-Free Income Portfolio, 8.49%; and Pennsylvania Tax-Free Income
Portfolio, 8.03%.
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 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.
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<PAGE> 167
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 and 5
show Pennsylvania, Ohio, North Carolina and Virginia 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, and the Virginia 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> 168
TABLE 1
<TABLE>
<CAPTION>
Federal TAX-EXEMPT YIELD
1995 Taxable Marginal
Income Bracket Tax Rate* 3.0 3.5 4.0 4.5 5.0 5.5 6.0
- ------------------------------------------------------------------------------------------------------------------------------
Single Return Joint Return
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - $23,350 $ 0 - $39,000 15.0% 3.529% 4.118% 4.706% 5.294% 5.882% 6.471% 7.059%
$23,351 - $56,550 $39,001 - $94,250 28.0% 4.167% 4.861% 5.556% 6.250% 6.944% 7.639% 8.333%
$56,551 -$117,950 $94,251 -$143,600 31.0% 4.348% 5.072% 5.797% 6.522% 7.246% 7.971% 8.696%
$117,951-$256,500 $143,601-$256,500 36.0% 4.688% 5.469% 6.250% 7.031% 7.812% 8.594% 9.375%
Over $256,500 Over $256,500 39.6% 4.967% 5.795% 6.623% 7.450% 8.278% 9.106% 9.934%
</TABLE>
*Rates do not include the phase out of personal exemptions or itemized
deductions. It is assumed that the investor is not subject to the alternative
minimum tax. Where applicable, investors should consider that the benefit of
certain itemized deductions and the benefit of personal exemptions are limited
in the case of higher income individuals. For 1995, taxpayers with adjusted
gross income in excess of a threshold amount of approximately $114,700 are
subject to an overall limitation on certain itemized deductions, requiring a
reduction in such deductions equal to the lesser of (i) 3% of adjusted gross
income in excess of the threshold of approximately $114,700 or (ii) 80% of the
amount of such itemized deductions otherwise allowable. The benefit of each
personal exemption is phased out at the rate of two percentage points for each
$2,500 (or fraction thereof) of adjusted gross income in the phase-out zone.
For single taxpayers the range of adjusted gross income comprising the
phase-out zone for 1995 is estimated to be from $114,700 to $237,201 and for
married taxpayers filing a joint return from $172,050 to $294,551. The Federal
tax brackets, the threshold amounts at which itemized deductions are subject to
reduction, and the range over which personal exemptions are phased out will be
further adjusted for inflation for each year after 1995.
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<PAGE> 169
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
- ----------------------------------------------------------------------------------------------------------------------------
Single Return Joint Return
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 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.
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<PAGE> 170
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% 5.0% 5.5% 6.0%
- -------------- -------- -------- ----------------- ---- ----- ----- ------ ------ ----- ------
Single Return Taxable Yield - Single Return
-------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 - 23,350 15.0% 2.549% 17.166% 3.622% 4.225% 4.829% 5.433% 6.036% 6.640% 7.243%
23,351 - 56,550 28.0% 4.828% 31.476% 4.378% 5.108% 5.837% 6.567% 7.297% 8.026% 8.756%
56,551 - 100,000 31.0% 5.543% 34.824% 4.603% 5.370% 6.137% 6.904% 7.672% 8.439% 9.206%
100,001 - 117,950 31.0% 6.900% 35.761% 4.670% 5.448% 6.227% 7.005% 7.783% 8.562% 9.340%
117,951 - 200,000 36.0% 6.900% 40.416% 5.035% 5.874% 6.713% 7.552% 8.392% 9.231% 10.070%
200,001 - 256,500 36.0% 7.500% 40.800% 5.068% 5.912% 6.757% 7.601% 8.446% 9.291% 10.135%
Over 256,500 39.6% 7.500% 44.130% 5.370% 6.265% 7.159% 8.054% 8.949% 9.844% 10.739%
</TABLE>
<TABLE>
<CAPTION>
Joint Return Taxable Yield - Joint Return
------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 - 39,000 15.0% 2.711% 17.304% 3.628% 4.232% 4.837% 5.442% 6.046% 6.651% 7.255%
39,001 - 94,250 28.0% 4.881% 31.514% 4.380% 5.111% 5.841% 6.571% 7.301% 8.031% 8.761%
94,251 - 100,000 31.0% 5.646% 34.896% 4.608% 5.376% 6.144% 6.912% 7.680% 8.448% 9.216%
100,001 - 143,600 31.0% 6.555% 35.523% 4.653% 5.428% 6.204% 6.979% 7.755% 8.530% 9.306%
143,601 - 200,000 36.0% 6.555% 40.195% 5.016% 5.852% 6.688% 7.524% 8.361% 9.197% 10.033%
200,001 - 219,900 36.0% 7.125% 40.560% 5.047% 5.888% 6.729% 7.571% 8.412% 9.253% 10.094%
219,901 - 256,500 36.0% 7.500% 40.800% 5.068% 5.912% 6.757% 7.601% 8.446% 9.291% 10.135%
Over 256,500 39.6% 7.500% 44.130% 5.370% 6.265% 7.159% 8.054% 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 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
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<PAGE> 171
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.
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<PAGE> 172
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% 4.5% 5.0% 5.5% 6.0%
- ------------- ------------ -------- -------- ------------------ ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <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% 5.632% 6.258% 6.884% 7.509%
12,751 - 23,350 21,251 - 39,000 15.0% 7.00% 20.950% 3.795% 4.428% 5.060% 5.693% 6.325% 6.958% 7.590%
23,351 - 56,550 39,001 - 94,250 28.0% 7.00% 33.040% 4.480% 5.227% 5.974% 6.720% 7.467% 8.214% 8.961%
56,551 - 60,000 94,251 -100,000 31.0% 7.00% 35.830% 4.675% 5.454% 6.233% 7.013% 7.792% 8.571% 9.350%
60,001 - 117,950 100,001 -143,600 31.0% 7.75% 36.348% 4.713% 5.499% 6.284% 7.070% 7.855% 8.641% 9.426%
117,951 - 256,500 143,601- 256,500 36.0% 7.75% 40.960% 5.081% 5.928% 6.775% 7.622% 8.469% 9.316% 10.163%
Over 256,500 Over 256,500 39.6% 7.75% 44.281% 5.384% 6.282% 7.179% 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.
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<PAGE> 173
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% 5.0% 5.5% 6.0%
- ------------- ------------ -------- -------- ------------------ ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <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% 6.241% 6.865% 7.489%
22,751 - 55,100 38,001 - 91,850 28.0% 5.75% 32.140% 4.421% 5.158% 5.894% 6.631% 7.368% 8.105% 8.842%
55,101 - 115,000 91,851 - 140,000 31.0% 5.75% 34.968% 4.613% 5.382% 6.151% 6.920% 7.688% 8.457% 9.226%
115,001 - 250,000 140,001 - 250,000 36.0% 5.75% 39.680% 4.973% 5.802% 6.631% 7.460% 8.289% 9.118% 9.947%
OVER 250,000 OVER 250,000 39.6% 5.75% 43.073% 5.270% 6.148% 7.027% 7.905% 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 $111,800 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 $118,800 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 $111,800 to $234,301 and for married taxpayers
filing a joint return 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 1995.
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<PAGE> 174
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 Portfolio's adviser and/or sub-adviser
as to current market, economy, trade and interest rate trends, legislative,
regulatory and monetary developments, investment strategies and related matters
believed to be of relevance to 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.
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<PAGE> 175
TAXES
The following is only a summary of certain additional tax
considerations generally affecting the Portfolios and their 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
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<PAGE> 176
other disposition of such security held for less than three months for purposes
of the Short-Short Gain Test. However, any other income that is attributable
to realized market appreciation will be treated as gross income from the sale
or other disposition of securities for this purpose.
In addition to the foregoing requirements, at the close of each
quarter of its taxable year, at least 50% of the value of 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
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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 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 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 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
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to such taxes if paid in the normal course by the issuer of such defaulted
Obligations.
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.
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Ordinary income of individuals will be taxable at a maximum nominal
rate of 39.6%, but because of limitations on itemized deductions otherwise
allowable and the phase-out of personal exemptions, the maximum effective
marginal rate of tax for some taxpayers may be higher. An individual's
long-term capital gains will be taxable at a maximum rate of 28%. Capital
gains and ordinary income of corporate taxpayers are both taxed at a maximum
nominal rate of 35%, but at marginal rates of 39% for taxable income between
$100,000 and $335,000 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
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the foregoing) to elect either (1) to offset gains or losses from portions
which are part of a mixed straddle by separately identifying each mixed
straddle to which such treatment applies, or (2) to establish a mixed straddle
account for which gains and losses would be recognized and offset on a periodic
basis during the taxable year. Under either election, the 40-60 rule will
apply to the net gain or loss attributable to the futures contracts, but in the
case of a mixed straddle account election, not more than 50% of any net gain
may be treated as long-term and no more than 40% of any net loss may be treated
as short-term. Options on futures contracts generally receive Federal tax
treatment similar to that described above.
Under the Federal income tax provisions applicable to regulated
investment companies, less than 30% of a company's gross income for a taxable
year must be derived from gains realized on the sale or other disposition of
securities held for less than three months. The Internal Revenue Service has
issued a private letter ruling with respect to certain other investment
companies to the following effect: gains realized from a futures contract to
purchase or to sell will be treated as being derived from a security held for
three months or more regardless of the actual period for which the contract is
held if the gain arises as a result of a constructive sale of the contract at
the end of the taxable year as described above, and will be treated as being
derived from a security held for less than three months only if the contract is
terminated (or transferred) during the taxable year (other than by reason of
mark-to-market) and less than three months elapses between the date the
contract is acquired and the termination date. Although private letter rulings
are not binding on the Internal Revenue Service with respect to the 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,
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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 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
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in the creation of one or more straddles for Federal income tax purposes, in
which case certain loss deferral, short sales, and 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
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located or in which it is otherwise deemed to be conducting business, each
Portfolio may be subject to the tax laws of such states or localities.
Shareholders should consult their tax advisors about state and local tax
consequences, which may differ from the Federal income tax consequences
described above.
ADDITIONAL INFORMATION CONCERNING SHARES
Shares of the Fund have noncumulative voting rights and, accordingly,
the holders of more than 50% of the Fund's outstanding shares (irrespective of
class) may elect all of the trustees. Shares have no preemptive rights and
only such conversion and exchange rights as the Board may grant in its
discretion. When issued for payment as described in the Prospectus, shares
will be fully paid and non-assessable by the Fund.
There will normally be no meetings of shareholders for the purpose of
electing trustees unless and until such time as required by law. At that time,
the trustees then in office will call a shareholders' meeting to elect
trustees. Except as set forth above, the trustees shall continue to hold
office and may appoint successor trustees. The Fund's Declaration of Trust
provides that meetings of the shareholders of the Fund shall be called by the
trustees upon the written request of shareholders owning at least 10% of the
outstanding shares entitled to vote.
The Funds' Declaration of Trust authorizes the Board of Trustees,
without shareholder approval (unless otherwise required by applicable law), to:
(i) sell and convey the assets belonging to a class of shares to another
management investment company for consideration which may include securities
issued by the purchaser and, in connection therewith, to cause all outstanding
shares of such class to be redeemed at a price which is equal to their net
asset value and which may be paid in cash or by distribution of the securities
or other consideration received from the sale and conveyance; (ii) sell and
convert the assets belonging to one or more classes of shares into money and,
in connection therewith, to cause all outstanding shares of such class to be
redeemed at their net asset value; or (iii) combine the assets belonging to a
class of shares with the assets belonging to one or more other classes of
shares if the Board of Trustees reasonably determines that such combination
will not have a material adverse effect on the shareholders of any class
participating in such combination and, in connection therewith, to cause all
outstanding shares of any such class to be redeemed or converted into shares of
another class of shares at their net asset value. However, the exercise of
such authority may be subject to certain restrictions under the 1940 Act. The
Board of Trustees may authorize the termination of any class of shares
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after the assets belonging to such class have been distributed to its
shareholders.
MISCELLANEOUS
COUNSEL. The law firm of Drinker Biddle & Reath, PNB Building, 1345
Chestnut Street, Philadelphia, Pennsylvania 19107- 3496, serves as the Fund's
counsel.
INDEPENDENT ACCOUNTANTS. Coopers & Lybrand, 2400 Eleven Penn Center,
Philadelphia, Pennsylvania 19103, serves as the Fund's independent accountants.
FIVE PERCENT OWNERS. The name, address and percentage ownership of
each person that owned of record or beneficially on January 4, 1995 5% or more
of the outstanding shares of a Portfolio which had commenced operations as of
that date was as follows: Money Market, PNC Bank, 200 Stevens Drive, Lester, PA
19113 - 84.5%, BHC Securities Inc., 2005 Market Street, One Commerce Square,
Philadelphia, PA 19103 - 5.3%, PNC Bank, OH, 201 East Fifth Street, Cincinnati,
OH 45202 - 7.1%; Government Money Market, PNC Bank, 200 Stevens Drive, Lester,
PA 19113 - 68.7%, PNC Securities Corp, Fifth Avenue & Wood Street, Pittsburgh,
PA 15265 - 6.7%, PNC Bank Pittsburgh, 960 Ft. Duquesne Blvd., Pittsburgh, PA
15222 - 5.1%, PNC Bank, NW, P.O. Box 8480, Erie, PA 16553 - 5.9%; Municipal
Money Market, PNC Bank, Saxon & Co., 200 Stevens Drive, Lester, PA 19113 -
61.8%, PNC Bank, OH, 201 E. Fifth Street, Cincinnati, OH 45202 - 17.7%, PNC
Bank Pittsburgh, 960 Ft. Duquesne Blvd., Pittsburgh, PA 15222 - 6.4%; Growth
Equity, PNC Bank, 200 Stevens Drive, Lester, PA 19113 - 96.1%; Balanced, PNC
Bank, 200 Stevens Drive, Lester, PA 19113 - 57.2%, BHC Securities, 100 N. 20th
Street, Philadelphia, PA 19103 - 27.4%; Managed Income, PNC Bank, 200 Stevens
Drive, Lester, PA 19113 - 91.3%; International Equity, PNC Bank, 200 Stevens
Drive, Lester, PA 19113 - 91.1%; Tax-Free Income, PNC Bank, 200 Stevens Drive,
Lester, PA 19113 - 27.8%, BHC Securities, 100 N. 20th Street, Philadelphia, PA
19103 - 17.7%; Ohio Municipal Money Market, PNC Bank, 200 Stevens Drive,
Lester, PA 19113 - 56.0%, BHC Securities, 2005 Market Street, One Commerce
Square, Philadelphia, PA 19103 - 22.3%, Consolidated Stores Corp, 300 Phillips
Road, Columbus, OH 43228 - 9.7%, Wayne County National Bank, P.O. Box 550,
Wooster, OH 44691 - 6.9%; Pennsylvania Municipal Money Market, PNC Bank, 200
Stevens Drive, Lester, PA 19113 - 87.5%, BHC Securities, 2005 Market Street,
One Commerce Square, Philadelphia, PA 19103 - 5.3%; Intermediate Government,
PNC Bank, 200 Stevens Drive, Lester, PA 19113 - 92.1%; OH Tax-Free Income, PNC
Bank, 200 Stevens Drive, Lester, PA 19113 - 57.6%, BHC Securities, 100 N. 20th
Street, Philadelphia, PA 19103 - 30.3%; Pennsylvania Tax-Free Income, PNC Bank,
200 Stevens Drive, Lester, PA 19113 - 21.1%, BHC Securities, 100 N. 20th
Street, Philadelphia, PA 19103 - 51.1%; Value Equity, PNC Bank,
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200 Stevens Drive, Lester, PA 19113 - 90.5%; Index Equity, PNC Bank, 200
Stevens Drive, Lester, PA 19113 - 96.7%; Small Cap Value Equity, PNC Bank, 200
Stevens Drive, Lester, PA 19113 - 85.3%, BHC Securities, 100 N. 20th Street,
Philadelphia, PA 19103 - 5.4%; North Carolina Municipal Money Market, Southern
National Bank, P.O. Box 1489, Lumberton, NC 28358 - 5.2%, Centura Bank, P.O.
Box 1220, Rocky Mount, NC 27802 - 8.3%, United Carolina Bank, P.O. Drawer 632,
Whiteville, NC 28472 - 21%, First Charter National Bank, P.O. Box 228, Concord,
NC 28025 - 9.7%, First Citizens Bank, Cotton Building, 4505 Creedmoor Road,
Raleigh, NC 27612 - 12.4%, North Carolina Trust Company, 301 N. Elm Street,
P.O. Box 1108, Greensboro, NC 27402, Calo Corporation c/o Smith Barney, 100
Tryon Street, Suite 3300, Charlotte, NC 28202; Short-Term Bond, PNC Bank, 200
Stevens Drive, Lester, PA 19113 - 89.7%, Medical Practice Account, 1020 Walnut
Street, Philadelphia, PA 19107 - 9.0%; Intermediate-Term Bond, PNC Bank, 200
Stevens Drive, Lester, PA 19113 - 99.7%; Small Cap Growth Equity, PNC Bank, 200
Stevens Drive, Lester, PA 19113 - 92.9%; Core Equity, PNC Bank, 200 Stevens
Drive, Lester, PA 19113 - 97.9%; Virginia Municipal Money Market, Oldom & Co.,
First Virginia Bank Inc., 6400 Arlington Blvd., Falls Church, VA 22042 - 96.3%;
and International Emerging Markets, PNC Bank, 200 Stevens Drive, Lester, PA
19113 - 77.7%, PNC Securities, 100 N. 20th Street, Philadelphia, PA 19103 -
20.1%.
On January 4, 1995, PNC Bank held of record approximately 80% of the
Fund's outstanding shares, and may be deemed a controlling person of the Fund
under the 1940 Act. PNC Bank is a national bank organized under the laws of
the United States. All of the capital stock of PNC Bank is owned by PNC
Bancorp, Inc. All of the capital stock of PNC Bancorp, Inc. is owned by PNC
Bank Corp., a publicly-held bank holding company.
BANKING LAWS. Banking laws and regulations currently prohibit a bank
holding company registered under the Federal Bank Holding Company Act of 1956
or any bank or non-bank affiliate thereof from sponsoring, organizing,
controlling or distributing the shares of a registered, open-end investment
company continuously engaged in the issuance of its shares, and prohibit banks
generally from underwriting securities, but such banking laws and regulations
do not prohibit such a holding company or affiliate or banks generally from
acting as investment adviser, administrator, transfer agent or custodian to
such an investment company, or from purchasing shares of such a company as
agent for and upon the order of customers. PIMC, PNC Bank Ohio, PCM and PNC
Bank are subject to such banking laws and regulations.
PIMC, PNC Bank Ohio, PCM 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
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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 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") accompanies this Statement of
Additional Information. The financial statements and notes thereto in the 1994
Annual Report are incorporated in this Statement of Additional Information by
reference. The financial statements included in the 1994 Annual Report have
been examined by the Fund's independent accountants, Coopers & Lybrand, L.L.P.,
whose reports 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
Fund's 1994 Annual Report may be obtained at no charge by telephoning the
Distributor at the telephone number appearing on the front page of this
Statement of Additional Information.
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APPENDIX A
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current
assessment of the likelihood of timely payment of debt considered short-term in
the relevant market. The following summarizes the rating categories used by
Standard and Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory.
However, the relative degree of safety is not as high as for issues designated
"A-1."
"A-3" - Issue has an adequate capacity for timely payment. It
is, however, somewhat more vulnerable to the adverse effects of changes and
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are
considered to have a superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity will normally be evidenced by the
following characteristics: leading market positions in well established
industries; high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad
margins in earning coverage of fixed financial charges and high internal cash
generation; and well established access to a range of financial markets and
assured sources of alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are
considered to have a strong capacity for repayment of short-
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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 "Duff 1," "Duff 2" and "Duff 3."
Duff & Phelps employs three designations, "Duff 1+," "Duff 1" and "Duff 1-,"
within the highest rating category. The following summarizes the rating
categories used by Duff & Phelps for commercial paper:
"Duff 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.
"Duff 1" - Debt possesses very high certainty of timely
payment. Liquidity factors are excellent and supported by good fundamental
protection factors. Risk factors are minor.
"Duff 1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"Duff 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.
"Duff 3" - Debt possesses satisfactory liquidity, and other
protection factors qualify issue as investment grade. Risk factors are larger
and subject to more variation. Nevertheless, timely payment is expected.
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"Duff 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.
"Duff 5" - Issuer has failed to meet scheduled principal
and/or interest payments.
Fitch short-term ratings apply to debt obligations that are
payable on demand or have original maturities of up to three years. The
following summarizes the rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit
quality. Issues assigned this rating are regarded as having the strongest
degree of assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues
assigned this rating have a satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as the "F-1+" and "F-1"
categories.
"F-3" - Securities possess fair credit quality. Issues
assigned this rating have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues
assigned this rating have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term
ratings to indicate that the rating is based upon a letter of credit issued by
a commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of
an untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one year or less which is issued by United
States commercial banks, thrifts and non-bank banks; non-United States banks;
and broker-
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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 are supported by the highest capacity for
timely repayment. Where issues possess a particularly strong credit feature, a
rating of A1+ is assigned.
"A2" - Obligations are supported by a good capacity for timely
repayment.
"A3" - Obligations are supported by a satisfactory capacity
for timely repayment.
"B" - Obligations for which there is an uncertainty as to the
capacity to ensure timely repayment.
"C" - Obligations for which there is a high risk of default or
which are currently in default.
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CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's
for corporate and municipal debt:
"AAA" - This designation represents the highest rating
assigned by Standard & Poor's to a debt obligation and indicates an extremely
strong capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to
pay interest and repay principal and differs from AAA issues only in small
degree.
"A" - Debt is considered to have a strong capacity to pay
interest and repay principal although such issues are somewhat more susceptible
to the adverse effects of changes in circumstances and economic conditions than
debt in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The
"BB" rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
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"CCC" - Debt has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The "CCC"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated
to senior debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no
interest is being paid.
"D" - Debt is in payment default. This rating is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S & P believes such
payments will be made during such grace period. "D" rating is also used upon
the filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid,
and certain other obligations that S & P believes may experience high
volatility or high variability in expected returns due to non-credit risks.
Examples of such obligations are: securities whose principal or interest return
is indexed to equities, commodities, or currencies; certain swaps and options;
and interest only and principal only mortgage securities.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
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"Aa" - Bonds are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in "Aaa" securities or fluctuation
of protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than in
"Aaa" securities.
"A" - Bonds possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be
in default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which
some other limiting condition attaches. Parenthetical rating denotes probable
credit stature upon completion of construction or elimination of basis of
condition.
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" to "B" in its bond rating system. The modifier 1
indicates that the issuer ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issuer ranks at the lower end of its generic rating
category.
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The following summarizes the long-term debt ratings used by
Duff & Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but
such protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when
due. Debt rated "B" possesses the risk that obligations will not be met when
due. Debt rated "CCC" is well below investment grade and has considerable
uncertainty as to timely payment of principal, interest or preferred dividends.
Debt rated "DD" is a defaulted debt obligation, and the rating "DP" represents
preferred stock with dividend arrearages.
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major
categories.
The following summarizes the highest four ratings used by
Fitch for corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
"AA" - Bonds considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated "AAA." Because
bonds rated in the "AAA" and "AA" categories are not significantly vulnerable
to foreseeable future developments, short-term debt of these issuers is
generally rated "F-1+."
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"A" - Bonds considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Bonds that
possess one of these ratings are considered by Fitch to be speculative
investments. The ratings "BB" to "C" represent Fitch's assessment of the
likelihood of timely payment of principal and interest in accordance with the
terms of obligation for bond issues not in default. For defaulted bonds, the
rating "DDD" to "D" is an assessment of the ultimate recovery value through
reorganization or liquidation.
To provide more detailed indications of credit quality, the
Fitch ratings from and including "AA" to "C" may be modified by the addition of
a plus (+) or minus (-) sign to show relative standing within these major
rating categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
"A" - Obligations for which there is a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business,
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<PAGE> 196
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 very high.
"AA" - This designation indicates a superior ability to repay
principal and interest on a timely basis with limited incremental risk versus
issues rated in the highest category.
"A" - This designation indicates that the ability to repay
principal and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned
by Thomson BankWatch to non-investment grade long- term
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<PAGE> 197
debt. Such issues are regarded as having speculative characteristics regarding
the likelihood of timely payment of principal and interest. "BB" indicates the
lowest degree of speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC"
may include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
MUNICIPAL NOTE RATINGS
A Standard and Poor's rating reflects the liquidity concerns
and market access risks unique to notes due in three years or less. The
following summarizes the ratings used by Standard & Poor's Ratings Group for
municipal notes:
"SP-1" - The issuers of these municipal notes exhibit very
strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics are given a plus (+)
designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit
speculative capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable Moody's Investment Grade
("VMIG"). Such ratings recognize the differences between short-term credit
risk and long-term risk. The following summarizes the ratings by Moody's
Investors Service, Inc. for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the
best quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high
quality, with margins of protection ample although not so large as in the
preceding group.
"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.
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<PAGE> 198
Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of
adequate quality, carrying specific risk but having protection commonly
regarded as required of an investment security and not distinctly or
predominantly speculative.
"SG" - Loans bearing this designation are of speculative
quality and lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
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<PAGE> 199
APPENDIX B
THE FOLLOWING INFORMATION HAS BEEN PROVIDED TO THE FUND BY THE
DISTRIBUTOR.
Why the PNC Family of Funds?
The PNC Funds are guided by money managers whose philosophy and
discipline come with the 148-year tradition in money management of PNC
Bank Corp. and its affiliates. PNC Bank Corp. is one of the largest
banking institutions in the country, has a strong capital position,
and oversees assets of more than $170 billion as America's sixth
largest bank money manager.
Because of this size, depth and breadth of experience, the PNC Family
of Funds can offer portfolios guided by a variety of investment
philosophies -- from indexing to value to growth -- to help investors
with their goals.
For years, money managers in the PNC Bank Corp. Family have been the
investment advisor/manager for dozens of the world's major
institutions.
- - In 1993, more than 1,200 corporate investors turned to members
of the PNC Bank Corp. Family for the expertise they needed to
earn investment income in international markets.
- - During 1993, some of the world's largest investors turned to
members of the PNC Bank Corp. Family to help them earn
tax-exempt income on over $4 billion of assets.
- - In 1993, some of America's leading companies turned to members
of the PNC Bank Corp. Family to help them manage over $4
billion in employee retirement plans.
NOW THIS EXPERTISE IS AVAILABLE TO INDIVIDUAL INVESTORS.
Each PNC Fund portfolio focuses on specific client needs -- income,
growth, risk tolerance, tax bracket. Every portfolio is managed with
a sophisticated blend of discipline, experience and expertise.
In managing PNC Fund portfolios, the money managers utilize a
philosophy of "optimizing rather than maximizing." PNC Fund money
managers understand the risks of securities investments and believe
their philosophy helps to avoid taking unnecessary risks with
customers' money. Instead, PNC Fund money managers aim for
consistency and above-average results year in and year out.
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<PAGE> 200
MESSAGE FROM THE DISTRIBUTOR
Individuals have many financial goals. Some are more immediate, like higher
current income, tax savings or buying a new home. And others are long-term
goals, such as saving for retirement or funding a college education. To meet
these goals, individuals must invest their money. And when investing, an
individual's goals and needs must be balanced with his or her desire and
ability to accept risk to the money invested. All of which is why PNC Funds
offers a wide choice of portfolios that focus on a variety of specific
investing needs.
WHY INVEST
While the past is no guarantee of future results, stocks, and in particular
small-capitalization stocks, have provided a better opportunity for real growth
over time than other types of investments.
THE REAL VALUE OF $1 INVESTED IN 1925
[FIGURE 1]
[chart depicting the value of $1.00 invested in 1925 in small cap stocks,
Treasury bonds and Treasury bills, respectively, through 12/31/93, as compared
with S & P 500 index]
- --------------------
An investment in a small cap equity portfolio is subject to risks
associated with small cap stocks.
Past performance is no guarantee of future results. There can be no
guarantee that the portfolio's performance will match that of any index.
The S&P 500 Index is composed of 500 commons stocks chosen on the
basis of market value and industry diversification. While most issuers are
among the largest in terms of aggregate market value, some other stocks
are included for purposes of diversification. There can be no guarantee that
the portfolio's performance will match that of any index.
<PAGE> 201
The downside to stocks is their inherent risk of price volatility, especially
when compared to fixed-income investments such as bonds and money market
instruments. In general, the potential for higher returns is always
accompanied by the potential for wider price fluctuations. For example, while
the stocks of small U. S. companies have provided high returns, the volatility
of these stocks has also been very high.
RANGE OF ANNUAL RETURNS (1926 - 93)
[FIGURE 2]
[graph depicting range of annual returns from 1926-1993 with respect to
investments in small cap stocks, long-term Treasury bonds and Treasury bills,
respectively, as compared with the S & P 500 Index]
- --------------------
An investment in a small cap equity portfolio is subject to risks
associated with small cap stocks.
Past performance is no guarantee of future results. There can be no
guarantee that the portfolio's performance will match that of any index.
The S&P 500 Index is composed of 500 commons stocks chosen on the basis
of market value and industry diversification. While most issuers are among the
largest in terms of aggregate market value, some other stocks are included for
purposes of diversification. There can be no guarantee that the portfolio's
performance will match that of any index.
<PAGE> 202
There are a number of ways to manage risk in an attempt to dampen this
volatility. One comes simply from time. When returns are measured in five and
ten-year increments, the volatility of various investments has been less.
RANGE OF 5-YEAR RETURNS (1930-93)
[FIGURE 3]
[graph depicting range of 5-year returns from 1930 through 1993 with respect to
investments in small cap stocks, long-term Treasury bonds and Treasury bills,
respectively, as compared with the S & P 500 Index]
RANGE OF 10-YEAR RETURNS (1930-93)
[FIGURE 4]
[graph depicting range of 10-year returns from 1930 through 1993 with respect
to investments in small cap stocks, long-term Treasury bonds and Treasury
bills, respectively, as compared with the S & P 500 Index]
- --------------------
An investment in a small cap equity portfolio is subject to risks
associated with small cap stocks.
Past performance is no guarantee of future results. There can be no
guarantee that the portfolio's performance will match that of any 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
largest in terms of aggregate market value, some other stocks are included for
purposes of diversification. There can be no guarantee that the portfolio's
performance will match that of any index.
<PAGE> 203
Another way to address volatility is through asset diversification. For
example, by diversifying assets in stocks and fixed income securities --
such as bonds and money market instruments, a balanced portfolio can help
reduce the risk of volatility that comes with investing in stocks alone. A
balanced portfolio offers the potential for both regular income payments and
growth over time. So more risk-adverse investors don't have to choose between
income and growth to help them achieve their goals.
STOCK AND BOND DIVERSIFICATION (1925-93)
[FIGURE 5]
[graph depicting the volatility of 5-year returns (on a continuum) from 1925
through 1993 for investment portfolios with a broad range of diversifications
as between stocks and bonds]
- ---------------------
Past performance is no guarantee of future results. There can be no
guarantee that the portfolio's performance will match that of any index.
The potential return on an investment is only one of many
considerations to be made when deciding how to invest. Other considerations
include your investment objective, need for liquidity, comfort with volatility
and preference for certain tax features.
<PAGE> 204
While an investor's focus on yield and income often excludes opportunities to
grow principal through stocks, it may also cause him or her to overlook
the effects of inflation. As the first chart below shows, $10,000 in June 1984
would buy just $7,002 worth of goods and services in June 1994. The challenge
to investors seeking income to meet their expenses of today and tomorrow is
finding investments that provide sufficient income as their expenses rise with
inflation.
INFLATION ERODES THE VALUE OF YOUR MONEY
CHANGES IN THE COST OF LIVING - JUNE, 1984 TO JUNE, 1994
[FIGURE 6]
[graph illustrating changes in the cost of living from 6/84 through 6/94 based
on the Consumer Price Index]
- ---------------------
Past performance is no guarantee of future results. There can be no
guarantee that the portfolio's performance will match that of any index.
The potential return on an investment is only one of many
considerations to be made when deciding how to invest. Other considerations
include your investment objective, need for liquidity, comfort with volatility
and preference for certain tax features.
<PAGE> 205
[FIGURE 7]
[graph depicting the spread between the 10-year U.S. Treasury bond and the
Consumer Price Index from July 1989 through September 1994 (average spread: 348
bases points)]
- ---------------------
Past performance is no guarantee of future results. There can be no
guarantee that the portfolio's performance will match that of any index.
The potential return on an investment is only one of many
considerations to be made when deciding how to invest. Other considerations
include your investment objective, need for liquidity, comfort with volatility
and preference for certain tax features.
<PAGE> 206
Investors should recognize that fixed-income securities are also subject to
risk, including volatility. In general, the longer the term of the security,
the greater the range of returns and the higher the volatility.
[FIGURE 8]
[graph illustrating the comparative returns associated with Long-Term
Government Bonds, Intermediate-Term Government Bonds and The 30-day Treasury
bill, respectively, from December 1979 through December 1993, as compared with
the U.S. inflation rate]
- ---------------------
Past performance is no guarantee of future results. There can be no
guarantee that the portfolio's performance will match that of any index.
The potential return on an investment is only one of many
considerations to be made when deciding how to invest. Other considerations
include your investment objective, need for liquidity, comfort with volatility
and preference for certain tax features.
<PAGE> 207
RANGE OF ANNUAL RETURNS FOR DIFFERENT BOND CLASSES (1926-93)
[FIGURE 9]
[graph depicting the range of annual returns from 1926 through 1993 of
long-term corporate bonds, long-term government bonds, intermediate-term
government bonds and Treasury bills, respectively]
- ---------------------
Past performance is no guarantee of future results. There can be no
guarantee that the portfolio's performance will match that of any index.
The potential return on an investment is only one of many
considerations to be made when deciding how to invest. Other considerations
include your investment objective, need for liquidity, comfort with volatility
and preference for certain tax features.
<PAGE> 208
For investors seeking to maximize long-term capital appreciation, and who are
comfortable with the risks associated with investing in non-U. S.
securities markets, the stocks of companies in industrialized countries or
companies in "emerging markets" or both, may be an alternative. These stocks
also provide an added element of diversification.
INTERNATIONAL EQUITY INVESTMENTS IN 1993
$159.2 BILLION INVESTED ACROSS BORDERS WORLDWIDE IN 1993
[FIGURE 10]
[pie chart illustrating the amounts invested across borders worldwide in 1993
(USA - 19%, Japan - 13%, Europe - 35% and Emerging Markets - 33%)]
- --------------------
An investment in an international equity portfolio is subject to risks
including currency and political changes.
<PAGE> 209
GROWTH AND DISTRIBUTION OF WORLD EQUITY MARKETS
[FIGURE 11]
[2 pie charts illustrating total capitalization of world equity markets in 1970
and 1993, respectively]
INTERNATIONAL EQUITY DIVERSIFICATION (1970 - 94)
[FIGURE 12]
[graph depicting the volatility and total returns (on a continuum) from 1970
through 1994 for investment portfolios with a broad range of diversifications as
between U.S. stocks and non - U.S. stocks]
- --------------------
An investment in an international equity portfolio is subject to risks
including currency and political changes.
The potential return on an investment is only one of many
considerations to be made when deciding how to invest. Other considerations
include your investment objective, need for liquidity, comfort with
volatility and preference for certain tax features.
<PAGE> 210
While the past is no guarantee of future results, non-U. S. stocks have
provided a better opportunity for real growth in recent years than U. S.
stocks. When investing in equities abroad, however, the potential for higher
returns is accompanied by the potential for higher volatility resulting
from risk factors such as government stability, economic policies and currency
exchange. And while a number of factors seem to favor continued economic
growth in emerging markets - low labor costs, regional trade agreements, and
significant growth of capitalization and in the size of their securities
markets - investors should consider investing only a portion of their total
portfolio in an emerging market's equities.
THE GROWTH OF INTERNATIONAL STOCKS
GROWTH OF $100 INVESTMENT: DECEMBER 31, 1971 - JUNE 30, 1994
[FIGURE 13]
[graph depicting the growth from 12/31/71 through 6/30/94 of a $100 investment
in international stocks, U.S. stocks, 20-year Treasury bonds, and 30-day
Treasury bills, respectively, as compared with the Consumer Price Index]
- --------------------
Past performance is no guarantee of future results. There can be no
guarantee that the portfolio's performance will match that of any 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 largest in terms of aggregate market value, some other stocks
are included for purposes of diversification. There can be no guarantee that
the portfolio's performance will match that of any index.
An investment in an international equity portfolio is subject to risks
including currency and political changes.
The potential return on an investment is only one of many
considerations to be made when deciding how to invest. Other considerations
include your investment objective, need for liquidity, comfort with
volatility and preference for certain tax features.
<PAGE> 211
THE PNC FUNDS PHILOSOPHY -- DISCIPLINE, NOT DARING
The PNC Funds portfolio advisors have a long-term view and a global
perspective. They believe that successful investing comes from the practice of
patience, discipline and diversification.
Patience is necessary, because true growth and higher real returns take time
and can only be achieved over a number of years. Discipline is critical,
especially in volatile markets, because portfolio managers cannot shift
investments on a whim. The PNC Funds managers use their training and
experience, comprehensive and ongoing screening, and rigorous qualitative and
quantitative analysis in making their decisions - from deciding what and when
to buy to setting goals and determining when to sell. And diversification is a
key tool for the portfolio advisors in both managing risk and enhancing
return.
The PNC Funds managers are guided by a philosophy of "discipline, not daring."
In seeking to achieve the investment objective of each portfolio, they use a
variety of investment styles - including indexing, core, balanced, value and
growth -- while adhering to a highly disciplined investment process. For
instance:
- The managers believe that the key to the performance of PNC
Funds equity portfolios using a "value" approach is
identifying today which stocks have the potential for large
price increases tomorrow. The managers use a step by step
process which --
- first, reduces a universe of securities by screening
for those with a market capitalization that best
suits the objectives of the portfolio;
- second, further refines the list of securities by
concentrating on the stocks that fall into the lowest
two price-to-earnings ratio (P/E) quintiles;
- third, subjects the refined list to rigorous relative
value screening, and narrows the field again using
quantitative value characteristics such as
price-to-cash flow ratio, price-to-book value
ratio, dividend yield and favorable balance sheets;
and
- fourth, employs rigorous quantitative and qualitative
analysis in an effort to verify financial stability
and strength, earnings quality and the ability
of the company to sustain the earnings, and the
impact of events in the industry and the general
economy on the corporate profitability. This step
often includes contact with company management, and
researching any indication of investor disfavor.
This process is comprehensive and ongoing, and
provides assistance in seeking to manage the risk
level of the portfolio's investments.
Only after thorough screening and analysis are the portfolio
managers ready to select the individual stocks to include in
the portfolio. Diversification between sectors and weightings
are considerations, as are countries in the case of
international portfolios, although the qualifications of an
individual stock is the primary concentration. As a stock
progresses upwards in its P/E ratio, its future value to the
portfolio is reduced. When it reaches a predetermined target
price or fundamental value characteristics deteriorate, a
stock is considered for sale from the portfolio.
<PAGE> 212
- The managers believe that the key to the performance of the
PNC Funds Balanced Portfolio is not necessarily minimizing
risk alone, but in seeking to obtain an optimal trade-off
between risk and reward. In allocating the portfolio's assets
between fixed-income and equity securities, the managers seek
an appropriate balance between increased volatility and
increased return to obtain an optimal risk-adjusted return.
- The fixed-income portion of the PNC Balanced
Portfolio is a diversified portfolio of
investment-grade securities, primarily composed of
bonds and money market instruments. In managing the
current income, maturity and credit risk of these
securities, the managers seek to achieve the
portfolio's objectives through duration management,
sector allocation, yield curve positioning and issue
selection. Important factors used by the managers in
determining the portfolio's posture include economic
forecasts, Federal Reserve policy, credit trends and
research, relative value and supply and demand
analysis, yield curve and volatility trends and
industry and corporate fundamentals.
- The equity portion of the PNC Balanced Portfolio is a
diversified portfolio of large capitalization stocks.
The broad diversification in these large company
stocks results not only from the industries and
sectors selected, but from the blended investment
strategy used by the managers. The portfolio includes
stocks that offer good relative value and growth
potential, stocks that are undervalued -- their price
is low in relation to current earnings (low P/E), and
stocks which are experiencing very rapid growth.
- The managers believe that the key to the performance of PNC
Funds fixed-income portfolios is to actively manage the
current income, maturity and credit risk of the portfolios'
securities as they seek to achieve a high level of monthly
income and moderate volatility. In seeking the objectives of
the portfolios, the managers are guided by four fundamental
principles:
- controlled duration -- or expected price sensitivity
relative to interest rate changes -- within a narrow
band relative to a benchmark index;
- relative value sector rotation and security selection;
- a rigorous quantitative approach to the valuation of
each security and of the portfolio as a whole; and
- a strong credit quality bias.
