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COMPASS CAPITAL FUNDS(R)
(FORMERLY, 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, U.S. Treasury Money Market (formerly, the Government
Money Market Portfolio), Ohio Municipal Money Market, Pennsylvania Municipal
Money Market, North Carolina Municipal Money Market, Virginia Municipal Money
Market, New Jersey Municipal Money Market, Value Equity, Growth Equity, Index
Equity, Small Cap Value Equity, International Equity, International Emerging
Markets, Balanced, Small Cap Growth Equity, Select Equity (formerly, the Core
Equity Portfolio), Managed Income, Tax-Free Income, Intermediate Government Bond
(formerly, the Intermediate Government Portfolio), Ohio Tax-Free Income,
Pennsylvania Tax-Free Income, Short Government Bond (formerly, the Short-Term
Bond Portfolio), Intermediate Bond (formerly, the Intermediate-Term Bond
Portfolio), Government Income, International Bond (formerly, the International
Fixed Income Portfolio), New Jersey Tax-Free Income and Core Bond Portfolios
(collectively, the "Portfolios") of Compass Capital Funds (the "Fund"). The
Money Market, Municipal Money Market, U.S. Treasury Money Market, Ohio Municipal
Money Market, Pennsylvania Municipal Money Market, North Carolina Municipal
Money Market, Virginia Municipal Money Market and New Jersey Municipal Money
Market Portfolios are hereinafter collectively called "Money Market Portfolios,"
and the other Portfolios are hereinafter collectively called "Non-Money Market
Portfolios." This Statement of Additional Information is not a prospectus, and
should be read only in conjunction with the Prospectuses of the Fund relating to
the Portfolios dated January 16, 1996, 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 16, 1996. Capitalized terms used herein and not otherwise defined
have the same meanings as are given to them in the Prospectuses.
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CONTENTS
Page
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Investment Policies....................... 3
Trustees and Officers..................... 48
Investment Advisory, Administration,
Distribution and Servicing Arrangements.. 59
Portfolio Transactions.................... 80
Purchase and Redemption Information....... 85
Valuation of Portfolio Securities......... 91
Performance Information................... 94
Taxes..................................... 121
Additional Information Concerning Shares.. 129
Miscellaneous............................. 130
Appendix A................................ A-1
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 Prospectuses
concerning the Portfolios' investment policies. A description of applicable
credit ratings is set forth in Appendix A hereto. Except as indicated, the
information below relates only to those Portfolios that are authorized to invest
in the instruments or securities described below.
The Index Equity Portfolio is currently structured as most investment
companies and invests its assets directly. However, during the first half of
1996, the Index Equity Portfolio expects to invest all of its investable assets
in The U.S. Large Company Series (the "Index Master Portfolio") of The DFA
Investment Trust Company (the "Trust"). Accordingly, the following discussion
relates to: (i) the investment policies of all the Portfolios including the
Index Equity Portfolio; and (ii) where indicated the investment policies of the
Index Master Portfolio.
ADDITIONAL INFORMATION ON PORTFOLIO INVESTMENTS.
REVERSE REPURCHASE AGREEMENTS. Each Portfolio (including the Index
Master Portfolio) other than the Municipal Money Market, Ohio Municipal Money
Market, Pennsylvania Municipal Money Market, North Carolina Municipal Money
Market, Virginia Municipal Money Market and New Jersey Municipal Money Market
Portfolios (the "Municipal Money Market Portfolios") and the Index Master
Portfolio may invest in reverse repurchase agreements. Reverse repurchase
agreements involve the sale of securities held by a Portfolio pursuant to a
Portfolio's agreement to repurchase the securities at an agreed upon price, date
and interest rate. Such agreements are considered to be borrowings under the
Investment Company Act of 1940 (the "1940 Act"). 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
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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 as specified in the instrument. Variable rate U.S. Government
obligations held by the Portfolios, however, will be deemed to have maturities
equal to the period remaining until the next interest rate adjustment.
MONEY MARKET OBLIGATIONS OF DOMESTIC BANKS, FOREIGN BANKS AND FOREIGN
BRANCHES OF U.S. BANKS. Each Non-Money Market Portfolio may purchase bank
obligations, such as certificates of deposit, bankers' acceptances and time
deposits, including instruments issued or supported by the credit of U.S. or
foreign banks or savings institutions having total assets at the time of
purchase in excess of $1 billion. The assets of a bank or savings institution
will be deemed to include the assets of its domestic and foreign branches for
purposes of each Portfolio's investment policies. Investments in short-term
bank obligations may include obligations of foreign banks and domestic branches
of foreign banks, and also foreign branches of domestic banks.
The Index Master Portfolio may purchase obligations of U.S. banks and
savings and loan associations and dollar-denominated obligations of U.S.
subsidiaries and branches of foreign banks, such as certificates of deposit
(including marketable variable rate certificates of deposit) and bankers'
acceptances. Bank certificates of deposit will only be acquired by the Index
Master Portfolio if the bank has assets in excess of $1 billion.
MORTGAGE-RELATED SECURITIES. There are a number of important
differences among the agencies and instrumentalities of the U.S. Government that
issue mortgage-related securities and among the securities that they issue.
Mortgage-related securities guaranteed by the Government National Mortgage
Association ("GNMA") include GNMA Mortgage Pass-Through Certificates (also known
as "Ginnie Maes") which are guaranteed as to the timely payment of principal and
interest by GNMA and such guarantee is backed by the full faith and credit of
the United States. GNMA is a wholly-owned U.S. Government corporation within
the Department of Housing and Urban Development. GNMA certificates also are
supported by the authority of GNMA to borrow funds from the U.S. Treasury to
make payments under its guarantee. Mortgage-related securities issued by the
Federal National Mortgage Association ("FNMA") include
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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 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 Government Bond,
Intermediate Bond, Government Income, International Bond, Core Bond, Tax-Free
Income, Pennsylvania Tax-Free Income, New Jersey Tax-Free Income and Ohio Tax-
Free Income Portfolios (the "Bond 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
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of the classes of CMOs or REMIC Certificates to be retired substantially earlier
than their final distribution dates. Generally, interest is paid or accrues on
all classes of CMOs or REMIC Certificates on a monthly basis.
The principal of and interest on the Mortgage Assets may be allocated
among the several classes of CMOs or REMIC Certificates in various ways. In
certain structures (known as "sequential pay" CMOs or REMIC Certificates),
payments of principal, including any principal prepayments, on the Mortgage
Assets generally are applied to the classes of CMOs or REMIC Certificates in the
order of their respective final distribution dates. Thus no payment of
principal will be made on any class of sequential pay CMOs or REMIC Certificates
until all other classes having an earlier final distribution date have been paid
in full.
Additional structures of CMOs or REMIC Certificates include, among
others, "parallel pay" CMOs and REMIC Certificates. Parallel pay CMOs or REMIC
Certificates are those which are structured to apply principal payments and
prepayments of the Mortgage Assets to two or more classes concurrently on a
proportionate or disproportionate basis. These simultaneous payments are taken
into account in calculating the final distribution date of each class.
A wide variety of REMIC Certificates may be issued in the parallel pay
or sequential pay structures. These securities include accrual certificates
(also known as "Z-Bonds"), which only accrue interest at a specified rate until
all other certificates having an earlier final distribution date have been
retired and are converted thereafter to an interest-paying security, and planned
amortization class ("PAC") certificates, which are parallel pay REMIC
Certificates which generally require that specified amounts of principal be
applied on each payment date to one or more classes of REMIC Certificates (the
"PAC Certificates"), even though all other principal payments and prepayments of
the Mortgage Assets are then required to be applied to one or more other classes
of the Certificates. The scheduled principal payments for the PAC Certificates
generally have the highest priority on each payment date after interest due has
been paid to all classes entitled to receive interest currently. Shortfalls, if
any, are added to the amount payable on the next payment date. The PAC
Certificate payment schedule is taken into account in calculating the final
distribution date of each class of PAC. In order to create PAC tranches, one or
more tranches generally must be created that absorb most of the volatility in
the underlying Mortgage Assets. These tranches tend to have market prices and
yields that are much more volatile than the PAC classes.
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FNMA REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by FNMA. In addition, FNMA will be
obligated to distribute on a timely basis to holders of FNMA REMIC Certificates
required installments of principal and interest and to distribute the principal
balance of each class of REMIC Certificates in full, whether or not sufficient
funds are otherwise available.
For FHLMC REMIC Certificates, FHLMC guarantees the timely payment of
interest, and also guarantees the ultimate payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("PCs"). PCs represent undivided interests in specified level payment,
residential mortgages or participations therein purchased by FHLMC and placed in
a PC pool. With respect to principal payments on PCs, FHLMC generally
guarantees ultimate collection of all principal of the related mortgage loans
without offset or deduction. FHLMC also guarantees timely payment of principal
on certain PCs, referred to as "Gold PCs."
ASSET-BACKED SECURITIES. Asset-backed securities are generally issued
as pass-through certificates, which represent undivided fractional ownership
interests in an underlying pool of assets, or as debt instruments, which are
also known as collateralized obligations, and are generally issued as the debt
of a special purpose entity organized solely for the purpose of owning such
assets and issuing such debt. Asset-backed securities are often backed by a
pool of assets representing the obligations of a number of different parties.
The yield characteristics of asset-backed securities differ from
traditional debt securities. A major difference is that the principal amount of
the obligations may be prepaid at any time because the underlying assets (i.e.,
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loans) generally may be prepaid at any time. As a result, if an asset-backed
security is purchased at a premium, a prepayment rate that is faster than
expected may reduce yield to maturity, while a prepayment rate that is slower
than expected may have the opposite effect of increasing yield to maturity.
Conversely, if an asset-backed security is purchased at a discount, faster than
expected prepayments may increase, while slower than expected prepayments may
decrease, yield to maturity.
In general, the collateral supporting asset-backed securities is of
shorter maturity than mortgage-related securities. Like other fixed-income
securities, when interest rates rise the value of an asset-backed security
generally will decline; however, when interest rates decline, the value of an
asset-backed security with prepayment features may not increase as much as that
of other fixed-income securities.
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U.S. GOVERNMENT OBLIGATIONS. Examples of the types of U.S. Government
obligations which the Portfolios may hold include U.S. Treasury bills, Treasury
instruments and Treasury bonds and the obligations of Federal Home Loan Banks,
Federal Farm Credit Banks, Federal Land Banks, the Federal Housing
Administration, the Farmers Home Administration, the Export-Import Bank of the
United States, the Small Business Administration, FNMA, GNMA, the General
Services Administration, the Student Loan Marketing Association, the Central
Bank for Cooperatives, FHLMC, the Federal Intermediate Credit Banks, the
Maritime Administration, the International Bank for Reconstruction and
Development (the "World Bank"), the Asian-American Development Bank and the
Inter-American Development Bank.
The Index Master Portfolio may purchase (i) debt securities issued by
the U.S. Treasury which are direct obligations of the U.S. Government, including
bills, notes and bonds, and (ii) obligations issued or guaranteed by U.S.
Government-sponsored instrumentalities and federal agencies, including FNMA,
Federal Home Loan Bank and the Federal Housing Administration.
SUPRANATIONAL ORGANIZATION OBLIGATIONS. The Index Master Portfolio
may purchase debt securities of supranational organizations such as the European
Coal and Steel Community, the European Economic Community and the World Bank,
which are charted to promote economic development.
LEASE OBLIGATIONS. The Municipal Money Market, Pennsylvania Municipal
Money Market, Ohio Municipal Money Market, North Carolina Municipal Money
Market, Virginia Municipal Money Market, New Jersey Municipal Money Market,
Managed Income, Tax-Free Income, Pennsylvania Tax-Free Income, Ohio Tax-Free
Income, Short Government Bond, Intermediate Bond, International Bond and New
Jersey Tax-Free 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
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enhancement such as insurance; and (vii) any limitations which are imposed on
the lease obligor's ability to utilize substitute property or services other
than those covered by the lease obligation.
The Municipal Money Market, Pennsylvania Municipal Money Market, Ohio
Municipal Money Market, North Carolina Municipal Money Market, Virginia
Municipal Money Market and New Jersey Municipal Money Market Portfolios will
only invest in lease obligations with puts that (i) may be exercised at par on
not more than seven days notice, and (ii) are issued by institutions deemed by
the adviser to present minimal credit risks. Such obligations will be
considered liquid. However, a number of puts are not exercisable at the time
the put would otherwise be exercised if the municipal borrower is not
contractually obligated to make payments (e.g., an event of nonappropriation
with a "nonappropriation" lease obligation). Under such circumstances, the
lease obligation while previously considered liquid would become illiquid, and a
Portfolio might lose its entire investment in such obligation.
Municipal leases, like other municipal debt obligations, are subject
to the risk of non-payment. The ability of issuers of municipal leases to make
timely lease payments may be adversely impacted in general economic downturns
and as relative governmental cost burdens are allocated and reallocated among
federal, state and local governmental units. Such non-payment would result in a
reduction of income to the Fund, and could result in a reduction in the value of
the municipal lease experiencing non-payment and a potential decrease in the net
asset value of the Fund. Issuers of municipal securities might seek protection
under the bankruptcy laws. In the event of bankruptcy of such an issuer, the
Fund could experience delays and limitations with respect to the collection of
principal and interest on such municipal leases and the Fund may not, in all
circumstances, be able to collect all principal and interest to which it is
entitled. To enforce its rights in the event of a default in lease payments,
the Fund may take possession of and manage the assets securing the issuer's
obligations on such securities, which may increase the Fund's operating expenses
and adversely affect the net asset value of the Fund. When the lease contains a
non-appropriation clause, however, the failure to pay would not be a default and
the Fund would not have the right to take possession of the assets. Any income
derived from the Fund's ownership or operation of such assets may not be tax-
exempt. In addition, the Fund's intention to qualify as a "regulated investment
company" under the Internal Revenue Code of 1986, as amended, may limit the
extent to which the Fund may 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.
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COMMERCIAL PAPER. The Money Market Portfolios may purchase commercial
paper rated in one of the two highest rating categories of a nationally
recognized statistical rating organization ("NRSRO"). The Non-Money Market
Portfolios, except the Index Master Portfolio, may purchase commercial paper
rated (at the time of purchase) "A-1" by S&P or "Prime-1" by Moody's or, when
deemed advisable by a Portfolio's adviser or sub-adviser, "high quality" issues
rated "A-2" or "Prime-2" by S&P or Moody's, respectively. The Index Master
Portfolio may purchase commercial paper rated (at the time of purchase) "A-1" or
better by S&P or "Prime-1" by Moody's, or, if not rated, issued by a corporation
having an outstanding unsecured debt issue rated "Aaa" by Moody's or "AAA" by
S&P, and having a maximum maturity of nine months. These ratings symbols are
described in Appendix A.
Commercial paper purchasable by each Portfolio includes "Section 4(2)
paper," a term that includes debt obligations issued in reliance on the "private
placement" exemption from registration afforded by Section 4(2) of the
Securities Act of 1933. Section 4(2) paper is restricted as to disposition
under the Federal securities laws, and is frequently sold (and resold) to
institutional investors such as the Fund through or with the assistance of
investment dealers who make a market in the Section 4(2) paper, thereby
providing liquidity. Certain transactions in Section 4(2) paper may qualify for
the registration exemption provided in Rule 144A under the Securities Act of
1933.
REPURCHASE AGREEMENTS. Each Portfolio may invest in repurchase
agreements. The repurchase price under the repurchase agreements described in
the Prospectuses generally equals the price paid by a Portfolio involved plus
interest negotiated on the basis of current short-term rates (which may be more
or less than the rate on securities underlying the repurchase agreement). The
financial institutions with whom a Portfolio may enter into repurchase
agreements will be banks and non-bank dealers of U.S. Government securities that
are listed on the Federal Reserve Bank of New York's list of reporting dealers,
if such banks and non-bank dealers are deemed creditworthy by the Portfolio's
adviser or sub-adviser. A Portfolio's adviser or sub-adviser will continue to
monitor creditworthiness of the seller under a repurchase agreement, and will
require the seller to maintain during the term of the agreement the value of the
securities subject to the agreement at not less than the repurchase price
(including accrued interest). In addition, the Portfolio's adviser or sub-
adviser will mark-to-market daily the value of the 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
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by another authorized securities depository. Repurchase agreements are
considered to be loans by the Portfolios under the 1940 Act.
The Index Master Portfolio will not enter into a repurchase agreement
with a duration of more than seven days if, as a result, more than 10% of the
value of its total assets would be so invested. The Index Master Portfolio will
also only invest in repurchase agreements with a bank if the bank has at least
$1 billion in assets and is approved by the Investment Committee of DFA. DFA
will monitor the market value of transferred securities plus any accrued
interest thereon so that the value of such securities will at least equal the
repurchase price. The securities underlying the repurchase agreements will be
limited to U. S. Government and agency obligations described under "Government
Obligations" above.
INVESTMENT GRADE DEBT OBLIGATIONS. Each of the Money Market
Portfolios may invest in securities in the two highest rating categories of
NRSROs. The Non-Money Market Portfolios, except the Index Master Portfolio,
invest in "investment grade securities," which are securities rated in the four
highest rating categories of an NRSRO. It should be noted that debt obligations
rated in the lowest of the top four ratings (i.e., "Baa" by Moody's or "BBB" by
S&P) are considered to have some speculative characteristics and are more
sensitive to economic change than higher rated securities.
The Index Master Portfolio may invest in non-convertible corporate
debt securities which are issued by companies whose commercial paper is rated
"Prime-1" by Moody's or "A-1" by S&P and dollar-denominated obligations of
foreign issuers issued in the U.S. If the issuer's commercial paper is unrated,
then the debt security would have to be rated at least "AA" by S&P or "Aa2" by
Moody's. If there is neither a commercial paper rating nor a rating of the debt
security, then the Index Master Portfolio's investment adviser must determine
that the debt security is of comparable quality to equivalent issues of the same
issuer rated at least "AA" or "Aa2."
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. When a Portfolio
agrees to purchase securities on a when-issued or 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
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commitments than when it sets aside cash. Because a Portfolio's liquidity and
ability to manage its portfolio might be affected when it sets aside cash or
portfolio securities to cover such purchase commitments, each Portfolio expects
that its commitments to purchase when-issued securities and forward commitments
will not exceed 25% of the value of its total assets absent unusual market
conditions.
A Portfolio will purchase securities on a when-issued or forward
commitment basis only with the intention of completing the transaction and
actually purchasing the securities. If deemed advisable as a matter of
investment strategy, however, a Portfolio may dispose of or renegotiate a
commitment after it has been entered into, and may sell securities it has
committed to purchase before those securities are delivered to the Portfolio on
the settlement date. In these cases the Portfolio may realize a taxable capital
gain or loss.
When a Portfolio engages in when-issued and forward commitment
transactions, it relies on the other party to consummate the trade. Failure of
such party to do so may result in the Portfolio's incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a when-issued purchase
or a forward commitment to purchase securities, and any subsequent fluctuations
in their market value, is taken into account when determining the market value
of a Portfolio starting on the day the Portfolio agrees to purchase the
securities. The Portfolio does not earn interest on the securities it has
committed to purchase until they are paid for and delivered on the settlement
date.
RIGHTS OFFERINGS AND WARRANTS TO PURCHASE. As stated in their
Prospectus, the Value Equity, Growth Equity, Small Cap Growth Equity, Select
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
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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. The Portfolio may use forward foreign currency exchange contracts to
hedge against movements in the value of foreign currencies (including the "ECU"
used in the European Community) relative to the U.S. dollar in connection with
specific portfolio transactions or with respect to portfolio positions. A
Portfolio may enter into forward foreign currency exchange contracts when deemed
advisable by its adviser or sub-adviser under two circumstances. First, when
entering into a contract for the purchase or sale of a security, the Portfolio
may enter into a forward foreign currency exchange contract for the amount of
the purchase or sale price to protect against variations, between the date the
security is purchased or sold and the date on which payment is made or received,
in the value of the foreign currency relative to the U.S. dollar or other
foreign currency.
Second, when a Portfolio's adviser or sub-adviser anticipates that a
particular foreign currency may decline substantially relative to the U.S.
dollar or other leading currencies, in order to reduce risk, the Portfolio may
enter into a forward contract to sell, for a fixed amount, the amount of foreign
currency approximating the value of some or all of the Portfolio's securities
denominated in such foreign currency. No Portfolio intends to enter into
forward contracts under this second circumstance on a regular or continuing
basis and will not do so if, as a result, it will have more than 15% of the
value of its total assets committed to such contracts. With respect to any
forward foreign currency contract, it will not generally be possible to match
precisely the amount covered by that contract and the value of the securities
involved due to the changes in the values of such securities resulting from
market movements between the date the forward contract is entered into and the
date it matures. In addition, while forward contracts may offer protection from
losses resulting from declines in the value of a 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.
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A separate account of a Portfolio consisting of cash or liquid
securities equal to the amount of the Portfolio's assets that could be required
to consummate forward contracts entered into under the second circumstance, as
set forth above, will be established with the Fund's custodian. For the purpose
of determining the adequacy of the securities in the account, the deposited
securities will be valued at market or fair value. If the market or fair value
of such securities declines, additional cash or securities will be placed in the
account daily so that the value of the account will equal the amount of such
commitments by the Portfolio.
OPTIONS. Options trading is a highly specialized activity which
entails greater than ordinary investment risks. Options on particular
securities may be more volatile than the underlying securities, and therefore,
on a percentage basis, an investment in the underlying securities themselves. A
Portfolio will write call options only if they are "covered." In the case of a
call option on a security, the option is "covered" if a Portfolio owns the
security underlying the call or has an absolute and immediate right to acquire
that security without additional cash consideration (or, if additional cash
consideration is required, cash or cash equivalents in such amount as are held
in a segregated account by its custodian) upon conversion or exchange of other
securities held by it. For a call option on an index, the option is covered if
a Portfolio maintains with its custodian cash or cash equivalents equal to the
contract value. A call option is also covered if a Portfolio holds a call on
the same security or index as the call written where the exercise price of the
call held is (i) equal to or less than the exercise price of the call written,
or (ii) greater than the exercise price of the call written provided the
difference is maintained by the Portfolio in cash or cash equivalents in a
segregated account with its custodian.
When a Portfolio purchases a put option, the premium paid by it is
recorded as an asset of the Portfolio. When a Portfolio writes an option, an
amount equal to the net premium (the premium less the commission) received by
the Portfolio is included in the liability section of the Portfolio's statement
of assets and liabilities as a deferred credit. The amount of this asset or
deferred credit will be subsequently marked-to-market to reflect the current
value of the option purchased or written. The current value of the traded
option is the last sale price or, in the absence of a sale, the mean between the
last bid and asked 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
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the stipulated expiration date or if the Portfolio enters into a closing
purchase transaction, it will realize a gain (or loss if the cost of a closing
purchase transaction exceeds the net premium received when the option is sold)
and the deferred credit related to such option will be eliminated. If an option
written by a Portfolio is exercised, the proceeds of the sale will be increased
by the net premium originally received and the Portfolio will realize a gain or
loss.
There are several risks associated with transactions in options on
securities and indexes. For example, there are significant differences between
the securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives. In addition, a liquid secondary market for particular options,
whether traded over-the-counter or on a national securities exchange
("Exchange") may be absent for reasons which include the following: there may
be insufficient trading interest in certain options; restrictions may be imposed
by an Exchange on opening transactions or closing transactions or both; trading
halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities; unusual or
unforeseen circumstances may interrupt normal operations on an Exchange; the
facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or one or more Exchanges
could, for economic or other reasons, decide or be compelled at some future date
to discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that Exchange (or in that class
or series of options) would cease to exist, although outstanding options that
had been issued by the Options Clearing Corporation as a result of trades on
that Exchange would continue to be exercisable in accordance with their terms.
FUTURES CONTRACTS AND RELATED OPTIONS. Each Non-Money Market
Portfolio (including the Index Master Portfolio) may invest in futures contracts
and options thereon (interest rate futures contracts or index futures contracts,
as applicable). Positions in futures contracts may be closed out only on an
exchange which provides a secondary market for such futures. However, there can
be no assurance that a liquid secondary market will exist for any particular
futures contract at any specific time. Thus, it may not be possible to close a
futures position. In the event of 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
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positions also could have an adverse impact on a Portfolio's ability to
effectively hedge.
Successful use of futures by a Portfolio is also subject to the
adviser's ability to correctly predict movements in the direction of the market.
For example, if a Portfolio has hedged against the possibility of a decline in
the market adversely affecting securities held by it and securities prices
increase instead, the Portfolio will lose part or all of the benefit to the
increased value of its securities which it has hedged because it will have
approximately equal offsetting losses in its futures positions. In addition, in
some situations, if a Portfolio has insufficient cash, it may have to sell
securities to meet daily variation margin requirements. Such sales of
securities may be, but will not necessarily be, at increased prices which
reflect the rising market. A Portfolio may have to sell securities at a time
when it may be disadvantageous to do so.
The risk of loss in trading futures contracts in some strategies can
be substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit, before any deduction for the
transaction costs, if the contract were closed out. Thus, a purchase or sale of
a futures contract may result in losses in excess of the amount invested in the
contract.
Utilization of futures transactions by a Portfolio involves the risk
of loss by a Portfolio of margin deposits in the event of bankruptcy of a broker
with whom the Portfolio has an open position in a futures contract or related
option.
Most futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous 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
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or no trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.
The trading of futures contracts is also subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
STAND-BY COMMITMENTS. Under a stand-by commitment for a Municipal
Obligation, a dealer agrees to purchase at the Portfolio's option a specified
Municipal Obligation at a specified price. Stand-by commitments for Municipal
Obligations may be exercisable by a Portfolio at any time before the maturity of
the underlying Municipal Obligations and may be sold, transferred or assigned
only with the instruments involved. It is expected that such stand-by
commitments will generally be available without the payment of any direct or
indirect consideration. However, if necessary or advisable, a Portfolio may pay
for such a stand-by commitment either separately in cash or by paying a higher
price for Municipal Obligations which are acquired subject to the commitment for
Municipal Obligations (thus reducing the yield to maturity otherwise available
for the same securities). The total amount paid in either manner for
outstanding stand-by commitments for Municipal Obligations held by a Portfolio
will not exceed 1/2 of 1% of the value of such Portfolio's total assets
calculated immediately after each stand-by commitment is acquired.
Stand-by commitments will only be entered into with dealers, banks and
broker-dealers which, in the adviser's or sub-adviser's opinion, present minimal
credit risks. A Portfolio will acquire stand-by commitments solely to
facilitate portfolio liquidity and not to exercise its rights thereunder for
trading purposes. Stand-by commitments will be valued at zero in determining
net asset value. Accordingly, where a Portfolio pays directly or indirectly for
a stand-by commitment, its cost will be reflected as an unrealized loss for the
period during which the commitment is held by such Portfolio and will be
reflected as a realized gain or loss when the commitment is exercised or
expires.
TAX-EXEMPT DERIVATIVES. The Municipal Money Market Portfolios and the
Tax-Free Income, Ohio Tax-Free Income, Pennsylvania Tax-Free Income and New
Jersey 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,
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interests in long-term fixed-rate municipal obligations, held by a bank as
trustee or custodian, are coupled with tender option, demand and other features
when the tax-exempt derivatives are created. Together, these features entitle
the holder of the interest to tender (or put), the underlying municipal
obligation to a third party at periodic intervals and to receive the principal
amount thereof. In some cases, municipal obligations are represented by
custodial receipts evidencing rights to receive specific future interest
payments, principal payments, or both, on the underlying municipal securities
held by the custodian. Under such arrangements, the holder of the custodial
receipt has the option to tender the underlying municipal securities at its face
value to the sponsor (usually a bank or broker dealer or other financial
institution), which is paid periodic fees equal to the difference between the
bond's fixed coupon rate and the rate that would cause the bond, coupled with
the tender option, to trade at par on the date of a rate adjustment. The Money
and Non-Money Market Municipal Portfolios may hold tax-exempt derivatives, such
as participation interests and custodial receipts, for municipal obligations
which give the holder the right to receive payment of principal subject to the
conditions described above. The Internal Revenue Service has not ruled on
whether the interest received on tax-exempt derivatives in the form of
participation interests or custodial receipts is tax-exempt, and accordingly,
purchases of any such interests or receipts are based on the opinion of counsel
to the sponsors of such derivative securities. Neither the Fund nor its
investment adviser will review the proceedings related to the creation of any
tax-exempt derivatives or the basis for such opinions.
SECURITIES LENDING. A Portfolio would continue to accrue interest on
loaned securities and would also earn income on investment collateral for such
loans. Any cash collateral received by a Portfolio in connection with such
loans would be invested in short-term Government obligations.
While the Index Master Portfolio may earn additional income from
lending securities, such activity is incidental to the investment objective of
the Index Master Portfolio. The value of securities loaned may not exceed
33 1/3% of the value of the Index Master Portfolio's total assets. In connection
with such loans, the Index Master Portfolio will receive collateral consisting
of cash or U.S. Government securities, which will be maintained at all times in
an amount equal to at least 100% of the current market value of the loaned
securities. In addition, the Index Master Portfolio will be able to terminate
the loan at any time, will receive reasonable interest on the loan, as well as
amounts equal to any dividends, interest or other distributions on the loaned
securities. In the event of the bankruptcy of the borrower, the Trust could
experience delay in recovering the loaned securities. Management of the Trust
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believes that this risk can be controlled through careful monitoring procedures.
YIELDS AND RATINGS. The yields on certain obligations are dependent
on a variety of factors, including general market conditions, conditions in the
particular market for the obligation, the financial condition of the issuer, the
size of the offering, the maturity of the obligation and the ratings of the
issue. The ratings of Moody's, Duff & Phelps Credit Co. ("Duff & Phelps"),
Fitch Investor Services, Inc. ("Fitch") 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."
INTEREST RATE TRANSACTIONS AND CURRENCY SWAPS. The Bond Portfolios
may enter into interest rate swaps, caps and floors on either an asset-based or
liability-based basis, depending on whether a Portfolio is hedging its assets or
its liabilities. The International Bond Portfolios may also enter into currency
swaps, which involve the exchange of the rights of a Portfolio and another party
to make or receive payments in specific currencies.
A Portfolio will usually enter into interest rate swaps on a net
basis, i.e., the two payment streams are netted out, with the Portfolio
receiving or paying, as the case may be, only the net amount of the two
payments. In contrast, currency swaps usually involve the delivery of the
entire principal value of one designated currency in exchange for the other
designated currency.
A Portfolio will accrue the net amount of the excess, if any, of its
obligations over its entitlements with respect to each interest rate swap on a
daily basis and will deliver an amount of cash, U.S. Government securities or
liquid high-grade debt securities having an aggregate net asset value at least
equal to the accrued excess to a custodian that satisfies the requirements of
the 1940 Act. A Portfolio will not enter into any interest rate or currently
swap unless the unsecured commercial paper, senior debt or claims paying ability
of the other party is rated either "A" or "A-1" or better by S&P, Duff & Phelps
or Fitch, or "A" or "P-1" or better by Moody's.
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A Portfolio will enter into currency or interest rate swap, cap and
floor transactions only with institutions deemed the creditworthy by the
Portfolio's adviser or sub-adviser. If there is a default by the other party to
such a transaction, a Portfolio will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As
a result, the swap market has become relatively liquid. Caps and floors are
more recent innovations for which standardized documentation has not yet been
developed and, accordingly, they are less liquid than swaps.
INVESTMENT COMPANIES. Each Portfolio, other than the Index Equity
Portfolio, currently intends to limit its investments so that, as determined
immediately after a securities purchase is made: (i) not more than 5% of the
value of its total assets will be invested in the securities of any one
investment company; (ii) not more than 10% of the value of its total assets will
be invested in the aggregate in securities of investment companies as a group;
and (iii) not more than 3% of the outstanding voting stock of any one investment
company will be owned by the Portfolio or by the Fund as a whole.
SPECIAL CONSIDERATION REGARDING THE OHIO TAX FREE INCOME PORTFOLIO.
The Ohio Tax-Free Income 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 strategies.
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
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(Ohio Obligations). The Ohio Portfolios are therefore susceptible to general or
particular economic, political 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 1994 is 11,102,000.
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
16% of total employment in agribusiness.
In prior years, the State's overall unemployment rate was commonly
somewhat higher than the national figure. For example, the reported 1990
average monthly State rate was 5.7%, compared to the 5.5% national figure.
However, for the last four years the State rates were below the national rates
(5.5% versus 6.1% in 1994). The unemployment rate and its effects vary among
geographic areas of the State.
There can be no assurance that future national, regional or state-wide
economic difficulties, and the resulting impact on State or local government
finances generally, will not adversely
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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). June 30, 1991 ending fund balances were $135.3
million (GRF) and $300 million (BSF).
The next biennium, 1992-93, presented significant challenges to State
finances, successfully addressed. To allow time to resolve certain budget
differences, an interim appropriations act was enacted effective July 1, 1991;
it included GRF debt service and lease rental appropriations for the entire
1992-93 biennium, while continuing most other appropriations for a month.
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 that FY, both
in light of a continuing uncertain nationwide economic situation, there was
projected, and then timely addressed a FY 1992 imbalance in GRF resources and
expenditures. In response, the Governor ordered most State agencies to reduce
GRF spending in the last six months of FY 1992 by a total of approximately $184
million; the $100.4 million BSF balance and additional amounts from certain
other funds were transferred late in the FY to the GRF; and adjustments were
made in the timing of certain tax payments.
A significant GRF shortfall (approximately $520 million) was then
projected for FY 1993. It was addressed by appropriate legislative and
administrative actions, including the Governor's ordering $300 million in
selected GRF spending reductions and subsequent executive and legislative action
(a combination of tax
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revisions and additional spending reductions). 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.
None of the spending reductions were applied to appropriations needed
for debt service on or lease rentals relating to any State obligations.
The 1994-95 biennium presented a more affirmative financial picture.
Based on June 30, 1994 balances, an additional $260 million was deposited in the
BSF. The biennium ended June 30, 1995 with a GRF ending fund balance of $928
million, of which $535.2 million has been transferred into the BSF (which had a
January 4, 1996 balance of over $828 million).
The GRF appropriations act for the current 1995-96 biennium was passed
on June 28, 1995 and promptly signed (after selective vetoes) by the Governor.
All necessary GRF appropriations for State debt service and lease rental
payments then projected for the biennium were included in that act. In
accordance with the appropriations act, the significant June 30, 1995 GRF fund
balance, after leaving in the GRF an unreserved and undesignated balance of $70
million, has been transferred to the BSF and other funds, including school
assistance funds and, in anticipation of possible federal program changes, a
human services stabilization fund.
The State's incurrence or assumption of debt without a vote of the
people is, with limited exceptions, prohibited by current State constitutional
provisions. The State may incur debt, limited in amount to $750,000, to cover
casual deficits or failures in revenues or to meet expenses not otherwise
provided for. The Constitution expressly precludes the State from assuming the
debts of any local government or corporation. (An exception is made in both
cases for any debt incurred to repel invasion, suppress insurrection or defend
the State in war.)
By 14 constitutional amendments, the last adopted in 1995, Ohio voters
have authorized the incurrence of State debt and the pledge of taxes or excises
to its payment. At January 4, 1996, $898 million (excluding certain highway
bonds payable primarily from highway use charges) of this debt was outstanding.
The only such State debt at that date still authorized to be incurred were
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
($45.3 million outstanding or awaiting delivery); (b) $240 million of
obligations authorized for local infrastructure improvements, no more than $120
million of which may be issued in any calendar year ($685.4 million
outstanding); and (c) up to $200 million in general obligation bonds for parks,
recreation and natural resources purposes which may be outstanding at any
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one time ($47.2 million outstanding, with no more than $50 million to be issued
in any one year).
The electors approved in November 1995 a constitutional amendment that
extends the local infrastructure bond program (authorizing an additional $1.2
billion of State full faith and credit obligations to be issued over 10 years
for the purpose), and authorizes additional highway bonds (expected to be
payable primarily from highway use receipts). The latter supersedes the prior
$500 million highway obligation authorization, and authorizes not more than $1.2
billion to be outstanding at any time and not more than $220 million to be
issued in a fiscal year.
Common resolutions are pending in both houses of the General Assembly
that would submit a constitutional amendment relating to certain other aspects
of State debt. The proposal would authorize, among other things, the issuance
of State general obligation debt for a variety of purposes without debt service
on all State general obligation debt and GRF-supported obligations not to exceed
5% of the preceding fiscal year's GRF expenditures.
The Constitution also authorizes the issuance of State obligations for
certain purposes, the owners of which do not have the right to have excises or
taxes levied to pay debt service. Those special obligations include obligations
issued by the Ohio Public Facilities Commission and the Ohio Building Authority,
and certain obligations issued by the State Treasurer, $4.5 billion of which was
outstanding at January 4, 1996.
A 1990 constitutional amendment authorizes greater State and political
subdivision participation (including financing) in the provision of housing.
The General Assembly may for that purpose authorize the issuance of State
obligations secured by a pledge of all or such portion as it authorizes of State
revenues or receipts (but not by a pledge of the State's full faith and credit).
A 1994 constitutional amendment pledges the full faith and credit and
taxing power of the State to meeting certain guarantees under the State's
tuition credit program which provides for purchase of tuition credits, for the
benefit of State residents, guaranteed to cover a specified amount when applied
to the cost of higher education tuition. (A 1965 constitutional provision that
authorized student loan guarantees payable from available State moneys has never
been implemented, apart from a "guarantee fund" approach funded essentially
from program revenues.)
The House has adopted a resolution that would submit to the electors a
constitutional amendment prohibiting the General
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Assembly from imposing a new tax or increasing an existing tax unless approved
by a three-fifths vote of each house or by a majority vote of the electors. It
cannot be predicted whether required Senate concurrence will be received.
State and local agencies issue obligations that are payable from
revenues from or relating to certain facilities (but not from taxes). By
judicial interpretation, these obligations are not "debt" within constitutional
provisions. In general, payment obligations under lease-purchase agreements of
Ohio public agencies (in which certificates of participation may be issued) are
limited in duration to the agency's fiscal period, and are renewable only upon
appropriations being made available for the subsequent fiscal period.
Local school districts in Ohio receive a major portion (state-wide
aggregate in the range of 44% in recent years) of their operating moneys from
State subsidies, but are dependent on local property taxes, and in 117 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 concluded
that aspects of the system (including basic operating assistance) are
unconstitutional, and ordered the State to provide for and fund a system
complying with the Ohio Constitution. The State appealed and a court of appeals
reversed the trial court's findings for plaintiff districts. The plaintiff
coalition has filed an appeal of the court of appeals decision to the Ohio
Supreme Court. A small number of the State's 612 local school districts have in
any year required special assistance to avoid year-end deficits. A current
program provides for school district cash need borrowing directly from
commercial lenders, with diversion of State subsidy distributions to repayment
if needed. Recent borrowings under this program totalled $94.5 million for 27
districts (including $75 million for one)in FY 1993, $41.1 million for 28
districts in FY 1994, and $71.1 million for 29 districts in FY 1995.
Ohio's 943 incorporated cities and villages rely primarily on property
and municipal income taxes for their operations. With other subdivisions, they
also receive local government support and property tax relief moneys distributed
by the State. For those few municipalities that on occasion have faced
significant financial problems, there are statutory procedures for a joint
State/local commission to monitor the municipality's fiscal affairs and for
development of a financial plan to eliminate deficits and cure any defaults.
Since inception in 1979, these procedures have been applied to 23 cities and
villages; for 19 of them the fiscal situation was resolved and the procedures
terminated.
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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 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
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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 have
resulted in surpluses the last three years; and as of June 30, 1994, the General
Fund has had a surplus of $892.9 million. The deficit in the Commonwealth's
unreserved/undesignated funds also has been eliminated, and there was a surplus
of $79.2 million as of June 30, 1994.
Current constitutional provisions permit the Commonwealth to issue the
following types of debt: (i) electorate approved debt, (ii) debt for capital
projects subject to an aggregate debt limit of 1.75 times the annual average tax
revenues of the preceding five fiscal years, (iii) tax anticipation notes
payable in the fiscal year of issuance and (iv) debt to suppress insurrection or
rehabilitate areas affected by disaster. Certain state-created agencies issue
debt supported by assets of, or revenues derived from, the various projects
financed and the debt of such agencies is not an obligation of the Commonwealth,
although some of the agencies are indirectly dependent on Commonwealth
appropriations.
Certain litigation is pending against the Commonwealth that could
adversely affect the ability of the Commonwealth to pay debt service on its
obligations including suits relating to the following matters: (a) the ACLU
has filed suit in Federal court demanding additional funding for child welfare
services; the Commonwealth settled a similar suit in the Commonwealth Court of
Pennsylvania and is seeking the dismissal of the federal suit, inter alia,
----- ----
because of that settlement. After its earlier denial was reversed by the Third
Circuit Court of Appeals, the district court granted class certification to the
ACLU, and the parties are proceeding with discovery (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) litigation has been filed in both state and Federal
court by an association of rural and small schools and several individual
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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); and (d)
Envirotest/Synteria Partners ("Envirotest") has filed suit against the
Commonwealth asserting that it sustained damages in excess of $350 million as a
result of investments it made in reliance on a contract to conduct emissions
testing before the emissions testing program was suspended. Envirotest has
entered into a Standstill Agreement with the Commonwealth pursuant to which the
parties will attempt to resolve Envirotest's claims (no available estimate of
potential liability).
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
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difficulties. The Authority is broadly empowered to assist cities in avoiding
defaults and eliminating deficits by encouraging the adoption of sound budgetary
practices and issuing bonds. In order for the Authority to issue bonds on
behalf of the City, the City and the Authority entered into an intergovernmental
cooperative agreement providing the Authority with certain oversight powers with
respect to the fiscal affairs of the City. Philadelphia currently is operating
under a five year plan approved by the Authority on April 17, 1995 with
technical amendments officially incorporated on July 18, 1995. The audited
balance of the City's General Fund as of June 30, 1994 was $15.4 million and
preliminary unaudited financial statements as of June 30, 1995 project a surplus
of $59.6 million.
The Authority's power to issue further bonds to finance capital
projects or deficit expired on December 31, 1994. The Authority may continue to
issue debt to finance a cash flow deficit until December 31, 1996, and its
ability to refund outstanding bonds is unrestricted.
Most recently, Moody's has rated the long-term general obligation
bonds of the Commonwealth "A1," and Standard & Poor's has rated such bonds "AA-
." There can be no assurance that the economic conditions on which these
ratings are based will continue or that particular bonds issues may not be
adversely affected by changes in economic or political conditions.
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, and soft drink tax. North Carolina receives other
non-tax revenues which are also deposited in the General Fund. The most
important are Federal funds collected by North Carolina agencies, university
fees and tuition, interest earned by the North Carolina Treasurer on investments
of General Fund moneys and revenues from the judicial
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branch. The proceeds from the motor fuel tax, highway use tax and motor vehicle
license tax are deposited in the Highway Fund and the Highway Trust Fund.
During the 1989-92 budget years, growth of North Carolina tax revenues
slowed considerably, requiring tax increases and budget adjustments, including
hiring freezes and restrictions, spending constraints, changes in timing and
certain collections and payments, and other short-term budget adjustments
necessary to comply with North Carolina's constitutional mandate for a balanced
budget. Many areas of North Carolina government were affected. Reductions in
capital spending, local government aid, and the use of the budget stabilization
reserve, combined with other budget adjustments, brought the budget into
balance. Tax increases in the fiscal 1992 budget included a $.01 increase in
the North Carolina sales tax and increases in the personal and corporate income
tax rates, as well as increases in the tax on cigarettes and alcohol, among
other items.
Fiscal year 1992 ended with a positive fund balance of approximately
$164.8 million. By law, $41.2 million of such positive fund balance was
required to be reserved in the General Fund of North Carolina as part of a
"Savings Reserve," leaving an unrestricted General Fund balance at June 30, 1992
of $123.6 million. Fiscal year 1993 ended with a positive General Fund balance
of approximately $537.3 million. Of this amount, $134.3 million was reserved in
the Savings Reserve and $57 million was reserved in a Reserve for Repair and
Renovation of State Facilities, leaving an unrestricted General Fund balance at
June 30, 1993 of $346 million. Fiscal year 1994 ended with a positive General
Fund balance of approximately $444.7 million. An additional $178 million was
available from a reserved fund balance. Of this aggregate amount, $155.7
million was reserved in the Savings Reserve (bringing the total reserve to
$210.6 million after prior withdrawals) and $60 million was reserved in the
Reserve for Repair and Renovation of State Facilities (bringing the total
reserve to $60 million after prior withdrawals), leaving an unrestricted General
Fund balance at June 30, 1994 of $407 million. Fiscal year 1995 ended with a
positive General Fund balance of approximately $343.4 million. An additional
$269.9 million was available from a reserved fund balance. Of this aggregate
amount, $146.3 million was reserved in the Savings Reserve (bringing the total
reserve to $423.6 million after prior contributions) and $146.3 million was
reserved in the Reserve for Repair and Renovation of State Facilities (bringing
the total reserve to $146.3 million after prior withdrawals), leaving an
unrestricted General Fund balance at June 30, 1995 of $320.7 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
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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 foregoing results for fiscal year 1995 are based upon unaudited financial
information supplied by the Office of State Budget and Management. Modified
accrual basis results were not available as of the date this summary was
prepared.
The 1995-97 biennium budget adopted by the General Assembly authorized
continuation funding from the General Fund of $9,512 million for fiscal 1996 and
$9,763 million for fiscal 1997. Expansion funds of $280 million for fiscal 1996
were approved, along with capital improvements of $114 million for such fiscal
year. For fiscal 1997, $267 million of expansion funds were approved, along
with $157 million of capital improvements. Tax reductions of approximately $363
million for fiscal 1996 and $400 million for fiscal 1997 were authorized,
principally through the repeal of North Carolina's intangible personal property
tax and reductions in North Carolina's unemployment and personal income taxes.
The General Assembly also took several measures that benefitted North Carolina's
Department of Corrections, including a reservation of $33 million to build new
prison beds. State workers generally received a 2% pay increase. The General
Assembly also passed a package of tort reform bills that included a cap on
punitive damage awards.
The North Carolina budget is based upon a number of existing and
assumed State and non-State factors, including State and national economic
conditions, international activity, Federal government policies and legislation
and the activities of the State's General Assembly. Such factors are subject to
change which may be material and affect the budget. The Congress of the United
States is considering a number of matters affecting the federal government's
relationship with State governments that, if enacted into law, could affect
fiscal and economic policies of the States, including North Carolina.
During recent years North Carolina has moved from an agricultural to a
service and goods producing economy. According to the North Carolina Employment
Security Commission (the "Commission"), in November 1994, North Carolina ranked
ninth among the states in non-agricultural employment and eighth in
manufacturing employment. The Commission estimated North Carolina's seasonally
adjusted unemployment rate in October 1995 to be 3.9% of the labor force, as
compared with an unemployment rate of 5.5% nationwide.
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
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adversely affect the State's ability to meet its financial obligations:
1. Swanson v. State of North Carolina -- State Tax Refunds - Federal
Retirees. In Davis v. Michigan (1989), the United States Supreme Court ruled
-----------------
that a Michigan income tax statute which taxed federal retirement benefits while
exempting those paid by state and local governments violated the constitutional
doctrine of intergovernmental tax immunity. At the time of the Davis decision,
-----
North Carolina law contained similar exemptions in favor of state and local
retirees. Those exemptions were repealed prospectively, beginning with the 1989
tax year. All public pension and retirement benefits are now entitled to a
$4,000 annual exclusion.
Following Davis, federal retirees filed a class action suit in federal
-----
court in 1989 seeking damages equal to the North Carolina income tax paid on
federal retirement income by the class members. A companion suit was filed in
state court in 1990. The complaints alleged that the amount in controversy
exceeded $140 million. The North Carolina Department of Revenue estimate of
refunds and interest liability is $280.89 million as of June 30, 1994. In 1991,
the North Carolina Supreme Court ruled in favor of the State in the state court
action, concluding that Davis could only be applied prospectively and that the
-----
taxes collected from the federal retirees were thus not improperly collected.
In 1993, the United States Supreme Court vacated that decision and remanded the
case back to the North Carolina Supreme Court. The North Carolina Supreme Court
then ruled in favor of the State on the grounds that the federal retirees had
failed to comply with state procedures for challenging unconstitutional taxes.
Plaintiffs petitioned the United States Supreme Court for review of that
decision, and the United States Supreme Court denied that petition. The United
States District Court ruled in favor of the defendants in the companion federal
case, and a petition for reconsideration was denied. Plaintiffs appealed to the
United States Court of Appeals, which concurred with the lower court's ruling.
The United States Supreme Court rejected an appeal, ruling that the lawsuit was
a state matter, leaving the North Carolina Supreme Court's ruling in force.
An additional lawsuit was recently filed in State Court by federal
pensioners to recover State income taxes paid on federal retirement benefits.
This case grew out of a claim by federal pensioners in the original federal
court case in Swanson. In the new lawsuit, the plaintiffs allege that when the
-------
State granted an increase in retirement benefits to State retirees in the same
legislation that equalized tax treatment between state and federal retirees, the
increased benefits to State retirees constituted an indirect violation of Davis.
-----
The lawsuit seeks a refund of taxes paid by federal retirees on federal
retirement benefits received in the years 1989 through 1993 and refunds or
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monetary relief sufficient to equalize the alleged on-going discriminatory
treatment for those years. An extension of time to answer the complaint has
been filed by the North Carolina Attorney General, which believes that sound
legal authority and arguments support the denial of this claim.
2. Bailey v. State of North Carolina -- State Tax Refunds - State
Retirees. State and local governmental retirees filed a class action suit in
1990 as a result of the repeal of the income tax exemptions for state and local
government retirement benefits. The original suit was dismissed after the North
Carolina Supreme Court ruled in 1991 that the plaintiffs had failed to comply
with state law requirements for challenging unconstitutional taxes and the
United States Supreme Court denied review. In 1992, many of the same plaintiffs
filed a new lawsuit alleging essentially the same claims, including breach of
contract, unconstitutional impairment of contract rights by the State in taxing
benefits that were allegedly promised to be tax-exempt and violation of several
state constitutional provisions. On May 31, 1995 the Superior Court issued an
order ruling in favor of the plaintiffs. Under the terms of the order, the
Superior Court found that the act of the General Assembly that repealed the tax
exemption on State and local government retirement benefits is null, void, and
unenforceable and that retirement benefits which were vested before August 1989
are exempt from taxation. The North Carolina Attorney General intends to pursue
an appeal from this order.
The North Carolina Attorney General's office estimates that the amount
in controversy is approximately $40-$45 million annually for the tax years 1989
through 1991. In addition, it is anticipated that the decision reached in this
case will govern the resolution of tax refund claims made by retired state and
local government employees for taxes paid on retirement benefit income for tax
years after 1991. Furthermore, if the order of the Superior Court is upheld,
its provisions would apply prospectively to prevent future taxation of State and
local government retirement benefits that were vested before August 1989.
3. Fulton Corp. v. Justus. 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
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ruling is to increase collections by rendering all stock taxable on 100% of its
value. The State and the plaintiff sought further appellate review. On
December 9, 1994, the North Carolina Supreme Court ruled in favor of the State,
reversing the decision of the Court of Appeals and upholding the tax on
intangible personal property. The plaintiff's petition for review by the United
States Supreme Court was granted. A decision is expected by mid-1996. Net
collections from the tax for the fiscal year ended June 30, 1994 amounted to
$127.6 million. The North Carolina Attorney General's Office believes that
sound legal arguments support the State's position. In April 1995, the North
Carolina General Assembly repealed the State's intangible personal property tax,
effective for taxable years beginning on or after January 1, 1995.
In October 1993, the State issued a total of $194.7 million general
obligation bonds (consisting of $87.5 million Prison and Youth Services
Facilities Bonds, $61 million Public Improvement Refunding Bonds, $30.2 million
Highway Refunding Bonds, and $16 million Clean Water Refunding Bonds). An
additional $67.5 million general obligation bonds (Prison and Youth Services
Facilities Bonds) were issued in November, 1993. On November 2, 1993, a total
of $740 million general obligation bonds (consisting of $310 million University
Improvement Bonds, $250 million Community College Bonds, $145 million Clean
Water Bonds, and $35 million State Parks Bonds) were approved by the voters of
the State. Pursuant to this authorization, the State issued $400 million
general obligation bonds (Capital Improvement Bonds) in January, 1994. The
proceeds of these Capital Improvement Bonds may be used for any purpose for
which the proceeds of the University Improvement Bonds, Community College Bonds,
and State Parks Bonds may be used (none of such proceeds may be used for Clean
Water purposes). An additional $60 million general obligation bonds (Clean
Water Bonds) were issued in September and October, 1994. The remaining $85
million general obligation bonds (Clean Water Bonds) were issued in June and
July, 1995. The offering of the remaining $195 million of these authorized
bonds is anticipated to occur over the next two years.
Currently, Moody's, S&P and Fitch 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
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developments and does not purport to be a complete description of them. The
information has been obtained from recent fiscal statements prepared by the
Commonwealth of Virginia relating to its securities and no independent
investigation has been undertaken to verify its accuracy. Moreover, the
information relates only to the state itself and not to the numerous special
purpose or local government units whose issues may also be held by the
Portfolio. The credits represented by such issues may be affected by a wide
variety of local factors or structuring concerns and no disclosure is made here
relating to such matters.
The rate of economic growth in the Commonwealth of Virginia has
increased steadily over the past decade. Per capita income in Virginia has been
consistently above national levels during that time. The services sector in
Virginia generates the largest number of jobs, followed by wholesale and retail
trade, government employment and manufacturing. Because of Northern Virginia,
with its proximity to Washington, D.C. and Hampton Roads which has the nation's
largest concentration of military installations, the Federal government has a
greater economic impact on Virginia relative to its size than any state other
than Alaska and Hawaii. It is unclear what effect the current efforts by the
Federal government to restructure the defense budget will have on long-term
economic conditions in Virginia.
According to statistics published by the U.S. Department of Labor,
Virginia 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. 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.
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. Once an appropriation act becomes
law, revenue collections and expenditures are constantly monitored by the
Governor, assisted by the Secretary of Finance and the Department of Planning
and Budget, to ensure that a balanced budget is maintained. If projected
revenue collections fall below amounts appropriated at any time, the Governor
must reduce expenditures and withhold allotments of appropriations (other than
for debt service and other specified purposes) to restore balance. An amendment
to the Constitution, effective January 1, 1993, established a Revenue
Stabilization Fund. This Fund is used to offset a portion of anticipated
shortfalls in revenues in years when appropriations based on initial forecasts
exceed expected revenues in any subsequent forecast. The Revenue Stabilization
Fund consists of an amount not to exceed 10 percent of the Commonwealth's
average annual tax revenues derived from taxes on income and retail sales.
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General Fund revenues are principally composed of direct taxes. In
recent fiscal years, most of the total tax revenues have been derived from five
major taxes imposed by the Commonwealth on individual and fiduciary income,
sales and use, corporate income, public services corporations and premiums of
insurance companies.
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 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, and the Commonwealth is well within its limit for each:
Section 9(a)(2) provides that the General Assembly may incur general
obligation debt to meet certain types of emergencies, subject to limitations on
amount and duration; to meet casual deficits in the revenue or in anticipation
of the collection of revenues of the Commonwealth; and to redeem a previous debt
obligation of the Commonwealth. Total indebtedness issued pursuant to this
Section may not exceed 30 percent of an amount equal to 1.15 times the annual
tax revenues derived from taxes on income and retail sales, as certified by the
Auditor of Public Accounts for the preceding fiscal year.
Section 9(b) provides that the General Assembly may authorize the
creation of general obligation debt for capital projects. Such debt is required
to be authorized by an affirmative vote of a majority of each house of the
General Assembly and approved in a statewide election. The outstanding amount
of such debt is limited to an amount equal to 1.15 times the average annual tax
revenues derived from taxes on income and retail sales, as certified by the
Auditor of Public Accounts for the three preceding fiscal years less the total
amount of bonds outstanding. The amount of 9(b) debt that may be authorized in
any single fiscal year is limited to 25 percent of the limit on all 9(b) debt
less the amount of 9(b) debt authorized in the current and prior three fiscal
years.
Section 9(c) provides that the General Assembly may authorize the
creation of general obligation debt for revenue-
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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.
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.
The Commonwealth Transportation Board ("CTB") is a substantial issue
of bonds for highway projects. 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 which are secured by a portion of
the Transportation Trust Fund.
Virginia is involved in numerous leases that are subject to
appropriation of
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funding by the General Assembly. Virginia also finances the acquisition of
certain personal property and equipment through installment purchase agreements.
Bonds issued by the Virginia Housing Development Authority, the
Virginia Resources Authority and the Virginia Public School Authority are
designed to be self-supporting from their individual loan programs. A portion
of the Virginia Housing Development Authority and Virginia Public School
Authority bonds and all of the Virginia Resources Authority bonds are secured in
part by a moral obligation pledge of the Commonwealth. Should the need arise,
the Commonwealth may consider funding deficiencies in the respective debt
service reserves for such moral obligation debt. To date, none of these
authorities has advised the Commonwealth that any such deficiencies exist.
Local government in the Commonwealth is comprised of 95 counties, 41
incorporated cities, and 188 incorporated towns. The Commonwealth is unique
among the several states in that cities and counties are independent, and their
land areas do not overlap. 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. The Virginia Constitution imposes numerous restrictions on local
indebtedness affecting both its incurrence and amount.
In Davis v. Michigan (decided March 28, 1989), the United States
Supreme Court ruled unconstitutional states' exempting from state income tax the
retirement benefits paid by the state or local governments without exempting
retirement benefits paid by the Federal government. At that time, Virginia
exempted state and local retirement benefits but not Federal retirement
benefits. At a Special Session held in April 1989, the General Assembly
repealed the exemption of state and local retirement benefits. Following Davis,
at least five suits, some with multiple plaintiffs, for refunds of Virginia
income taxes, were filed by Federal retirees. These suits were consolidated
under the name of Harper v. Virginia Department of Taxation.
In a Special Session, the Virginia General Assembly on July 9, 1994,
passed emergency legislation to provide payments to Federal retirees in a
settlement of the retirees' claims as a result of Davis. The settlement
payments are to be made over a five-year period, commencing March 31, 1995. The
total amount of authorized appropriations for the settlement is $340 million
(payable to participating retirees in installments of $60 million on March 31,
1995, and $70 million on each succeeding March 31 through March 31, 1999,
subject to appropriation by the General Assembly).
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Most recently, Moody's has rated the long-term general obligation
bonds of the Commonwealth Aaa, and Standard & Poor's has rated such bonds AAA.
There can be no assurance that the economic conditions on which these ratings
are based will continue or that particular bond issues may not be adversely
affected by changes in economic or political conditions.
SPECIAL CONSIDERATIONS REGARDING INVESTMENT IN NEW JERSEY MUNICIPAL
OBLIGATIONS. The State of New Jersey and its political subdivisions, agencies
and public authorities are authorized to issue two general classes of
indebtedness: general obligation bonds and revenue bonds. Both classes of bonds
may be included in the New Jersey Municipal Money Market and New Jersey Tax-Free
Income Portfolios. The repayment of principal and interest on general
obligation bonds is secured by the full faith and credit of the issuer, backed
by the issuer's taxing authority, without recourse to any special project or
source of revenue. Special obligation or revenue bonds may be repaid only from
revenues received in connection with the project for which the bonds are issued,
special excise taxes, or other special revenue sources and generally are issued
by entities without taxing power. Neither the State of New Jersey nor any of
its subdivisions is liable for the repayment of principal or interest on revenue
bonds except to the extent stated in the preceding sentences.
General obligation bonds of the State are repaid from revenues
obtained through the State's general taxing authority. An inability to increase
taxes may adversely affect the State's ability to authorize or repay debt.
Public authorities, private non-profit corporations, agencies and
similar entities of New Jersey ("Authorities") are established for a variety of
beneficial purposes, including economic development, housing and mortgage
financing, health care facilities and public transportation. The Authorities
are not operating entities of the State of New Jersey, but are separate legal
entities that are managed independently. The State oversees the Authorities by
appointing the governing boards, designating management, and by significantly
influencing operations. The Authorities are not subject to New Jersey
constitutional restrictions on the incurrence of debt, applicable to the State
of New Jersey itself, and may issue special obligation or private activity bonds
in legislatively authorized amounts.
An absence or reduction of revenue will affect a bond-issuing
Authority's ability to repay debt on special obligation bonds and no assurance
can be given that sufficient revenues will be obtained to make such payments,
although in some instances repayment may be guaranteed or otherwise secured.
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<PAGE>
Various Authorities have issued bonds for the construction of health
care facilities, transportation facilities, office buildings and related
facilities, housing facilities, pollution control facilities, water and sewage
facilities and power and electric facilities. Each of these facilities may
incur different difficulties in meeting its debt repayment obligations.
Hospital facilities, for example, are subject to changes in Medicare and
Medicaid reimbursement regulations, attempts by Federal and state legislatures
to limit the costs of health care and management's ability to complete
construction projects on a timely basis as well as to maintain projected rates
of occupancy and utilization. At any given time, there are several proposals
pending on a Federal and state level concerning health care which may further
affect a hospital's debt service obligation.
Housing facilities may be subject to increases in operating costs,
management's ability to maintain occupancy levels, rent restrictions and
availability of Federal or state subsidies, while power and electric facilities
may be subject to increased costs resulting from environmental restrictions,
fluctuations in fuel costs, delays in licensing procedures and the general
regulatory framework in which these facilities operate. All of these entities
are constructed and operated under rigid regulatory guidelines.
Some entities which financed facilities with proceeds of private
activity bonds issued by the New Jersey Economic Development Authority, a major
issuer of special obligation bonds, have defaulted on their debt service
obligations. Because these special obligation bonds were repayable only from
revenue received from the specific projects which they funded, the New Jersey
Economic Development Authority was unable to repay the debt service to
bondholders for such facilities. Each issue of special obligation bonds,
however, depends on its own revenue for repayment, and thus these defaults
should not affect the ability of the New Jersey Economic Development Authority
to repay obligations on other bonds that it issues in the future.
The State has, in the past, experienced a period of substantial
economic growth with unemployment levels below the national average. Recently,
however, the state has experienced an economic slowdown, and its unemployment
rate has risen to the extent the State has lost its relative advantage over the
nation. To the extent that any adverse conditions exist in the future which
affect the obligor's ability to repay debt, the value of the Portfolio may be
immediately and substantially affected.
The following are cases presently pending or threatened in which the
State has a potential for either a significant loss of revenue or a significant
unanticipated expenditure: (i) several labor unions have challenged 1992
legislation mandating a revaluation of several public employee pension funds
which
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<PAGE>
resulted in a refund of $773 million in public employer contributions to the
State and significant ongoing annual savings to the State; (ii) several cases
filed in the State courts challenged the basis on which recoveries of certain
costs for residents in State psychiatric hospitals and other facilities are
shared between the State Department of Human Services and the State's county
governments, and certain counties are seeking the recovery from the Department
of costs they have incurred for the maintenance of such residents; (iii) a
lawsuit filed in the United States District Court in 1990 alleges that the State
Department of Human Services has established unreasonably low Medicaid payment
rates for long-term care facilities; (iv) various hospitals have challenged the
Commissioner's calculation of the hospital assessment required by the Health
Care Cost Reduction Act of 1991; (v) the 1990 Fair Automobile Insurance Reform
Act has been challenged in several State court suits; (vi) the County of Passaic
and other parties have filed suit alleging the State violated a 1984 consent
order concerning the construction of a resource recovery facility in that
county; (vii) several Medicaid eligible children and the Association for
Children of New Jersey have filed suit claiming the Medicaid reimbursement rates
for services rendered to such children are inadequate under federal law; (viii)
a coalition of churches and church leaders in Hudson County have filed suit
asserting the State-owned Liberty State Park in Jersey City violates
environmental standards; (ix) Waste Management of Pennsylvania, Inc. and an
affiliate have filed suit alleging their constitutional rights were violated by
the State's issuance of two emergency reduction orders and a draft permit; and
(x) representatives of the trucking industry have filed a constitutional
challenge to annual hazardous and solid waste licensure renewal fees.
Although the Portfolio generally intends to invest its assets
primarily in New Jersey Municipal Obligations rated within the two highest
rating categories of an NRSRO, there can be no assurance that such ratings will
remain in effect until such obligations mature or are redeemed or will not be
revised downward or withdrawn. Such revisions or withdrawals may have an
adverse affect on the market price of such securities.
Although there can be no assurance that such conditions will continue,
the State's general obligation bonds are currently rated "AA+" by S&P and "AA1"
by Moody's.
ADDITIONAL INVESTMENT LIMITATIONS.
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
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<PAGE>
under "Miscellaneous"). The Index Master Portfolio's fundamental investment
limitations are described separately.
MONEY MARKET PORTFOLIOS:
1) Each of the Money Market, Municipal Money Market and U.S. Treasury
Money Market Portfolios may not 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 (taken at current value)
would 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 (taken
at current value) may 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 is not deemed to be a security issued by the guarantor when the value
of all securities issued and guaranteed by the guarantor, and owned by the
Portfolio, does not exceed 10% of the value of the Portfolio's total assets.
2) No Portfolio may borrow money or issue senior securities, except
that each Portfolio may borrow from banks and (other than a Municipal Money
Market Portfolio) 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.
3) Each of the Municipal Money Market, U.S. Treasury Money Market,
Ohio Municipal Money Market, Pennsylvania Municipal Money Market, North Carolina
Municipal Money Market, Virginia Municipal Money Market and New Jersey Municipal
Money Market Portfolios may not purchase 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. The Money Market Portfolio, on the other hand,
may not purchase any securities which would cause, at the time of purchase, less
than 25% of the value of its total assets to be invested in the obligations of
issuers in the banking industry, or in
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<PAGE>
obligations, such as repurchase agreements, secured by such obligations (unless
the Portfolio is in a temporary defensive position) or which would cause, at the
time of purchase, more than 25% of the value of its total assets to be invested
in the obligations of issuers in any other industry. In applying the investment
limitations stated in this paragraph, (i) there is no limitation with respect to
the purchase of (a) instruments issued (as defined in Investment Limitation
number 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, (b)
instruments issued by domestic banks (which may include U.S. branches of foreign
banks) and (c) repurchase agreements secured by the instruments described in
clauses (a) and (b); (ii) 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 (iii) utilities will be divided
according to their services, for example, gas, gas transmission, electric and
gas, electric and telephone will be each considered a separate industry.
4) Each of the Ohio Municipal Money Market, Pennsylvania Municipal
Money Market, North Carolina Municipal Money Market, Virginia Municipal Money
Market and New Jersey Municipal Money Market Portfolios will invest at least 80%
of its net assets in AMT Paper and instruments the interest on which is exempt
from regular Federal income tax, except during defensive periods or during
periods of unusual market conditions.
5) The Municipal Money Market Portfolio will invest at least 80% of
its net assets in instruments the interest on which is exempt from regular
Federal income tax and is not an item of tax preference for purposes of Federal
alternative minimum tax, except during defensive periods or during periods of
unusual market conditions.
NON-MONEY MARKET PORTFOLIOS:
Each of the Non-Money Market Portfolios (other than the Ohio Tax-Free
Income, Pennsylvania Tax-Free Income and New Jersey Tax-Free 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
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<PAGE>
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 guarantors 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.
Each of the Non-Money Market Portfolios may not:
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.
Each Non-Money Market Portfolio (other than the Managed Income,
Intermediate Government Bond, Short Government Bond, Intermediate Bond,
Government Income, Core Bond, International Bond and Balanced Portfolios) may
not:
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.
None of the Managed Income, Intermediate Government Bond, Short
Government Bond, Intermediate Bond, Government Income, Core Bond, International
Bond and Balanced Portfolios may:
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<PAGE>
4) Issue prior securities, borrow money or pledge its assets except
that a Portfolio may borrow from banks or enter into reverse repurchase
agreements or dollar rolls in amounts aggregating not more than 33 1/3% of the
value of its total assets (calculated when the loan is made) to take advantage
of investment opportunities and may pledge up to 33 1/3% of the value of its
total assets to secure such borrowings. Each Portfolio is also authorized to
borrow an additional 5% of its total assets without regard to the foregoing
limitations for temporary purposes such as clearance of portfolio transactions
and share redemptions. For purposes of these restrictions, the purchase or sale
of securities on a "when-issued," delayed delivery or forward commitment basis,
the purchase and sale of options and futures contracts and collateral
arrangements with respect thereto are not deemed to be the issuance of a senior
security, a borrowing or a pledge of assets.
ALL PORTFOLIOS:
No Portfolio may:
1. Purchase or sell real estate, except that each Portfolio may
purchase securities of issuers which deal in real estate and may purchase
securities which are secured by interests in real estate.
2. Acquire any other investment company or investment company
security except in connection with a merger, 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 and, in
the case of the International Bond Portfolio, currencies.
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.
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<PAGE>
7. Purchase or sell commodity contracts, or invest in oil, gas or
mineral exploration or development programs, except that each Portfolio may, to
the extent appropriate to its investment policies, purchase securities (publicly
traded securities in the case of each Money Market Portfolio) of companies
engaging in whole or in part in such activities and may enter into futures
contracts and related options.
8. Make loans, except that each Portfolio may purchase and hold debt
instruments and enter into repurchase agreements in accordance with its
investment objective and policies and may lend portfolio securities.
9. Notwithstanding the investment limitations of the Index Equity
Portfolio, the Index Equity Portfolio may invest all of its assets in shares of
an open-end management investment company with substantially the same investment
objective, policies and limitations as the Portfolio.
Although the foregoing investment limitations would permit the Money
Market Portfolios to invest in options, futures contracts and options on futures
contracts, and to sell securities short against the box, those Portfolios do not
currently intend to trade in such instruments or engage in such transactions
during the next twelve months. Prior to making any such investments, a Money
Market Portfolio would notify its shareholders and add appropriate descriptions
concerning the instruments and transactions to its Prospectus.
INDEX MASTER PORTFOLIO:
The investment limitations of the Index Master Portfolio, the
Portfolio in which the Index Equity Portfolio expects to invest all of its
investable assets, are separate from those of the Index Equity Portfolio. The
Index Master Portfolio may not:
1. Invest in commodities or real estate, including limited
partnership interests therein, although it may purchase and sell securities of
companies which deal in real estate and securities which are secured by
interests in real estate, and may purchase or sell financial futures contracts
and options thereon;
2. Make loans of cash, except through the acquisition of repurchase
agreements and obligations customarily purchased by institutional investors;
3. As to 75% of the total assets of the Index Master Portfolio,
invest in the securities of any issuer (except obligations of the U.S.
Government and its instrumentalities) if, as a result, more than 5% of the Index
Master Portfolio's total assets, at market, would be invested in the securities
of such issuer;
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<PAGE>
4. Purchase or retain securities of an issuer if those officers and
trustees of the Trust or officers and directors of the Trust's investment
adviser owning more than 1/2 of 1% of such securities together own more than 5%
of such securities;
5. Borrow, except from banks and as a temporary measure for
extraordinary or emergency purposes and then, in no event, in excess of 5% of
the Index Master Portfolio's gross assets valued at the lower of market or cost;
provided that it may borrow amounts not exceeding 33% of its net assets from
banks and pledge not more than 33% of such assets to secure such loans;
6. Pledge, mortgage, or hypothecate any of its assets to an extent
greater than 10% of its total assets at fair market value, except as described
in (5) above;
7. Invest more than 10% of the value of its total assets in illiquid
securities which include certain restricted securities, repurchase agreements
with maturities of greater than seven days, and other illiquid investments;
8. Engage in the business of underwriting securities issued by
others;
9. Invest for the purpose of exercising control over management of
any company;
10. Invest its assets in securities of any investment company, except
in connection with a merger, acquisition of assets, consolidation or
reorganization;
11. Invest more than 5% of its total assets in securities of
companies which have (with predecessors) a record of less than three years'
continuous operation;
12. Acquire any securities of companies within one industry if, as a
result of such acquisition, more than 25% of the value of its total assets would
be invested in securities of companies within such industry;
13. Write or acquire options (except as described in (1) above) or
interests in oil, gas or other mineral exploration, leases or development
programs;
14. Purchase warrants; however, it may acquire warrants as a result of
corporate actions involving its holdings of other equity securities;
15. Purchase securities on margin or sell short; or
16. Acquire more than 10% of the voting securities of any issuer.
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<PAGE>
Although (2) above prohibits cash loans, the Index Master Portfolio is
authorized to lend portfolio securities. With respect to (7) above, pursuant to
Rule 144A under the 1993 Act, the Index Master Portfolio may purchase certain
unregistered (i.e. restricted) securities upon a determination that a liquid
institutional market exists for the securities. If it is decided that a liquid
market does exist, the securities will not be subject to the 10% limitation on
holdings of illiquid securities stated in (7) above. While maintaining
oversight, the Board of Trustees of the Trust has delegated the day-to-day
function of making liquidity determinations to DFA, the Index Master Portfolio's
adviser. For Rule 144A securities to be considered liquid, there must be at
least two dealers making a market in such securities. After purchase, the Board
of Trustees of the Trust and DFA will continue to monitor the liquidity of Rule
144A securities.
For purposes of (12) above, utility companies will be divided
according to their services; e.g., gas, gas transmission, electric and gas,
electric, water and telephone will each be considered a separate industry.
Because the structure of the Index Master Portfolio is based on the
relative market capitalizations of eligible holdings, it is possible that the
Index Master Portfolio might include at least 5% of the outstanding voting
securities of one or more issuers. In such circumstances, the Trust and the
issuer would be deemed "affiliated persons" under the Investment Company Act of
1940, and certain requirements of the Act regulating dealings between affiliates
might become applicable.
TRUSTEES AND OFFICERS
THE FUND
The trustees and executive officers of the Fund, and their business
addresses and principal occupations during the past five years, are:
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH FUND DURING PAST FIVE YEARS
- --------------------------- ------------------ ------------------------
William O. Albertini Trustee Executive Vice President
Bell Atlantic Corporation and Chief Financial
1717 Arch Street Officer since February
47th Floor West 1995, Vice President and
Philadelphia, PA 19103 Chief Financial Officer
Age: 52 from January 1991 -February
1995, Bell Atlantic Corporation
(a diversified telecommuni-
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<PAGE>
cations company); Chairman,
President and Chief Executive
Officer from August 1989 -
January 1991, Bell Atlantic
Enterprises International,
Inc.; Director, Groupo
Iusacell, S.A. de C.V. since
June 1994; Director, American
Waterworks, Inc. since May
1990; Trustee, The Carl E. &
Emily I. Weller Foundation
since October 1991.
Raymond J. Clark Trustee Treasurer of Princeton
Office of the Treasurer University since 1987;
Princeton University Trustee, The Compass
3 New South Building Capital Group of Funds
P.O. Box 35 from 1987 to 1996; Trustee,
Princeton, New Jersey 08540 United-Way Princeton Area
Age: 60 Communities from 1992-94;
Trustee, Chemical Bank, New
Jersey Advisory Board from 1994
until 1995; Trustee, American
Red Cross - Mercer County
Chapter since 1995; and
Trustee, United Way-Greater
Mercer County since 1995.
Robert M. Hernandez Trustee Director since 1991,
USX Corporation Chairman and Chief
600 Grant Street Financial Officer since
6105 USX Tower since 1994, Executive
Pittsburgh, PA 15219 Vice President -
Age: 51 Chief Financial Officer from
1991 to 1994, Senior Vice
President - Finance and
Treasurer from 1990 to 1991,
USX Corporation (a diversified
company principally engaged in
energy and steel businesses);
Director, ACE Limited; Trustee,
Allegheny General Hospital and
Allegheny Accounting & Finance
and
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<PAGE>
Health, Education and Research
Foundation; Director, Marinette
Marine Corporation; Director;
Pittsburgh Baseball, Inc.; and
Director and Chairman of the
Board, RMI Titanium Company.
Anthony M. Santomero Trustee Deputy Dean from
The Wharton School 1990 to 1994, Richard
University of Pennsylvania K. Mellon Professor
Room 2344 of Finance since April 1984,
Steinberg Hall - Dietrich Hall Director, Wharton Financial
Philadelphia, PA 19104-6367 Institutions Center, since July
Age: 48 1995, and Dean's Advisory
Council Member since July 1984,
The Wharton School, University
of Pennsylvania; Associate
Editor, Journal of Banking and
Finance since June 1978;
Associate Editor, Journal of
Economics and Business since
October 1979; Associate Editor,
Journal of Money, Credit and
Banking since January 1980;
Research Associate, New York
University Center for Japan-
U.S. Business and Economic
Studies since July 1989;
Editorial Advisory Board, Open
Economics Review since November
1990; Director, The Zweig Fund
and The Zweig Total Return
Fund; Director or Trustee of
Temporary Investment Fund,
Inc., Trust for Federal
Securities, Municipal Fund for
Temporary Investment, Municipal
Fund for California Investors,
Inc., Municipal Fund for New
York Investors, Inc., and
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<PAGE>
Provident Institutional Fund.
David R. Wilmerding, Jr. Vice-Chairman President, Gates,
One Aldwyn Center of the Board Wilmerding, Carper &
Villanova, PA 19085 Rawlings, Inc.
Age: 60 (investment advisers) since
February 1989; Director, Beaver
Management Corporation;
Director, Independence Square
Income Securities, Inc.; 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.
G. Willing Pepper President Retired, Chairman of the
128 Springton Lake Road Board, Specialty
Media, PA 19063 Composites Corporation
Age: 87 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 Partner of a number
investment companies advised by
PIMC.
Edward J. Roach Treasurer Certified Public
400 Bellevue Parkway and Vice- Accountant; Partner of
Suite 100 President the accounting firm of
Wilmington, DE 19809 Main Hurdman until 1981;
Age: 71 Vice Chairman of the Board, Fox
Chase Cancer Center; Trustee
Emeritus, Pennsylvania School
for the Deaf; President, Vice
President and/or Treasurer of a
number of investment companies
advised by PIMC; Director, The
Bradford Funds, Inc. since 1995.
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<PAGE>
Morgan R. Jones Secretary Partner in the law
Philadelphia National firm of Drinker Biddle &
Bank Building Reath, Philadelphia,
1345 Chestnut Street Pennsylvania.
Philadelphia, PA 19107-3496
Age: 55
The Fund pays trustees who are not affiliated with PNC Asset Management
Group, Inc. ("PAMG") or Compass Distributors, Inc. ("CDI" 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 PAMG or the Distributor are
reimbursed for any expenses incurred in attending meetings of the Board of
Trustees or any committee thereof. No officer, director or employee of PAMG,
PNC Institutional Management Corporation. ("PIMC"), Provident Capital
Management, Inc. ("PCM"), BlackRock Financial Management, Inc. ("BlackRock"),
PNC Equity Advisors Company ("PEAC"), Morgan Grenfell Investment Services,
Limited. ("Morgan Grenfell"), PFPC Inc. ("PFPC"), Compass Capital Group, Inc.
("CCG"), CDI collectively with PFPC and CCG, the "Administrators", or PNC Bank,
National Association ("PNC Bank" or the "Custodian") 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, 1995:
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<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM
AGGREGATE BENEFITS ESTIMATED REGISTRANT AND
COMPENSATION ACCRUED AS ANNUAL FUND COMPLEX/1/
NAME OF PERSON, FROM PART OF FUND BENEFITS UPON PAID TO
POSITION REGISTRANT EXPENSES RETIREMENT TRUSTEES
- --------------- ------------ ------------- -------------- --------------------
<S> <C> <C> <C> <C>
Philip E. Coldwell,/*/ $ 9,500 N/A N/A (4)/2/ $46,200
Trustee
Robert R. Fortune,/*/ $ 9,500 N/A N/A (6)/2/ $66,200
Trustee
Rodney D. Johnson,/*/ $ 9,500 N/A N/A (6)/2/ $58,450
Trustee
G. Willing Pepper,/*/ $14,000 N/A N/A (7)/2/ $98,850
President and former
Chairman of the Board
Anthony M. $ 9,000 N/A N/A (6)/2/ $51,000
Santomero, Trustee
David R. Wilmerding, $ 9,500 N/A N/A (7)/2/ $63,200
Jr., Trustee
William O.
Albertini, Trustee** N/A N/A N/A N/A
Raymond J. Clark,
Trustee** N/A N/A N/A N/A
Robert M. Hernandez,
Trustee** N/A N/A N/A N/A
</TABLE>
* Messrs. Coldwell, Fortune, Johnson and Pepper resigned as trustees of
the Fund on January 4, 1996.
** Messrs. Albertini, Clark and Hernandez were elected as trustees by the
shareholders of the Fund on January 4, 1996, and were not trustees of the
Fund during the fiscal year ended September 30, 1995.
==============
1. A Fund Complex means two or more investment companies that hold themselves
out to investors as related companies for purposes of investment and
investor services, or have a common investment adviser or have an investment
adviser that is an affiliated person of the investment adviser of any of the
other investment companies.
2. Total number of such other investment companies trustee serves on within
the Fund Complex.
-53-
<PAGE>
THE TRUST
The names, ages and addresses of the trustees and officers of the Trust and
a brief statement of their present positions and principal occupations during
the past five years is set forth below. As used below, "DFA Entities" refers to
the following: Dimensional Fund Advisors Inc., Dimensional Fund Advisors Ltd.,
DFA Australia Pty Limited, DFA Investment Dimensions Group Inc. (Registered
Investment Company), Dimensional Emerging Markets Fund Inc. (Registered
Investment Company), Dimensional Investment Group Inc. (Registered Investment
Company) and DFA Securities Inc.
TRUSTEES
- --------
David G. Booth* Trustee, President, Chairman-Chief Executive
Santa Monica, President and Officer and Director of all DFA
CA Chairman-Chief Entities, except Dimensional Fund
Age: 49 Executive Officer Advisors Ltd., of which he is
Chairman and Director
George M. Trustee Leon Carroll Marshall Professor of
Constantinides Finance, Graduate School of
Chicago, IL Business, University of Chicago.
Age: 47 Director, DFA Investment Dimensions
Group Inc., Dimensional Investment
Group Inc. and Dimensional Emerging
Markets Fund Inc.
John P. Gould Trustee Distinguished Service Professor of
Chicago, IL Economics, Graduate School of
Age: 57 Business, University of Chicago.
Trustee, First Prairie Funds
(registered investment companies).
Director, DFA Investment Dimensions
Group Inc., Dimensional Investment
Group Inc., Dimensional Emerging
Markets Fund Inc. and Harbor
Investment Advisors.
Roger G. Trustee Professor in Practice of Finance,
Ibbotson Yale School of Management.
New Haven, CT Director, DFA Investment Dimensions
Age: 52 Group Inc., Dimensional Investment
Group Inc., Dimensional Emerging
Markets Fund Inc., Hospital Fund,
Inc. (investment management
services) and Birr Portfolio
Analysis, Inc. (software products).
Chairman, Institute Study of
Securities Markets. Chairman and
President, Ibbotson Associates,
Inc., Chicago, IL (software, data,
publishing and consulting).
-54-
<PAGE>
Merton H. Trustee Robert R. McCormick Distinguished
Miller Service Professor Emeritus,
Chicago, IL Graduate School of Business,
Age: 72 University of Chicago. Director,
DFA Investment Dimensions Group
Inc., Dimensional Investment Group
Inc. and Dimensional Emerging
Markets Fund Inc.
Myron S. Trustee Frank E. Buck Professor of Finance,
Scholes Graduate School of Business and
Greenwich, CT Professor of Law, Law School,
Age: 54 Senior Research Fellow, Hoover
Institution, (all) Stanford
University. Director, DFA
Investment Dimensions Group Inc.,
Dimensional Investment Group Inc.,
Dimensional Emerging Markets Fund
Inc., Benham Capital Management
Group of Investment Companies and
Smith Breedon Group of Investment
Companies. Limited Partner, Long-
Term Capital Management L.P. (money
manager).
Rex A. Trustee, Chairman Chairman, Chief Investment Officer
Sinquefield* and Chief and Director of all DFA Entities,
Santa Monica, Investment except Dimensional Fund Advisors
CA Officer Ltd., of which he is Chairman,
Age: 51 Chief Executive Officer and
Director.
*Interested
Trustees of the
Trust.
_____________
OFFICERS
- --------
Arthur Barlow Vice President Vice President of all DFA Entities.
Santa Monica,
CA
Age: 40
-55-
<PAGE>
Truman Clark Vice President Vice President of all DFA Entities.
Santa Monica, Consultant until October 1995 and
CA Principal and Manager of Product
Age: 54 Development, Wells Fargo Nikko
Investment Advisors from 1990-1994.
Maureen Connors Vice President Vice President of all DFA Entities.
Santa Monica,
CA
Age: 59
Robert Deere Vice President Vice President of all DFA Entities.
Santa Monica,
CA
Age: 38
Irene R. Vice President, Vice President and Secretary of all
Diamant Secretary DFA Entities. Associate attorney,
Santa Monica, Cahill Gordon & Reindel from 1987
CA to 1991.
Age: 45
Eugene Fama, Vice President Vice President of all DFA Entities.
Jr.
Santa Monica,
CA
Age: 35
David Plecha Vice President Vice President of all DFA Entities.
Santa Monica,
CA
Age: 34
George Sands Vice President Vice President of all DFA Entities.
Santa Monica, Managing Director, Asset Strategy
CA Consulting, Los Angeles, CA from
Age: 40 1991 to 1992 and previously Vice
President of Wilshire Associates,
Santa Monica, CA.
Michael T. Vice President, Vice President, Chief Financial
Scardina Chief Financial Officer, Controller and Treasurer
Santa Monica, Officer, of all DFA Entities.
CA Controller and
Age: 40 Treasurer
Cem Severoglu Vice President Vice President of all DFA Entities.
Santa Monica,
CA
Age: 31
-56-
<PAGE>
Jeanne C. Executive Vice Executive Vice President of all DFA
Sinquefield, President Entities.
Ph.D.
Santa Monica,
CA
Age: 49
Rex A. Sinquefield, Trustee, Chairman and Chief Investment Officer of the Trust
and Jeanne C. Sinquefield, Executive Vice President of the Trust, are husband
and wife.
Set forth below is a table listing, for each trustee of the Trust entitled
to receive compensation, the compensation received from the Trust during the
fiscal year ended November 30, 1995 and the total compensation received from all
four registered investment companies for which Dimensional Fund Advisors Inc.
("DFA") served as investment adviser during that same fiscal year.
-57-
<PAGE>
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM
AGGREGATE BENEFITS ESTIMATED REGISTRANT AND
COMPENSATION ACCRUED AS ANNUAL FUND COMPLEX/1/
NAME OF PERSON, FROM PART OF FUND BENEFITS UPON PAID TO
POSITION REGISTRANT EXPENSES RETIREMENT TRUSTEES
- --------------- ------------ ------------- -------------- ----------------
<S> <C> <C> <C> <C>
George M. $5,000 N/A N/A $30,000
Constantinides, Trustee
John P. Gould, Trustee $5,000 N/A N/A $30,000
Roger G. Ibbotson, Trustee $5,000 N/A N/A $30,000
Merton H. Miller, Trustee $4,000 N/A N/A $24,000
Myron S. Scholes, Trustee $5,000 N/A N/A $30,000
</TABLE>
SHAREHOLDER AND TRUSTEE LIABILITY OF THE FUND
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
trust. However, the Fund's Declaration of Trust provides that shareholders
shall not be subject to any personal liability in connection with the assets of
the Fund for the acts or obligations of the Fund, and that every note, bond,
contract, order or other undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not personally liable thereunder. The
Declaration of Trust provides for indemnification out of the trust property of
any shareholder held personally liable solely by reason of his being or having
been a shareholder and not because of his acts or omissions or some other
reason. The Declaration of Trust also provides that the Fund shall, upon
request, assume the defense of any claim made against any shareholder for any
act or obligation of the Fund, and shall satisfy any judgment thereon.
The Declaration of Trust further provides that all persons having any claim
against the trustees or Fund shall look solely to the trust property for
payment; that no trustee of the Fund shall be personally liable for or on
account of any contract, debt, tort, claim, damage, judgment or decree arising
out of or connected with the administration or preservation of the trust
- ---------------
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.
-58-
<PAGE>
property or the conduct of any business of the Fund; and that no trustee shall
be personally liable to any person for any action or failure to act except by
reason of his own bad faith, willful misfeasance, gross negligence or reckless
disregard of his duties as a trustee. With the exception stated, the
Declaration of Trust provides that a trustee is entitled to be indemnified
against all liabilities and expenses reasonably incurred by him in connection
with the defense or disposition of any proceeding in which he may be involved or
with which he may be threatened by reason of his being or having been a trustee,
and that the Fund will indemnify officers, representatives and employees of the
Fund to the same extent that trustees are entitled to indemnification.
INVESTMENT ADVISORY, ADMINISTRATION,
DISTRIBUTION AND SERVICING ARRANGEMENTS
ADVISORY AND SUB-ADVISORY AGREEMENTS. The advisory and sub-advisory
services provided by PAMG, PIMC, BlackRock, PCM, PEAC, Morgan Grenfell and, with
respect to the Index Master Portfolio, Dimensional Fund Advisors Inc. ("DFA")
and the fees received by each of them for such services are described in the
Prospectuses. As stated in the Prospectuses, PAMG 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, PAMG and the
Administrators will bear the amount of such excess to the extent required by
such regulations in proportion to the fees otherwise payable to them for such
year. Such amount, if any, will be estimated and accrued daily and paid on a
monthly basis. As of the date of this Statement of Additional Information, to
the knowledge of the Fund, there were no state expense limitations more
restrictive than the following: 2 1/2% of the first $30 million of average
annual net assets, 2% of the next $70 million of average annual net assets, and
1/2% of average annual net assets in excess of $100 million.
PAMG renders advisory services to each of the Portfolios, except the Index
Equity Portfolio, pursuant to an Investment Advisory Agreement. PIMC currently
renders advisory services to the Index Equity Portfolio pursuant to an
Investment Advisory Agreement. From each Portfolio's (other than the Index
Equity Portfolio) respective commencement of operations until January 4, 1996
PIMC served as adviser. PCM renders sub-advisory services to the Balanced, Value
Equity, Small Cap Value Equity, International Equity, Select Equity and
International Emerging Markets Portfolios pursuant to Sub-Advisory Agreements.
PIMC renders sub-advisory services to the Money Market, U.S. Treasury Money
Market, Municipal Money Market, Ohio Municipal Money
-59-
<PAGE>
Market, Pennsylvania Municipal Money Market, North Carolina Municipal Money
Market, Virginia Municipal Money Market and New Jersey Municipal Money Market
Portfolios pursuant to Sub-Advisory Agreements. BlackRock renders sub-advisory
services to the Balanced, Managed Income, Intermediate Government Bond, Tax-Free
Income, Ohio Tax-Free Income, Pennsylvania Tax-Free Income, Short Government
Bond, Intermediate Bond, New Jersey Tax-Free Income, Core Bond and Government
Income Portfolios pursuant to Sub-Advisory Agreements. PEAC renders sub-
advisory services to the Index Equity, Growth Equity and Small Cap Growth Equity
Portfolios pursuant to Sub-Advisory Agreements. Morgan Grenfell renders sub-
advisory services to the International Bond Portfolio pursuant to a Sub-Advisory
Agreement. DFA renders advisory services to the Index Master Portfolio, the
registered investment company in which the Index Equity Portfolio expects to
invest all of its assets after its 1996 conversion, which will be pursuant to an
Investment Management Agreement. After the Index Equity Portfolio's 1996
conversion to a two-tiered structure described in the Prospectus, PIMC will no
longer render advisory services, and PEAC will no longer render sub-advisory
services, to the Index Equity Portfolio. These Advisory and Sub-Advisory
Agreements are collectively referred to as the "Advisory Contracts."
From December 1, 1992 (commencement of operations) to March 29, 1995, PNC
Bank, Ohio, National Association ("PNC Bank Ohio") served as sub-adviser to the
Ohio Tax-Free Income Portfolio. From November 1, 1989 (commencement of
operations) to September 10, 1993, 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., PEAC
served as sub-adviser to the Index Equity Portfolio and from July 23, 1993 until
the Index Equity Portfolio's expected investment in the Index Master Portfolio,
PEAC continues to serve as sub-advisor. From April 20, 1992 to September 10,
1993, PCM served as sub-adviser to the Intermediate Government Portfolio. From
July 23, 1992 to March 29, 1995, PNC Bank served as sub-adviser to the Index
Equity Portfolio. From September 11, 1993 to March 29, 1995, PNC Bank served as
sub-adviser to the Managed Income, Intermediate Government and Growth Equity
Portfolios. From December 1, 1992 (commencement of operations) to March 29,
1995, PNC Bank served as sub-adviser to the Ohio Tax-Free Income and
Pennsylvania Tax-Free Income Portfolios. From September 13, 1993 (commencement
of operations) to March 29, 1995, PNC Bank served as sub-adviser to the Select
Equity Portfolio. From September 14, 1993 (commencement of operations) to March
29, 1995, PNC Bank served as sub-adviser to the Small Cap Growth Equity
Portfolio. From September 17, 1993 (commencement of operations) to March 29,
1995, PNC Bank served as sub-adviser to the Intermediate Bond Portfolio. From
May 14, 1990 (commencement of operations) to July 1, 1995, PNC Bank served as
sub-adviser to the Tax-Free Income Portfolio.
PNC Bank served as sub-adviser for the Money
-60-
<PAGE>
Market Portfolio from October 4, 1989 (commencement of operations) to January 4,
1996; for the Municipal Money Market Portfolio from September 10, 1993 to
January 4, 1996; for the U.S. Treasury Money Market Portfolio from November 1,
1989 (commencement of operations) to January 4, 1996; for the Ohio Municipal
Money Market Portfolio from June 1, 1993 (commencement of operations) to
January 4, 1996; for the Pennsylvania Municipal Money Market Portfolio from
June 1, 1993 (commencement of operations) to January 4, 1996; for the North
Carolina Municipal Money Market Portfolio from May 4, 1993 (commencement of
operations) to January 4, 1996; for the Virginia Municipal Money Market
Portfolio from July 25, 1994 (commencement of operations) to December 20, 1995,
and for the New Jersey Municipal Money Market Portfolio from November 13, 1995
(commencement of operations) to January 4, 1996. From April 4, 1990
(commencement of operations) to January 4, 1996, PNC Bank served as sub-adviser
to the Balanced Portfolio. From March 1, 1993 to January 4, 1996, PEAC served as
sub-adviser to the Select Equity Portfolio.
From July 1, 1991 to December 31, 1995, Midlantic Bank, N.A. ("Midlantic
Bank") served as investment adviser to the predecessor portfolio of the
International Bond Portfolio. From July 1, 1991 to December 31, 1995, Midlantic
Bank served as investment adviser to the predecessor portfolio of the New Jersey
Tax-Free Income Portfolio. From July 1, 1991 to December 31, 1995, Midlantic
Bank served investment adviser to the predecessor portfolio of the New Jersey
Municipal Money Market Portfolio. From December 9, 1992 to January 13, 1996,
BlackRock served as investment adviser to the predecessor portfolio of the Core
Bond Portfolio. From July 17, 1992 to January 13, 1996, BlackRock served as
investment adviser to the predecessor portfolio of the Short Government Bond
Portfolio.
Under the relevant Advisory Contracts, PAMG, PIMC, PCM, PEAC, BlackRock and
Morgan Grenfell are not liable for any error of judgment or mistake of law or
for any loss suffered by the Fund or a Portfolio in connection with the
performance of the Advisory Contracts. Under the Advisory Contracts, PAMG,
PIMC, PCM, PEAC, BlackRock, Morgan Grenfell and DFA are liable for a loss
resulting from willful misfeasance, bad faith or gross negligence in the
performance of their respective duties or from reckless disregard of their
respective duties and obligations thereunder. Each of the Advisory Contracts
(except the Advisory Contract relating to the Index Master Portfolio) is
terminable as to a Portfolio by vote of the Fund's Board of Trustees or by the
holders of a majority of the outstanding voting securities of the relevant
Portfolio, at any time without penalty, on 60 days' written notice to PAMG,
PIMC, PCM, PEAC, Morgan Grenfell or BlackRock, as the case may be. PAMG, PIMC,
PCM, PEAC, Morgan Grenfell and BlackRock may also terminate their advisory
relationship with respect to a Portfolio, on 60 days' written notice to the
Fund. The Advisory Contract relating to the Index Master Portfolio is
terminable by vote of the Trust's Board of Trustees or by the holders of a
majority of the outstanding voting securities of the Index Master Portfolio at
any time without penalty on 60 days' written notice to DFA. DFA may also
terminate its advisory relationship with respect to the Index Master Portfolio
on 90 days' written notice to the Trust. Each of the Advisory Contracts
terminates automatically in the event of its assignment.
-61-
<PAGE>
For the year or periods ended September 30, 1995, the Fund paid PIMC advisory
fees, and PIMC waived advisory fees and reimbursed expenses, as follows:
<TABLE>
<CAPTION>
FEES PAID REIMBURSE-
(AFTER ----------
PORTFOLIOS WAIVERS) WAIVERS MENTS
- ---------- ---------- ---------- ----------
<S> <C> <C> <C>
Money Market $1,051,446 $5,217,130 $ 0
Municipal Money Market $ 189,929 $ 921,718 $ 0
U.S. Treasury Money Market $ 489,209 $2,327,266 $ 0
Ohio Municipal Money Market $ 49,133 $ 245,955 $ 0
Pennsylvania Municipal Money Market $ 304,651 $1,264,187 $ 0
North Carolina Municipal Money
Market $ 46,472 $ 369,591 $ 4,999
Managed Income $1,790,332 $ 767,285 $ 0
Tax-Free Income $ 0 $ 49,671 $ 1,599
Intermediate Government Bond $ 379,534 $ 569,302 $ 0
Ohio Tax-Free Income $ 0 $ 42,044 $ 6,713
Pennsylvania Tax-Free Income $ 161,038 $ 137,951 $ 0
Intermediate Bond $ 342,301 $ 335,908 $ 0
Value Equity $2,832,644 $ 746,727 $ 0
Growth Equity $ 866,271 $ 324,851 $ 0
Small Cap Growth Equity $ 618,374 $ 137,615 $ 0
Select Equity $ 691,447 $ 259,293 $ 0
Index Equity $ 30,772 $ 382,205 $ 0
Small Cap Value Equity $1,143,071 $ 114,307 $ 0
International Equity $2,391,607 $ 597,902 $ 0
Balanced $ 642,763 $ 241,037 $ 0
Virginia Municipal Money Market $ 0 $ 85,063 $35,957
International Emerging Markets $ 258,648 $ 52,186 $ 0
Government Income/1/ $ 0 $ 37,256 $11,980
===========================================================================
</TABLE>
/1/ For the period from commencement of operations (October 3, 1994) through
September 30, 1995.
For the year or periods ended September 30, 1994, the Fund paid PIMC advisory
fees, and PIMC waived advisory fees and reimbursed expenses, as follows:
<TABLE>
<CAPTION>
FEES PAID
(AFTER
PORTFOLIOS WAIVERS) WAIVERS REIMBURSEMENTS
- ---------- --------- ----------- --------------
<S> <C> <C> <C>
Money Market $ 951,230 $3,359,847 $ 0
</TABLE>
-62-
<PAGE>
<TABLE>
<CAPTION>
FEES PAID
(AFTER
PORTFOLIOS WAIVERS) WAIVERS REIMBURSEMENTS
- ---------- --------- ----------- --------------
<S> <C> <C> <C>
Municipal Money Market $ 171,405 $ 599,920 $ 0
U.S. Treasury Money
Market $ 281,771 $ 986,201 $ 0
Ohio Municipal Money
Market $ 6,724 $ 217,938 $20,660
Pennsylvania Municipal
Money Market $ 42,612 $ 336,382 $19,022
North Carolina Municipal
Money Market $ 0 $ 249,914 $26,804
Managed Income $1,398,343 $ 599,290 $ 0
Tax-Free Income $ 0 $ 47,655 $35,898
Intermediate Government
Bond $ 368,546 $ 552,819 $ 0
Ohio Tax-Free Income $ 0 $ 35,709 $35,496
Pennsylvania Tax-Free
Income $ 49,646 $ 227,003 $ 9,645
Intermediate Bond $ 131,294 $ 206,071 $ 0
Value Equity $2,306,672 $ 865,002 $ 0
Growth Equity $ 467,637 $ 175,364 $ 0
Small Cap Growth Equity $ 55,825 $ 160,320 $ 0
Select Equity $ 303,169 $ 113,689 $ 0
Index Equity $ 28,392 $ 376,934 $ 0
Small Cap Value Equity $ 890,883 $ 197,974 $ 0
International Equity $1,408,053 $ 477,733 $ 0
Balanced $ 470,579 $ 202,166 $ 0
Virginia Municipal Money
Market/1/ $ 0 $ 8,925 $ 4,816
International Emerging
Markets/2/ $ 7,672 $ 16,051 $ 0
=====================================================================
</TABLE>
/1/ For the period from commencement of operations (July 25, 1994) through
September 30, 1994.
/2/ For the period from commencement of operations (June 17, 1994) through
September 30, 1994.
For the year or periods ended September 30, 1993, the Fund paid PIMC advisory
fees, and PIMC waived advisory fees and reimbursed expenses, as follows:
FEES PAID
(AFTER
PORTFOLIOS WAIVERS) WAIVERS REIMBURSEMENTS
- ---------- --------- ------- --------------
-63-
<PAGE>
<TABLE>
<S> <C> <C> <C>
Money Market $2,899,093 $815,911 $ 0
Municipal Money Market $ 509,475 $131,249 $ 0
U.S. Treasury Money Market $ 601,820 $195,459 $ 0
Ohio Municipal Money
Market/1/ $ 0 $ 28,953 $ 8,630
Pennsylvania Municipal
Money Market/1/ $ 0 $ 18,117 $11,411
North Carolina Municipal
Money Market/2/ $ 0 $ 47,085 $11,729
Managed Income $1,522,695 $ 87,513 $ 0
Tax-Free Income $ 0 $ 43,457 $ 7,314
Intermediate Government
Bond $ 594,202 $ 77,301 $ 0
Ohio Tax-Free Income/3/ $ 0 $ 8,781 $20,906
Pennsylvania Tax-Free
Income/3/ $ 0 $ 87,528 $19,064
Intermediate Bond/5/ $ 5,432 $ 5,432 $ 0
Value Equity $1,996,726 $108,242 $ 0
Growth Equity $ 400,652 $ 31,912 $ 0
Small Cap Growth Equity/6/ $ 0 $ 2,773 $ 0
Select Equity/7/ $ 14,325 $ 5,372 $ 0
Index Equity $ 212,413 $161,606 $ 0
Small Cap Value Equity $ 564,065 $ 34,794 $ 0
International Equity $ 598,040 $ 47,134 $ 0
Balanced $ 124,556 $ 45,203 $ 0
Virginia Municipal Money
Market/8/ N/A N/A N/A
International Emerging
Markets/8/ N/A N/A N/A
New Jersey Municipal Money
Market/8/ N/A N/A N/A
</TABLE>
/1/ Commenced operations June 1, 1993.
/2/ Commenced operations May 3, 1993.
/3/ Commenced operations December 1, 1992.
/4/ Commenced operations September 1, 1993.
/5/ Commenced operations September 17, 1993.
/6/ Commenced operations September 14, 1993.
/7/ Commenced operations September 13, 1993.
For the year or periods ended September 30, 1995, PIMC paid sub-advisory fees to
the specified Portfolios' sub-advisers, after waivers, and such sub-advisers
waived sub-advisory fees as follows:
-64-
<PAGE>
<TABLE>
<CAPTION>
FEES PAID
(AFTER
PORTFOLIOS WAIVERS) WAIVERS
- ---------- --------- -------
<S> <C> <C>
Money Market $ 0 $721,072
Municipal Money Market $ 0 $123,516
U.S. Treasury Money Market $ 0 $312,942
Ohio Municipal Money Market $ 0 $ 32,788
Pennsylvania Municipal Money
Market $ 0 $174,315
North Carolina Municipal Money
Market $ 0 $ 46,229
Managed Income $1,253,232 $537,100
Tax-Free Income $ 0 $ 34,770
Intermediate Government Bond $ 265,674 $398,511
Ohio Tax-Free Income $ 0 $ 29,431
Pennsylvania Tax-Free Income $ 112,727 $ 96,566
Intermediate Bond $ 239,611 $235,136
Value Equity $2,060,105 $543,074
Growth Equity $ 630,015 $236,255
Small Cap Growth Equity $ 449,727 $100,084
Select Equity $ 502,871 $188,576
Index Equity $ 30,772 $286,654
Small Cap Value Equity $ 831,324 $ 83,132
International Equity $1,913,286 $478,322
Balanced $ 467,464 $175,299
Virginia Municipal Money Market $ 0 $ 9,451
International Emerging Markets $ 227,610 $ 45,924
Government Income/1/ 0 $ 26,079
</TABLE>
/1/ Commenced operations October 3, 1994.
For the year or periods ended September 30, 1994, PIMC paid sub-advisory fees to
the specified Portfolios' sub-advisers, after waivers, and such sub-advisers
waived sub-advisory fees as follows:
-65-
<PAGE>
<TABLE>
<CAPTION>
FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS
- ---------- --------------- -------
<S> <C> <C>
Money Market $ 0 $479,008
Municipal Money Market $ 0 $ 85,703
U.S. Treasury Money Market $ 0 $140,886
Ohio Municipal Money Market $ 0 $ 24,962
Pennsylvania Municipal Money Market $ 0 $ 42,110
North Carolina Municipal Money Market $ 0 $ 27,768
Managed Income $1,198,580 $199,763
Tax-Free Income $ 0 $ 33,359
Intermediate Government Bond $ 276,410 $368,546
Ohio Tax-Free Income $ 0 $ 24,996
Pennsylvania Tax-Free Income $ 33,198 $160,456
Intermediate Bond $ 97,470 $138,685
Value Equity $2,018,338 $288,334
Growth Equity $ 409,182 $ 58,455
Small Cap Growth Equity $ 55,825 $101,371
Select Equity $ 265,273 $ 37,896
Index Equity $ 28,392 $275,602
Small Cap Value Equity $ 791,896 $ 0
International Equity $1,257,191 $251,438
Balanced $ 409,420 $ 79,849
Virginia Municipal Money Market/1/ $ 0 $ 992
International Emerging Markets/2/ $ 6,723 $ 14,153
</TABLE>
/1/ Commenced operations July 25, 1994.
/2/ Commenced operations June 17, 1994.
For the year or periods ended September 30, 1993, PIMC paid sub-advisory fees
to the specified Portfolios' sub-advisers, after waivers, and such sub-advisers
waived sub-advisory fees as follows:
<TABLE>
<CAPTION>
FEES PAID
(AFTER
PORTFOLIOS WAIVERS) WAIVERS
- ---------- --------- -------
<S> <C> <C>
Money Market $ 0 $412,778
Municipal Money Market $ 0 $ 71,192
U.S. Treasury Money Market $ 0 $ 88,587
Ohio Municipal Money Market/1/ $ 0 $ 3,217
Pennsylvania Municipal Money Market/1/ $ 0 $ 2,013
</TABLE>
-66-
<PAGE>
<TABLE>
<CAPTION>
FEES PAID
(AFTER
PORTFOLIO WAIVERS) WAIVERS
- --------- ------- -------
<S> <C> <C>
North Carolina Municipal Money Market/2/ $ 0 $ 5,232
Managed Income $1,069,887 $ 61,259
Tax-Free Income $ 0 $ 30,420
Intermediate Government Bond $ 415,941 $ 54,111
Ohio Tax-Free Income/3/ $ 0 $ 6,174
Pennsylvania Tax-Free Income/3/ $ 0 $ 61,270
Intermediate Bond/5/ $ 3,802 $ 3,802
Value Equity $1,452,164 $ 78,721
Growth Equity $ 291,383 $ 25,967
Small Cap Growth Equity/6/ $ 0 $ 2,017
Select Equity /7/ $ 10,418 $ 3,906
Index Equity $ 159,310 $121,205
Small Cap Value Equity $ 410,229 $ 25,305
International Equity $ 478,432 $ 37,707
Balanced $ 90,586 $ 32,875
</TABLE>
/1/ Commenced operations June 1, 1993.
/2/ Commenced operations May 3, 1993.
/3/ Commenced operations December 1, 1992.
/4/ Commenced operations September 1, 1993.
/5/ Commenced operations September 17, 1993.
/6/ Commenced operations September 14, 1993.
/7/ Commenced operations September 13, 1993.
For the period from October 1, 1992 to September 10, 1993, PIMC paid sub-
advisory fees of $1,017,364 and $274,275 to PNC Bank Ohio for the Managed Income
and Growth Equity Portfolios, respectively. For the period from October 1, 1992
to September 10, 1993, PIMC paid sub-advisory fees of $397,885 to PMC with
respect to the Intermediate Government Bond Portfolio.
For the services it provides as investment adviser to the Index Master
Portfolio, DFA is paid a monthly fee calculated as a percentage of average net
assets of the Index Master Portfolio. For the fiscal years ending November 30,
1993, 1994 and 1995, the Index Master Portfolio paid advisory fees to DFA
totalling $7,231, $10,833 and $18,816, respectively. The Index Equity
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<PAGE>
Portfolio did not invest in the Index Master Portfolio during such periods.
The predecessor portfolio to the New Jersey Tax-Free Income Portfolio was
advised by Midlantic Bank. For the fiscal years ended February 28, 1995, 1994
and 1993, the predecessor portfolio to the New Jersey Tax-Free Income Portfolio
paid $607,485, $159,582 and $37,159, respectively, in investment advisory fees
to Midlantic Bank pursuant to its prior investment advisory contract. In
addition, during the fiscal years ended February 28, 1995, 1994 and 1993,
Midlantic Bank waived $2,451, $318,099 and $100,403, respectively, in investment
advisory fees.
The predecessor portfolio to the International Bond Portfolio was advised
by Midlantic Bank. For the fiscal years ended February 28, 1995, 1994 and 1993,
the predecessor portfolio to the International Bond Portfolio paid $361,620,
$346,865 and $265,549, respectively, in investment advisory fees to Midlantic
Bank pursuant to its prior investment advisory contract.
The predecessor portfolio to the New Jersey Municipal Money Market
Portfolio was advised by Midlantic Bank. For the fiscal years ended February 28,
1995, 1994 and 1993, the predecessor portfolio to the New Jersey Municipal Money
Market Portfolio paid $158,240, $158,536 and $139,596, respectively, in
investment advisory fees to Midlantic Bank pursuant to its prior investment
advisory contract.
The predecessor portfolio to the Core Bond Portfolio was advised by
BlackRock. For the fiscal years ended June 30, 1995 and 1994 and for the period
December 9, 1992 (commencement of operations) through June 30, 1993, BlackRock
waived its entire investment advisory fee in the amounts of $56,894, $34,010 and
$24,761, respectively, and reimbursed expenses amounting to $137,364, $137,179
and $0, respectively.
The predecessor portfolio to the Short Government Bond Portfolio was
advised by BlackRock. For the fiscal years ended June 30, 1995, 1994 and 1993,
BlackRock waived its entire investment advisory fee in the amounts of
$102,707, $110,232 and $64,580, respectively, and reimbursed expenses
amounting to $61,195, $55,582 and $0, respectively.
ADMINISTRATION AGREEMENTS. CCG, PFPC and CDI serve as the Fund's co-
administrators pursuant to administration agreements (collectively, the
"Administration Agreement"). PFPC and CDI 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. CCG did not serve as a co-administrator during the fiscal
year ended September 30, 1995.
The Administration Agreement provides that CCG, PFPC and CDI 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
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<PAGE>
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.
CCG serves as an Administrator to the Fund pursuant to a Co-Administration
Agreement. Under the Co-Administration Agreement, CCG is responsible for: (i)
the supervision and coordination of the performance of the Fund's service
providers; (ii) the negotiation of service contracts and arrangements between
the Fund and its service providers; (iii) acting as liaison between the trustees
of the Fund and the Fund's service providers; and (iv) providing ongoing
business management and support services in connection with the Fund's
operations.
The Co-Administration Agreement provides that CCG will not be liable for
any error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the matters to which the Agreement relates, except for losses
resulting from willful misfeasance, bad faith or gross negligence on the part of
CCG in the performance of its duties under the Agreement.
PFPC serves as the administrative services agent for the Index Master
Portfolio pursuant to an Administration and Accounting Services Agreement. The
services provided by PFPC are subject to supervision by the executive officers
and the Board of Trustees of the Trust, and include day-to-day keeping and
maintenance of certain records, calculation of the offering price of the shares,
preparation of reports and acting as liaison with the Trust's custodians and
dividend and disbursing agents. At the time of the Index Master Portfolio's
conversion, for its services, PFPC will be entitled to compensation from the
Index Master Portfolio at the annual rate of .015% of the Index Master
Portfolio's average daily net assets. At the time of the Index Equity
Portfolio's expected conversion to a feeder portfolio, PFPC will charge each
investor in the Index Master Portfolio a monthly fee of $2,600.
From February 1, 1993 until January 13, 1996, PFPC and Provident
Distributors, Inc. ("PDI") served as co-administrators to the Fund pursuant to
an administration agreement substantially similar to the administration
agreement currently in effect for the Fund.
For the year or periods ended September 30, 1995, the Fund paid PFPC and
PDI (formerly Provident Distributors, Inc.) combined administration fees (after
waivers), and PFPC and PDI waived combined administration fees and reimbursed
expenses, as follows:
<TABLE>
<CAPTION>
FEES PAID
(AFTER
PORTFOLIOS WAIVERS) WAIVERS REIMBURSEMENTS
- ---------- --------- ------- --------------
<S> <C> <C> <C>
Money Market $1,686,008 $200,348 $ 0
Municipal Money Market $ 208,246 $162,303 0
U.S. Treasury Money Market $ 631,041 $281,107 0
Ohio Municipal Money Market $ 43,263 $ 55,100 0
Pennsylvania Municipal
Money Market $ 322,632 $200,313 0
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
FEES PAID
(AFTER
PORTFOLIOS WAIVERS) WAIVERS REIMBURSEMENTS
- ---------- --------- ------- --------------
<S> <C> <C> <C>
North Carolina Municipal
Money Market $ 24,058 $114,630 $ 1,666
Managed Income $ 751,452 $267,310
Tax-Free Income $ 0 $ 19,868 $ 2,132
Intermediate Government Bond $ 244,417 $135,117
Ohio Tax-Free Income $ 0 $ 16,817 $ 8,950
Pennsylvania Tax-Free
Income $ 68,050 $ 51,546 0
Intermediate Bond $ 139,960 $131,323 0
Value Equity $1,083,967 $187,474 0
Growth Equity $ 360,966 $ 72,170 0
Small Cap Growth Equity $ 238,595 $ 36,310 0
Select Equity $ 288,666 $ 57,058 0
Index Equity $ 96,814 $316,163 0
Small Cap Value Equity $ 359,637 $ 97,592 0
International Equity $ 689,601 $107,601 0
Balanced $ 216,630 $104,752 0
Virginia Municipal Money
Market $ 0 $ 28,354 $11,986
International Emerging
Markets $ 41,383 $ 8,350 0
Government Income/1/ 0 $ 14,903 $15,973
</TABLE>
/1/ Commenced operations October 3, 1994.
For the year or periods ended September 30, 1994, the Fund paid PFPC and PDI
combined administration fees (after waivers), and PFPC and PDI waived combined
administration fees and reimbursed expenses, as follows:
<TABLE>
<CAPTION>
FEES PAID
(AFTER
PORTFOLIOS WAIVERS) WAIVERS REIMBURSEMENTS
- ---------- --------- ------- --------------
<S> <C> <C> <C>
Money Market $ 803,349 $541,066 $ 0
Municipal Money Market $ 42,931 $214,178 $ 0
U.S. Treasury Money Market $ 132,901 $289,756 $ 0
Ohio Municipal Money
Market $ 2,241 $ 72,646 $ 6,887
Pennsylvania Municipal
Money Market $ 11,758 $114,573 $ 6,340
North Carolina Municipal
Money Market $ 0 $ 83,304 $ 8,934
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
FEES PAID
(AFTER
PORTFOLIOS WAIVERS) WAIVERS REIMBURSEMENTS
- ---------- --------- ------- --------------
<S> <C> <C> <C>
Managed Income $ 521,204 $277,849 $ 0
Tax-Free Income $ 0 $ 19,062 $14,359
Intermediate Government
Bond $ 186,742 $181,804 $ 0
Ohio Tax-Free Income $ 0 $ 14,284 $14,199
Pennsylvania Tax-Free
Income $ 19,858 $ 90,020 $ 3,858
Intermediate Bond $ 52,518 $ 82,428 $ 0
Value Equity $1,075,209 $ 61,908 $ 0
Growth Equity $ 128,262 $105,557 $ 0
Small Cap Growth Equity $ 20,166 $ 58,432 $ 0
Select Equity $ 52,164 $ 99,421 $ 0
Index Equity $ 27,115 $378,211 $ 0
Small Cap Value Equity $ 354,486 $ 41,462 $ 0
International Equity $ 502,876 $ 0 $ 0
Balanced $ 125,112 $119,522 $ 0
Virginia Municipal Money
Market/1/ $ 0 $ 2,975 $ 1,605
International Emerging
Markets/2/ $ 1,259 $ 2,537 $ 0
</TABLE>
/1/ Commenced operations July 25, 1994.
/2/ Commenced operations June 17, 1994.
For the year or periods ended September 30, 1993, the Fund paid PFPC and PDI
combined administration fees (after waivers), and PFPC and PDI waived combined
administration fees and reimbursed expenses, as follows:
<TABLE>
<CAPTION>
FEES PAID
(AFTER
PORTFOLIOS WAIVERS) WAIVERS REIMBURSEMENTS
- ---------- --------- ------- --------------
<S> <C> <C> <C>
Money Market $674,120 $101,509 $ 0
Municipal Money Market $117,768 $ 21,036 $ 0
U.S. Treasury Money Market $157,519 $ 30,288 $ 0
Ohio Municipal Money Market/1/ $ 0 $ 9,651 $ 0
Pennsylvania Municipal Money
Market/1/ $ 0 $ 6,039 $ 0
North Carolina Municipal
Money Market/2/ $ 0 $ 15,659 $ 0
Managed Income $397,750 $ 87,513 $ 0
Tax-Free Income $ 0 $ 11,914 $ 0
</TABLE>
-71-
<PAGE>
<TABLE>
<CAPTION>
FEES PAID
(AFTER
PORTFOLIOS WAIVERS) WAIVERS REIMBURSEMENTS
- ---------- --------- ------- --------------
<S> <C> <C> <C>
Intermediate Government Bond $167,611 $ 24,673 $ 0
Ohio Tax-Free Income/3/ $ 0 $ 8,797 $6,515
Pennsylvania Tax-Free Income/3/ $ 0 $ 85,754 $5,766
Value Equity $528,584 $ 9,382 $ 0
Growth Equity $101,208 $ 12,879 $ 0
Small Cap Growth Equity/4/ $ 173 $ 835 $ 0
Select Equity/5/ $ 4,722 $ 2,441 $ 0
Index Equity $195,736 $ 59,581 $ 0
Small Cap Value Equity $156,048 $ 5,441 $ 0
International Equity $123,924 $ 6,477 $ 0
Balanced $ 44,667 $ 8,046 $ 0
</TABLE>
/1/ Commenced operations June 1, 1993.
/2/ Commenced operations May 3, 1993.
/3/ Commenced operations December 1, 1992.
/4/ Commenced operations September 14, 1993.
/5/ Commenced operations September 13, 1993.
For the period from October 1, 1992 to January 31, 1993, the Fund paid PFPC
and a 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 with respect to the Money Market, Municipal Money
Market, U.S. Treasury Money Market, Managed Income, Tax-Free Income,
Intermediate Government Bond, 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. 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
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<PAGE>
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.
The predecessor portfolio to the New Jersey Municipal Money Market,
International Bond and New Jersey Tax-Free Income Portfolios received
administrative services from SEI Financial Management Corporation ("SEI").
During the fiscal years ended February 28, 1995, 1994 and 1993, the predecessor
portfolio to the New Jersey Municipal Money Market Portfolio paid $44,863,
$43,497, $52,343, respectively in administration fees to SEI pursuant to the
prior administration agreement, and SEI waived $26,345, $27,844 and $10,475,
respectively, in administration fees. During the fiscal years ended February 28,
1995, 1994 and 1993, the predecessor portfolio to the New Jersey Tax-Free Income
Portfolio paid $105,029, $79,454 and $15,884, respectively, in administrative
fees to SEI pursuant to the prior administration agreement, and SEI waived
$77,951, $63,850 and $25,385, respectively, in administrative fees. During the
fiscal years ended February 28, 1995, 1994 and 1993, the predecessor portfolio
to the International Bond Portfolio paid $81,364, $78,033 and $59,749,
respectively, in administrative fees to SEI pursuant to the prior administration
agreement.
The predecessor portfolio to the Short Government Bond and Core Bond
Portfolios received administrative services from State Street Bank and Trust
Company ("State Street"). During the fiscal years ended June 30, 1995 and 1994
and for the period December 9, 1992 (commencement of operations) through June
30, 1993, the predecessor portfolio to the Core Bond Portfolio paid $73,257,
$40,261 and $4,076, respectively, in administrative fees to State Street
pursuant to the prior administration agreement and State Street waived $0,
$32,500 and $3,701, respectively, in administrative fees. During the fiscal
years ended June 30, 1995, 1994 and 1993, the predecessor portfolio to the Short
Government Bond Portfolio paid $69,234, $79,160 and $7,885, respectively, in
administrative fees to State Street pursuant to the prior administration
agreement and State Street waived $0, $0 and $64,580, respectively, in
administrative fees.
CUSTODIAN AND TRANSFER AGENCY AGREEMENTS. PNC Bank is custodian of the
Fund's assets pursuant to a custodian agreement
-73-
<PAGE>
(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 currently serves as the Fund's sub-custodians. On or about February 10,
1996, Citibank, N.A. will serve as the international sub-custodian with respect
to the International Bond Portfolio.
For its services to the Fund under the Custodian Agreement, PNC Bank
receives a fee which is calculated based upon each investment portfolio's
average gross assets, with a minimum monthly fee of $1,000 per investment
portfolio. PNC Bank is also entitled to out-of-pocket expenses and certain
transaction charges. PNC Bank intends to waive its custody fees with respect to
the Index Equity Portfolio once the Portfolio invests its assets in the Index
Master Portfolio.
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 with respect to the
Fund's Institutional and Service Shares under the Transfer Agency Agreement,
PFPC receives fees at the annual rate of .03% of the average net asset value of
outstanding Institutional and Service Shares in each Portfolio, plus per account
fees and disbursements. For its services under the Transfer Agency Agreement
with respect to Investor Shares, PFPC receives per account fees, with minimum
annual fees of $24,000 for each Portfolio, plus disbursements.
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<PAGE>
PNC Bank serves as the Trust's custodian and PFPC serves as the Trust's
transfer and dividend disbursing agent. The Index Equity Portfolio will bear
its pro rata portion of the Index Master Portfolio's custody and transfer and
dividend disbursing fees and expenses once the Index Equity Portfolio invests
its assets in the Index Master Portfolio.
DISTRIBUTOR AND DISTRIBUTION AND SERVICE PLAN. The Fund has entered into a
distribution agreement with the Distributor under which the Distributor, as
agent, offers shares of 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.
Pursuant to the Fund's Amended and Restated Distribution and Service Plan
(the "Plan"), the Fund may pay the Distributor and/or CCG or any other affiliate
of PNC Bank fees for distribution and sales support services. Currently, as
described further below, only Investor A Shares, Investor B Shares and Investor
C Shares bear the expense of distribution fees under the Plan. In addition, the
Fund may pay CCG fees for the provision of personal services to shareholders and
the processing and administration of shareholder accounts. CCG, in turn,
determines the amount of the service fee and shareholder processing fee to be
paid to other Service Organizations. The Plan provides, among other things,
that: (i) the Board of Trustees shall receive quarterly reports regarding the
amounts expended under the Plan and the purposes for which such expenditures
were made; (ii) the Plan will continue in effect for so long as its continuance
is approved at least annually by the Board of Trustees in accordance with Rule
12b-1 under the 1940 Act; (iii) any material amendment thereto must be approved
by the Board of Trustees, including the trustees who are not "interested
persons" of the Fund (as defined in the 1940 Act) and who have no direct or
indirect financial interest in the operation of the Plan or any agreement
entered into in connection with the Plan (the "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
services pursuant to the Plan shall be effective only upon approval by a vote of
a majority of the outstanding shares of such class and by a majority of the 12b-
1 Trustees; and (v) while the Plan remains in effect, the selection and
nomination of the Fund's trustees who are not "interested persons" of the Fund
shall be committed to the discretion of the Fund's non-interested trustees.
The Plan is terminable as to any class of Shares without penalty at any
time by a vote of a majority of the 12b-1
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<PAGE>
Trustees, or by vote of the holders of a majority of the shares of such class.
Similarly, any agreement entered into pursuant to the Plan with a Service
Organization is terminable as to a class without penalty, at any time, by the
Fund or by the Service Organization upon written notice to the other. Each such
agreement will terminate automatically in the event of its assignment.
With respect to Investor A Shares, the front-end sales charge and the
distribution fee payable under the Plan (at a maximum annual rate of .10% of the
average daily net asset value of each Portfolio's outstanding Investor A Shares)
are used to pay commissions and other fees payable to Service Organizations and
other broker/dealers who sell Investor A Shares.
With respect to Investor B Shares, Service Organizations and other
broker/dealers receive commissions from the Distributor for selling Investor B
Shares, which are paid at the time of the sale. These commissions approximate
the commissions payable with respect to sales of Investor A Shares. The
distribution fees payable under the Plan (at a maximum annual rate of .75% of
the average daily net asset value of each Portfolio's outstanding Investor 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 Investor B Shares are
redeemed prior to the expiration of the conversion period, after which Investor
B Shares automatically convert to Investor A Shares.
With respect to Investor C Shares, Service Organizations and other
broker/dealers receive commissions from the Distributor for selling Investor C
Shares, which are paid at the time of the sale. The distribution fees payable
under the Plan (at a maximum annual rate of .75% of the average daily net asset
value of each Portfolio's outstanding Investor C 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 Investor C Shares are redeemed within 18 months of
purchase.
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.
The Fund intends to enter into service agreements with institutions
pursuant to which institutions will render certain support services to their
customers ("Customers") who are the beneficial owners of Service, Investor A,
Investor B and Investor C Shares. Such services will be provided to Customers
who are the beneficial owners of Shares of such classes and are intended to
supplement the services provided by the Fund's Administrators
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<PAGE>
and transfer agent to the Fund's shareholders of record. In consideration for
payment of a service fee of up to .25% (on an annualized basis) of the average
daily net asset value of the Investor A, Investor B and Investor C Shares owned
beneficially by their Customers and .15% (on an annualized basis) of the average
daily net asset value of the Service Shares beneficially owned by their
Customers, institutions may provide general customer liaison services,
including, but not limited to (i) answering customer inquiries regarding account
status and history, the manner in which purchases, exchanges and redemptions of
shares may be effected and certain other matters pertaining to the customer's
investments; and (ii) assisting customers in designating and changing dividend
options, account designations and addresses. In consideration for payment of a
shareholder processing fee of up to a separate .15% (on an annualized basis) of
the average daily net asset value of Service, Investor A, Investor B and
Investor C Shares owned beneficially by their Customers, institutions may
provide one or more of these additional services to such Customers: (i)
providing necessary personnel and facilities to establish and maintain customer
accounts and records; (ii) assistance in aggregating and processing purchase,
exchange and redemption transactions; (iii) placement of net purchase and
redemption orders with the Distributor; (iv) arranging for wiring of funds; (v)
transmitting and receiving funds in connection with Customer orders to purchase
or redeem shares; (vi) processing dividend payments; (vii) verifying and
guaranteeing customer signatures in connection with redemption orders and
transfers and changes in customer-designated accounts, as necessary; (viii)
providing periodic statements showing Customers' account balances and, to the
extent practicable, integrating such information with other Customer
transactions otherwise effected through or with a Service Organization; (ix)
furnishing (either separately or on an integrated basis with other reports sent
to a shareholder by a Service Organization) monthly and year-end statements and
confirmations of purchases, exchanges and redemptions; (x) transmitting on
behalf of the Fund, proxy statements, annual reports, updating prospectuses and
other communications from the Fund to customers; (xi) receiving, tabulating and
transmitting to the Fund proxies executed by Customers with respect to
shareholder meetings; (xii) providing subaccounting with respect to shares
beneficially owned by Customers or the information to the Fund necessary for
subaccounting; (xiii) sub-transfer agency services; and (xiv) such other similar
services as the Fund or a Customer may request.
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<PAGE>
For the fiscal year ended September 30, 1995, the Investor A and Investor B
Shares of the Portfolios bore the expense of distribution fees relating to the
Fund's prior distribution plans for Investor A Shares and Investor B Shares, and
the Service Shares and Investor B Shares of the Portfolios bore the expense of
servicing and shareholder processing fees relating to the Fund's prior service
plans for Service Shares and Investor B Shares as follows:
<TABLE>
<CAPTION>
DISTRIBUTION
PLAN SERVICE PLAN SERVICE PLAN
INVESTOR A INVESTOR B (INVESTOR B (SERVICE
PORTFOLIOS SHARES SHARES SHARES) SHARES)
- ---------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
Money Market $ 31,400 - - $ 2,336,729
Municipal Money Market 143 - - 624,366
U.S. Treasury Money Market 8,770 - - 1,585,537
Ohio Municipal Money Market 132 - - 146,311
Pennsylvania Municipal Money Market 1,199 - - 387,016
North Carolina Municipal Money
Market 36 - - 1,334
Managed Income 50,278 - - 245,386
Tax-Free Income 30,269 - - 8,543
Intermediate Government Bond 22,909 - - 146,738
Ohio Tax-Free Income 7,686 $ 467 $ 156 13,273
Pennsylvania Tax-Free Income 197,753 15,286 5,095 34,032
Intermediate Bond 1,122 - - 98,742
Value Equity - - - -
Growth Equity - - - -
Small Cap Growth Equity - - - -
Select Equity - - - -
Index Equity - - - -
Small Cap Value Equity - 6,258 2,086 -
International Equity - 5,330 2,010 -
Balanced - 14,053 4,684 -
Virginia Municipal Money Market - - - 1,287
International Emerging Markets - - - -
Government Income 3,976 42,314 11,145 -
</TABLE>
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<PAGE>
No Investor C Shares of any Portfolio were offered during the fiscal year ended
September 30, 1995.
DIVIDENDS AND DISTRIBUTIONS -- BOND PORTFOLIOS
Each Bond Portfolio will distribute substantially all of its net
investment income and net realized capital gains, if any, to shareholders. All
distributions are reinvested at net asset value in form of additional full and
fractional shares of the relevant class 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 the Managed
Income, Tax-Free Income, Intermediate Government Bond, Intermediate Bond and
International Bond 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 the Pennsylvania Tax-Free Income,
Core Bond and Short Government Bond Portfolio is declared daily as a dividend on
"settled" shares (that is, shares for which the particular Portfolio has
received payment in Federal funds) on the first Business Day after a purchase
order is placed with the Fund. Payments by check are normally converted to
Federal funds within two Business Days of receipt. All dividends are paid
within ten days after the end of each month and, in the case of the Pennsylvania
Tax-Free Income, New Jersey Tax-Free Income, Ohio Tax-Free Income, Core Bond and
Short Government 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.
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 PAMG, PIMC (with respect to the Index Equity Portfolio
until the Portfolio invests its asset in the Index Master Portfolio) and the
Administrators, transfer agency fees, fees and expenses of officers and trustees
who are not affiliated with PAMG, PIMC or the Distributor or any of their
affiliates, taxes, interest, legal fees, custodian fees, auditing fees,
servicing fees, fees and expenses in registering and qualifying the Portfolios
and their 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, expenses relating to shareholder reports,
shareholder meetings and proxy solicitations, fidelity bond and trustees and
officers liability insurance premiums, the expense of independent pricing
services and other expenses which are not expressly assumed by PAMG, PIMC or the
Fund's service providers under their agreements with the Fund. Any general
expenses of the Fund that do not belong 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.
PAMG, PIMC and the sub-advisers expect to waive voluntarily a portion of
their respective advisory and sub-advisory fees during the Portfolios' current
fiscal year. In addition, if the total expenses borne by any Portfolio in a
fiscal year exceed the expense limitations imposed by applicable state
securities regulations, PAMG, PIMC (with respect to the Index Equity Portfolio
until the Portfolio invests its asset in the Index Master Portfolio), the
respective sub-adviser and the Administrators will bear the amount of the excess
to the extent required by such regulations in proportion to the advisory and
administration fees otherwise payable to them for such year.
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<PAGE>
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 the Trust with respect to the Index Master
Portfolio, (or affiliated persons of such persons) will be made in accordance
with Rule 17e-1 under the 1940 Act. With respect to the Index Master Portfolio,
commissions paid on such transactions would be commensurate with the rate of
commissions paid on similar transactions to brokers that are not so affiliated.
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
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<PAGE>
same transaction, provided that the adviser or sub-adviser determines in good
faith that such commission is reasonable in terms either of the transaction or
the overall responsibility of the adviser or sub-adviser to a Portfolio and its
other clients and that the total commissions paid by a Portfolio will be
reasonable in relation to the benefits to a Portfolio over the long-term. With
respect to the Index Master Portfolio, it will seek to acquire and dispose of
securities in a manner which would cause as little fluctuation in the market
prices of stocks being purchased or sold as possible in light of the size of the
transactions being effected, and brokers will be selected with this goal in
view. DFA monitors the performance of brokers which effect transactions for the
Index Master Portfolio to determine the effect that the Index Master Portfolio's
trading has on the market prices of the securities in which they invest. DFA
also checks the rate of commission being paid by the Index Master Portfolio to
its brokers to ascertain that they are competitive with those charged by other
brokers for similar services. Transactions also may be placed with brokers who
provide DFA with investment research, such as reports concerning individual
issuers, industries and general economic and financial trends and other research
services. The Investment Management Agreement permits DFA knowingly to pay
commissions on such transactions which are greater than another broker might
charge if DFA, in good faith, determines that the commissions paid are
reasonable in relation to the research or brokerage services provided by the
broker or dealer when viewed in terms of either a particular transaction or
DFA's overall responsibilities to the Trust.
Commission rates for brokerage transactions on foreign stock exchanges are
generally fixed. In addition, the adviser or sub-adviser may take into account
the sale of shares of the Fund in allocating purchase and sale orders for
portfolio securities to brokers (including brokers that are affiliated with them
or Distributor).
For the year or period ended September 30, 1995, the following Portfolios paid
brokerage commissions as follows:
<TABLE>
<CAPTION>
PORTFOLIOS BROKERAGE COMMISSIONS
- ---------- ---------------------
<S> <C>
Money Market -
Municipal Money Market -
U.S. Treasury Money Market -
Ohio Municipal Money Market -
Pennsylvania Municipal Money Market -
North Carolina Municipal Money Market -
Managed Income -
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
PORTFOLIOS BROKERAGE COMMISSIONS
- ---------- ---------------------
<S> <C>
Value Equity $ 364,680
Growth Equity 356,156
Small Cap Growth Equity 88,691
Select Equity 341,935
Index Equity 73,946
Small Cap Value Equity 251,396
International Equity 2,667,245
Balanced 144,451
International Emerging Markets 356,727
</TABLE>
For the year or period ended September 30, 1994, the following Portfolios
paid brokerage commissions as follows:
<TABLE>
<CAPTION>
PORTFOLIOS BROKERAGE COMMISSIONS
- ---------- ---------------------
<S> <C>
Value Equity $ 431,232
Growth Equity 530,428
Small Cap Growth Equity 62,339
Select Equity 156,700
Index Equity 47,190
Small Cap Value Equity 185,560
International Equity 1,031,631
Balanced 164,460
International Emerging Markets 32,367
</TABLE>
For the year or period ended September 30, 1993, the
following Portfolios paid brokerage commissions as follows:
<TABLE>
<CAPTION>
PORTFOLIOS BROKERAGE COMMISSIONS
- ---------- ---------------------
<S> <C>
Value Equity $ 136,565
Growth Equity/*/ $ 366,421
Small Cap Growth Equity/*/ $ 1,186
Select Equity $ 4,770
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
PORTFOLIOS BROKERAGE COMMISSIONS
- ---------- ---------------------
<S> <C>
Index Equity 18,386
Small Cap Value Equity/*/ 105,423
International Equity 308,297
Balanced 68,556
</TABLE>
/*/ The Growth Equity, Small Cap Growth Equity and Small Cap Value Equity
Portfolios paid Shearson Lehman Hutton Inc. ("Shearson"), an affiliate of
the Fund's former distributor, $4,390, $264 and $636, respectively.
Approximately 1%, 22% and 1% of the aggregate brokerage commissions of such
respective Portfolios 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 Index Master Portfolio's fiscal years ended November 30, 1993, 1994
and 1995, the Index Master Portfolio paid brokerage commissions totalling
$41,393, $10,610 and $15,289, respectively.
For the fiscal years ended February 28, 1995, 1994 and 1993 the predecessor
portfolios to the New Jersey Municipal Money Market, New Jersey Tax-Free Income
and International Bond Portfolios paid no brokerage commissions.
For the fiscal years ended June 30, 1995 and 1994 and for the period
December 9, 1992 (commencement of operations) through June 30, 1993, the
predecessor portfolio to the Core Bond paid no brokerage commissions.
For the fiscal years ended June 30, 1995, 1994 and 1993 the predecessor
portfolio to the Short Government Bond Portfolio paid no brokerage commissions.
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
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<PAGE>
such transactions because money market instruments are generally traded on a
"net" basis with dealers acting as principal for their own accounts without a
stated commission. The price of the security, however, usually includes a profit
to the dealer. Each Money Market Portfolio intends to purchase only securities
with remaining maturities of 13 months or less as determined in accordance with
the rules of the SEC. As a result, the portfolio turnover rates of a Money
Market Portfolio will be relatively high. However, because brokerage commissions
will not normally be paid with respect to investments made by a Money Market
Portfolio, the turnover rates should not adversely affect the Portfolio's net
asset values or net income.
Securities purchased in underwritten offerings include a fixed amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount. When securities are purchased or sold directly from or
to an issuer, no commissions or discounts are paid. It is the policy of the
Portfolios to give primary consideration to obtaining the most favorable price
and efficient execution of transactions involving money market instruments. In
seeking to implement this policy of the Portfolios, the adviser and sub-advisers
will effect transactions involving money market instruments with those dealers
they believe provide the most favorable prices and are capable of providing
efficient executions.
The adviser or sub-advisers may seek to obtain an undertaking from issuers
of commercial paper or dealers selling commercial paper to consider the
repurchase of such securities from a Portfolio prior to maturity at their
original cost plus interest (sometimes adjusted to reflect the actual maturity
of the securities), if it believes that a Portfolio's anticipated need for
liquidity makes such action desirable. Any such repurchase prior to maturity
reduces the possibility that a Portfolio would incur a capital loss in
liquidating commercial paper, especially if interest rates have risen since
acquisition of the particular commercial paper.
Investment decisions for each Portfolio and for other investment accounts
managed by the adviser or sub-advisers are made independently of each other in
light of differing conditions. However, the same investment decision may be
made for two or more such accounts. In such cases, simultaneous transactions
are inevitable. Purchases or sales are then averaged as to price and allocated
as to amount in a manner deemed equitable to each such account. While in some
cases this practice could have a detrimental effect upon the price or value of
the security as far as a Portfolio is concerned, in other cases it could be
beneficial to a Portfolio. A Portfolio will
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<PAGE>
not purchase securities during the existence of any underwriting or selling
group relating to such securities of which PAMG, PIMC, BlackRock, PNC Bank, PCM,
PEAC, the Administrators, the Distributor or any affiliated person (as defined
in the 1940 Act) thereof is a member except pursuant to procedures adopted by
the Board of Trustees in accordance with Rule 10f-3 under the 1940 Act. In no
instance will portfolio securities be purchased from or sold to PAMG, PIMC,
BlackRock, PNC Bank, PCM, PEAC, the Administrators, the 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 Index Master Portfolio
ordinarily will not sell portfolio securities except to reflect additions or
deletions of stocks that comprise the S&P 500 Index, including mergers,
reorganizations and similar transactions and, to the extent necessary, to
provide cash to pay redemptions of the Index Master Portfolio's shares.
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,
1995, the following Portfolios held the following securities:
<TABLE>
<CAPTION>
Portfolio Security Value
- --------- -------- -----
<S> <C> <C>
Money Market
- ------------
Bear, Stearns & Co. Variable Rate Obligation $ 70,000,000
Goldman Sachs, LP Variable Rate Obligation 47,000,000
Merrill Lynch & Co. Medium Term Note 42,000,000
Merrill Lynch & Co. Commercial Paper 24,490,222
Merrill Lynch & Co. Variable Rate Obligation 25,002,938
Morgan Stanley & Co. Repurchase Agreement 125,000,000
Portfolio Security Value
- --------- -------- -----
U.S. Treasury Money Market
- --------------------------
Morgan Stanley & Co. Repurchase Agreement $100,000,000
Managed Income
- --------------
Salomon Brothers, Inc. Corporate Bond $ 7,062,375
Merrill Lynch & Co. Corporate Bond 2,202,895
Morgan Stanley & Co. Corporate Bond 15,961,839
Balanced
- --------
Salomon Brothers, Inc. Corporate Bond $ 450,592
</TABLE>
-85-
<PAGE>
<TABLE>
<S> <C> <C>
Merrill Lynch & Co. Corporate Bond $ 919,875
Index Equity
- ------------
Salomon Brothers, Inc. Common Stock $ 256,275
Merrill Lynch & Co. Common Stock 543,750
Short Government Bond
- ---------------------
Salomon Brothers, Inc. Common Stock $ 492,000
PaineWebber Group Inc. Common Stock $ 147,375
International Bond
- ------------------
Salomon Brothers, Inc. Common Stock $ 2,046,250
PaineWebber Group Inc. Common Stock $ 1,558,125
Government Income
- -----------------
Merrill Lynch & Co. Common Stock $ 999,995
</TABLE>
PURCHASE AND REDEMPTION INFORMATION
COMPUTATION OF PUBLIC OFFERING PRICES FOR INVESTOR A SHARES OF THE
NON-MONEY MARKET PORTFOLIOS. An illustration of the computation of the public
offering price per Investor A Share of each Non-Money Market Portfolio, based on
the value of such Portfolios' net assets as of September 30, 1995, follows:
TABLE
-----
<TABLE>
<CAPTION>
Value Growth Small Cap Index
Equity Equity Growth Equity Select Equity Equity
Portfolio Portfolio Portfolio Portfolio Portfolio
------------ ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Net Assets................ $16,909,532 $10,033,689 $ 7,347,607 $ 3,807,750 $6,500,597
Outstanding
Shares................... 1,214,898 771,222 490,591 320,632 478,864
=========== =========== =========== =========== ==========
Net Asset Value
Per Share................ $ 13.92 $ 13.01 $ 14.98 $ 11.88 $ 13.58
Maximum Sales Charge,
4.50% of offering price
(4.71% of net asset
value per share)......... $ .66 $ .61 $ .71 $ .56 $ .64
----------- ----------- ----------- ----------- ----------
Offering to Public........ $ 14.58 $ 13.62 $ 15.69 $ 12.44 $ 14.22
=========== =========== =========== =========== ==========
</TABLE>
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<PAGE>
<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................ $21,562,824 $17,720,931 $67,891,929 $11,977,229 $6,590,747
Outstanding
Shares................... 1,424,503 1,338,381 4,946,071 1,153,926 621,214
=========== =========== =========== =========== ==========
Net Asset Value
Per Share................ $ 15.14 $ 13.24 $ 13.73 $ 10.38 $ 10.61
Maximum Sales Charge,
4.50% of offering price
(4.71% of net asset
value per share)......... $ .71 $ .62 $ .65 $ .49 $ .50
----------- ----------- ----------- ----------- ----------
Offering to Public........ $ 15.85 $ 13.86 $ 14.38 $ 10.87 $ 11.11
=========== =========== =========== =========== ==========
<CAPTION>
Pennsylvania Short
Intermediate Ohio Tax- Tax-Free Government Intermediate
Government Bond Free Income Income Bond Bond
Portfolio Portfolio Portfolio Portfolio Portfolio
------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Net Assets........... $ 9,801,709 $ 3,302,252 $42,774,116 $ 311,448 $ 646,591
Outstanding
Shares.............. 977,718 328,448 4,142,417 32,087 68,597
========== =========== =========== =========== ==========
Net Asset Value
Per Share........... $ 10.03 $ 10.05 $ 10.33 $ 9.71 $ 9.43
Maximum Sales Charge,
4.50% of offering price
(4.71% of net asset
value per share)..... $ .47 $ .47 $ .49 $ .46 $ .44
----------- ----------- ----------- ----------- ----------
Offering to Public... $ 10.50 $ 10.52 $ 10.82 $ 10.17 $ 9.87
=========== =========== =========== =========== ==========
<CAPTION>
International New Jersey
Government International Emerging Tax-Free Core
Income Bond Markets Income Bond
Portfolio Portfolio Portfolio Portfolio Portfolio
------------ ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Net Assets........... $ 2,989,844 $ 100 $ 2,562,718 $ 100 $ 100
Outstanding
Shares.............. 279,974 10 313,245 10 10
=========== =========== =========== =========== ==========
Net Asset Value
Per Share...............$ 10.68 $ 10.00 $ 8.18 $ 10.00 $ 10.00
Maximum Sales Charge,
4.50% of offering price
(4.71% of net asset
value per share)........$ .50 $ .47 $ .39 $ .47 $ .47
----------- ----------- ----------- ----------- ----------
Offering to Public...... $ 11.18 $ 10.47 $ 8.57 $ 10.47 $ 10.47
=========== =========== =========== =========== ==========
</TABLE>
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<PAGE>
Total front-end sales charges paid by shareholders of Investor A Shares of the
Portfolios for the year or period ended September 30, 1995 were as follows:
<TABLE>
<CAPTION>
PORTFOLIOS FRONT-END SALES CHARGES
- ---------- -----------------------
<S> <C>
Managed Income $ 37,132
Tax-Free Income 8,850
Intermediate Government Bond 42,765
Ohio Tax-Free Income 2,725
Pennsylvania Tax-Free Income 121,089
Intermediate Bond 1,513
Value Equity 68,289
Growth Equity 47,859
Small Cap Growth Equity 77,356
Select Equity 34,761
Index Equity 51,229
Small Cap Value Equity 61,709
International Equity 83,938
Balanced 144,255
International Emerging Markets 24,915
Government Income 69,712
</TABLE>
Total front-end sales charges paid by shareholders of Investor A Shares of the
Portfolios for the year or period ended September 30, 1994 were as follows:
<TABLE>
<CAPTION>
PORTFOLIOS FRONT-END SALES CHARGES
- ---------- -----------------------
<S> <C>
Managed Income $ 150,150
Tax-Free Income $ 37,504
Intermediate Government Bond $ 50,694
Ohio Tax-Free Income $ 64,596
Pennsylvania Tax-Free Income $ 678,464
Intermediate Bond $ 2,124
Value Equity $ 195,675
Growth Equity $ 81,496
Small Cap Growth Equity $ 44,054
Select Equity $ 17,550
Index Equity $ 38,454
Small Cap Value Equity $ 230,590
International Equity $ 303,547
Balanced $1,213,056
International Emerging Markets $ 130,755
</TABLE>
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<PAGE>
Total front-end sales charges paid by shareholders of Investor A Shares of the
Portfolios for the year or period ended September 30, 1993 were as follows:
<TABLE>
<CAPTION>
PORTFOLIOS FRONT-END SALES CHARGES
- ---------- -----------------------
<S> <C>
Managed Income $ 202,926
Tax-Free Income $ 128,003
Intermediate Government Bond $ 127,347
Ohio Tax-Free Income $ 68,959
Pennsylvania Tax-Free Income $1,083,103
Value Equity $ 155,096
Growth Equity $ 60,863
Index Equity $ 37,281
Small Cap Value Equity $ 250,615
International Equity $ 86,294
Balanced $1,304,538
</TABLE>
There is no initial sales charge on purchases of $1,000,000 or more of
Investor A Shares of the Non-Money Market Portfolios. However, a contingent
deferred sales charge of 1.00% will be imposed on the lesser of the net asset
value of the shares on the purchase or redemption date for Investor A Shares
purchased on a no-load basis and subsequently redeemed within 18 months after
purchase.
Investor B Shares of the Non-Money Market Portfolios are sold at the
net asset value per share next determined after a purchase order is received.
Investor B Shares of the Non-Money Market Portfolios are subject to a contingent
deferred sales charge which is payable on redemption of such Investor B Shares.
Investor C Shares of the Non-Money Market Portfolios are sold at the
net asset value per share next determined after a purchase order is received
plus the applicable front-end sales charge. In addition, Investor C Shares of
the Non-Money Market Portfolios are subject to a contingent deferred sales
charge which is payable on redemptions of such Investor C Shares within 18
months of purchase.
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 Investor A
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<PAGE>
Shares, Investor B Shares or Investor C Shares, of a Non-Money Market Portfolio.
INVESTMENTS OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES.
Investors may purchase Investor A Shares of the Non-Money Market Portfolios at
net asset value, without a sales charge, with the proceeds from the redemption
of shares of any other investment company which were sold with a sales charge or
commission in accordance with the terms set forth in the Prospectuses. This
does not include shares of an affiliated mutual fund which were or would be
subject to a contingent deferred sales charge upon redemption. For purposes of
this restriction, the term "affiliated mutual fund" means:
i) any Portfolio of the Fund; and
ii) any other investment company, if such company and the Fund hold
themselves out to investors as related companies for purposes of
investment and investor services, and if:
a) that company and the Fund have a common investment adviser or
distributor; or
b) the investment adviser or distributor of such company or the Fund
is an "affiliated person" (as defined in Section 2(a)(3) of the
1940 Act) of the investment adviser or distributor of the Fund or
the company, respectively.
MISCELLANEOUS. The Fund reserves the right, if conditions exist which make
cash payments undesirable, to honor any request for redemption or repurchase of
a Portfolio's shares by making payment in whole or in part in securities chosen
by the Fund and valued in the same way as they would be valued for purposes of
computing a Portfolio's net asset value. If payment is made in securities, a
shareholder may incur transaction costs in converting these securities into
cash. The Fund has elected, however, to be governed by Rule 18f-1 under the
1940 Act so that a Portfolio is obligated to redeem its shares solely in cash up
to the lesser of $250,000 or 1% of its net asset value during any 90-day period
for any one shareholder of a Portfolio.
With respect to the Index Master Portfolio, if the Board of Trustees of the
Trust determines that it would be detrimental to the best interests of the
remaining shareholders of the Index Master Portfolio to make payment wholly or
partly in cash, the Index Master Portfolio may pay the redemption price in whole
or
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<PAGE>
in part by a distribution of portfolio securities from the Index Master
Portfolio of the shares being redeemed in lieu of cash in accordance with Rule
18f-1 under the Investment Company Act of 1940. Investors, such as the
Portfolio, may incur brokerage charges and other transaction costs selling
securities that were received in payment of redemptions.
Under the 1940 Act, a Portfolio may suspend the right to redemption or
postpone the date of payment upon redemption for any period during which the New
York Stock Exchange (the "NYSE") is closed (other than customary weekend and
holiday closings), or during which trading on the NYSE is restricted, or during
which (as determined by the SEC by rule or regulation) an emergency exists as a
result of which disposal or valuation of portfolio securities is not reasonably
practicable, or for such other periods as the SEC may permit. (A Portfolio may
also suspend or postpone the recordation of the transfer of its shares upon the
occurrence of any of the foregoing conditions.)
In addition to the situations described in the Prospectuses, the Fund may
redeem shares involuntarily to reimburse a Portfolio for any loss sustained by
reason of the failure of a shareholder to make full payment for shares purchased
by the shareholder or to collect any charge relating to a transaction effected
for the benefit of a shareholder as provided in the Prospectus from time to
time.
VALUATION OF PORTFOLIO SECURITIES
In determining the approximate market value of portfolio investments, the
Fund may employ outside organizations, which may use, without limitation, a
matrix or formula method that takes into consideration market indexes, matrices,
yield curves and other specific adjustments. This may result in the securities
being valued at a price different from the price that would have been determined
had the matrix or formula method not been used. All cash, receivables and
current payables are carried on the Fund's books at their face value. Other
assets, if any, are valued at fair value as determined in good faith under the
supervision of the Board of Trustees.
MONEY MARKET PORTFOLIOS. The net asset value for each class of each Share
of the Money Market Portfolios for the purpose of pricing purchase and
redemption orders is determined twice each day, once as of 12:00 noon (Eastern
Time) and once as of 4:00 p.m. (Eastern Time) on each Business Day. Each
Portfolio's net asset value per share is calculated by adding the value of all
securities, cash and other assets of the respective classes of the Portfolio,
subtracting the liabilities and dividing the result by the number of outstanding
Shares of such classes. The net asset value per Share of each class of each
Portfolio is
-91-
<PAGE>
determined independently of the other classes and the other Portfolios.
The Fund seeks to maintain for each of the Money Market Portfolios a net
asset value of $1.00 per share for purposes of purchase and redemptions and
values their portfolio securities on the basis of the amortized cost method of
valuation, described below. There can be no assurance that the net asset value
per share will not vary.
A Money Market Portfolio may use a pricing service, bank or broker/dealer
experienced in such matters to value the Portfolio's securities.
As note above, the value of the portfolio securities of each Money Market
Portfolio is calculated using the amortized cost method of valuation. Under
this method the market value of an instrument is approximated by amortizing the
difference between the acquisition cost and value at maturity of the instrument
on a straight-line basis over the remaining life of the instrument. The effect
of changes in the market value of a security as a result of fluctuating interest
rates is not taken into account. The market value of debt securities usually
reflects yields generally available on securities of similar quality. When such
yields decline, market values can be expected to increase, and when yields
increase, market values can be expected to decline.
As indicated, the amortized cost method of valuation may result in the
value of a security being higher or lower than its market price, the price a
Money Market Portfolio would receive if the security were sold prior to
maturity. The Fund's Board of Trustees has established procedures for the
purpose of maintaining a constant net asset value of $1.00 per share for each
Money Market Portfolio, which include a review of the extent of any deviation of
net asset value per share, based on available market quotations, from the $1.00
amortized cost per share. Should that deviation exceed 1/2 of 1% for a Money
Market Portfolio, the Fund's Board of Trustees will promptly consider whether
any action should be initiated to eliminate or reduce material dilution or other
unfair results to shareholders. Such action may include redeeming shares in
kind, selling portfolio securities prior to maturity, reducing or withholding
dividends, shortening the average portfolio maturity, reducing the number of
outstanding shares without monetary consideration, and utilizing a net asset
value per share as determined by using available market quotations.
Each Money Market Portfolio will maintain a dollar-weighted average
portfolio maturity of 90 days or less, will not purchase any instrument with a
deemed maturity under Rule 2a-7 of the 1940 Act greater than 13 months, and will
limit portfolio investments, including repurchase agreements, to those
instruments that the adviser or sub-adviser determines present minimal credit
risks
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<PAGE>
pursuant to guidelines adopted by the Fund's Board of Trustees. There can be no
assurance that a constant net asset value will be maintained for any Money
Market Portfolio.
EQUITY PORTFOLIOS. The net asset value for each Service, Investor A,
Investor B, Investor C and Institutional Share for each Equity Portfolio is
calculated as of the close of regular trading hours on the NYSE (currently 4:00
p.m. Eastern Time) on each Business Day by adding the value of all its
securities, cash and other assets allocable to each respective class of shares
and dividing by the respective total number of outstanding shares of each class.
The net asset value per share of each class of each Portfolio is determined
independently of the other classes and the 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 Equity and International Emerging Markets Portfolios 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 stock 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
-93-
<PAGE>
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 Portfolios (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.
The valuation of securities held by the Index Master Portfolio is discussed
in its Registration Statement.
BOND PORTFOLIOS. The net asset value for each Service, Investor A,
Investor B, Investor C and Institutional Share for each Bond Portfolio is
calculated as of the close of regular trading hours on the NYSE on each Business
Day by adding the value of all its securities, cash and other assets allocable
to each respective class of shares and dividing by the respective total number
of outstanding shares of each class. The net asset value per share of each
class of each Portfolio is determined independently of the other classes and the
other Portfolios.
Valuation of securities held by each Bond Portfolio is as follows: domestic
securities traded on a national securities exchange or on the NASDAQ National
Market system are valued at the last reported sale price that day; domestic
securities traded on a national securities exchange or on the NASDAQ National
Market System for which there were no sales on that day are valued at the mean
of the bid and asked prices; foreign securities 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 (if a security is traded on more than one
exchange, the latest sale price on the exchange where the stock is primarily
traded is used); foreign securities traded on a recognized stock exchange for
which there were no sales on that day are valued at the mean of the bid and
asked prices; other securities are valued on the basis of valuations provided by
a pricing service approved by the Board of Trustees, provided that if the
investment adviser or sub-adviser concludes that the price provided by a pricing
service does not represent the fair value of a security, such security will be
valued at fair value determined by the adviser or sub-adviser based on
-94-
<PAGE>
quotations or the equivalent thereof received from dealers; 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
futures 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); the amortized cost
method of valuation is used with respect to debt obligations with sixty days or
less remaining to maturity; 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. Any securities which
are denominated in a foreign currency are translated into U.S. dollars at the
prevailing market rates.
PERFORMANCE INFORMATION
A Portfolio may quote performance in various ways. All performance
information supplied by a Portfolio in advertising is historical and is not
intended to indicate future returns.
MONEY MARKET PORTFOLIO YIELD. Each Money Market Portfolio's current and
effective yields for Service, Investor A, Investor B, Investor C and
Institutional Shares are computed separately using standardized methods required
by the SEC. The annualized yield for a class of Service, Investor A, Investor
B, Investor C or Institutional Shares is computed by: (a) determining the net
change in the value of a hypothetical account having a balance of one share at
the beginning of a seven-calendar day period; (b) dividing the net change by the
value of the account at the beginning of the period to obtain the base period
return; and (c) annualizing the results (i.e., multiplying the base period
return by 365/7). The net change in the value of the account reflects the value
of additional shares purchased with dividends declared and all dividends
declared on both the original share and such additional shares, but does not
include realized gains and losses or unrealized appreciation and depreciation.
Compound effective yields are computed by adding 1 to the base period return
(calculated as described above) raising the sum to a power equal to 365/7 and
subtracting 1. In addition, a standardized "tax-equivalent yield" may be quoted
for Service, Investor A, Investor B, Investor C and Institutional Shares in the
Municipal Money Market, Ohio Municipal Money Market, Pennsylvania Municipal
Money Market, North Carolina Municipal Money Market, Virginia Municipal Money
Market and New Jersey Municipal Money Market Portfolios, which is computed
separately for each class by: (a) dividing the portion of the Portfolio's yield
for shares (as calculated above) that is exempt from Federal or state income tax
by one minus a stated Federal or state income tax rate; and (b) adding the
figure resulting from (a) above to that portion, if any, of the yield that is
not exempt from Federal and state income tax.
-95-
<PAGE>
The annualized yield information for each Money Market Portfolio for the
seven-day period ended September 30, 1995 before waivers was as follows:
<TABLE>
<CAPTION>
TAX-EQUIVALENT YIELD
(ASSUMES A FEDERAL
EFFECTIVE INCOME
PORTFOLIO YIELD YIELD TAX RATE OF 28%)
- --------- ------ --------- --------------------
<S> <C> <C> <C>
Money Market
Service Shares 4.97% 5.09% N/A
Investor A Shares 4.70 4.81 N/A
Institutional Shares 5.27 5.41 N/A
Investor B Shares 4.20 4.29 N/A
Municipal Money Market
Service Shares 3.12 3.17 4.33%
Investor A Shares 2.86 2.90 3.97
Institutional Shares 3.42 3.48 4.75
U.S. Treasury Money Market
Service Shares 4.84 4.96 N/A
Investor A Shares 4.57 4.67 N/A
Institutional Shares 5.14 5.27 N/A
Ohio Municipal Money Market
Service Shares 3.14 3.19 4.36
Investor A Shares 2.87 2.91 3.99
Institutional Shares 3.44 3.50 4.78
Pennsylvania Municipal Money
Market
Service Shares 3.15 3.20 4.38
Investor A Shares 2.88 2.92 4.00
Institutional Shares 3.45 3.51 4.79
North Carolina Municipal
Money Market
Service Shares 3.13 3.18 4.35
Investor A Shares 2.86 2.90 3.97
Institutional Shares 3.43 3.49 4.76
Virginia Municipal Money
Market
Service Shares 2.90 2.94 4.03
Institutional Shares 3.20 3.25 4.44
</TABLE>
The Investor B Class had not commenced operations as of September 30, 1995,
except with respect to the Money Market Portfolio. The Investor C Class
had not commenced operations as of September 30, 1995.
The annualized yield information for each Money Market Portfolio for the
seven-day period ended September 30, 1995 after waivers was as follows:
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<PAGE>
<TABLE>
<CAPTION>
TAX-EQUIVALENT YIELD
(ASSUMES A FEDERAL
EFFECTIVE INCOME
PORTFOLIO YIELD YIELD TAX RATE OF 28%)
- --------- ----- --------- --------------------
<S> <C> <C> <C>
Money Market
Service Shares 5.34% 5.48% N/A
Investor A Shares 5.07 5.20 N/A
Institutional Shares 5.64 5.80 N/A
Investor B Shares 4.57 4.67 N/A
Municipal Money Market
Service Shares 3.56 3.62 4.33%
Investor A Shares 3.30 3.35 3.97
Institutional Shares 3.86 3.93 4.75
U.S. Treasury Money Market
Service Shares 5.26 5.40 N/A
Investor A Shares 4.99 5.11 N/A
Institutional Shares 5.56 5.71 N/A
Ohio Municipal Money Market
Service Shares 3.60 3.66 5.00
Investor A Shares 3.33 3.38 4.63
Institutional Shares 3.901 3.98 5.42
Pennsylvania Municipal Money
Market
Service Shares 3.57 3.63 4.96
Investor A Shares 3.30 3.35 4.58
Institutional Shares 3.87 3.94 5.38
North Carolina Municipal
Money Market
Service Shares 3.66 3.73 5.08
Investor A Shares 3.39 3.45 4.71
Institutional Shares 3.96 4.04 5.50
Virginia Municipal Money
Market
Service Shares 3.75 3.82 5.21
Institutional Shares 4.05 4.13 5.63
</TABLE>
The Investor B Class had not commenced operations as of September 30, 1995,
except with respect to the Money Market Portfolio. The Investor C Class
had not commenced operations as of September 30, 1995.
The predecessor portfolio to the New Jersey Municipal Money Market
Portfolio offered and sold only one class of shares. The annualized yield,
effective yield and tax-equivalent yield (assuming a Federal income tax rate of
28%) for the seven-day period ended February 28, 1995 for the New Jersey
Municipal Money Market Portfolio after waivers were 3.21%, 3.27% and 5.30%,
respectively.
The fees which may be imposed by institutions on their Customers are not
reflected in the calculations of yields for the Money Market Portfolios. Yields
on Institutional Shares will generally be higher than yields on Service Shares;
yields on Service Shares will generally be higher than yields on Investor A
Shares; and yields on Investor A Shares will generally be higher than yields on
Investor B Shares and Investor C Shares.
-97-
<PAGE>
From time to time, in advertisements, sale literature; in reports to
shareholders and other materials, the yields of a Portfolio's Service, Investor
A, Investor B, Investor C 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,
Investor A, Investor B, Investor C 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(R), a widely-recognized independent publication
that monitors the performance of money market funds, the average yields reported
by the Bank Rate Monitor from money market deposit accounts offered by the 50
leading banks and thrift institutions in the top five standard metropolitan
statistical areas, or to the data prepared by Lipper Analytical Services, Inc.,
a widely-recognized independent service that monitors the performance of mutual
funds. Yield may also be compared to yields set forth in the weekly statistical
release H.15(519) or the monthly statistical release designated G.13(415)
published by the Board of Governors of the Federal Reserve system.
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, sales
literature; or in communications to shareholders and other materials,
performance may be stated in terms of total return. The total return for each
class of a Non-Money Market Portfolio will be calculated independently of the
other classes within that Portfolio. Under the rules of the SEC, funds
advertising performance must include total return quotes calculated according to
the following formula:
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 Investor A 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
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<PAGE>
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 Investor B 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. In
calculating the ending redeemable value for Investor C Shares of the Fund's Non-
Money Market Portfolios, the maximum front-end sales charge is deducted from the
initial $1,000 payment, 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, the average annual total returns for
each Non-Money Market Portfolio for periods ended September 30, 1995 were as
follows:
-99-
<PAGE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
FOR THE 5 SINCE
FOR THE YEAR YEARS ENDED COMMENCEMENT
PORTFOLIO ENDED 9/30/95 9/30/95 OF OPERATIONS
- --------- ------------- ----------- -------------
<S> <C> <C> <C>
Managed Income
Service Shares/(1)/ 12.97% N/A 4.67%
Investor A Shares/(2)/ 7.68 N/A 5.77
Institutional Shares/(3)/ 13.27 9.07 8.29
Investor B Shares/(4)/ N/A N/A N/A
Tax-Free Income
Service Shares/(1)/ 11.24 N/A 5.11
Investor A Shares/(5)/ 6.03 7.27 7.02
Institutional Shares/(6)/ 11.54 N/A 6.65
Investor B Shares/(7)/ N/A N/A N/A
Intermediate Government Bond
Service Shares/(1)/ 9.99 N/A 3.95
Investor A Shares/(8)/ 5.08 N/A 4.24
Institutional Shares/(9)/ 10.28 N/A 6.04
Investor B Shares/(10)/ N/A N/A N/A
Ohio Tax-Free Income
Service Shares/(1)/ 10.45 N/A 4.45
Investor A Shares/(11)/ 5.51 N/A 3.67
Institutional Shares/(11)/ 10.75 N/A 5.45
Investor B Shares/(12)/ N/A N/A 4.46
Pennsylvania Tax-Free Income
Service Shares/(1)/ 10.51 N/A 4.78
Investor A Shares/(11)/ 5.37 N/A 4.70
Institutional Shares/(11)/ 10.81 N/A 6.59
Investor B Shares/(13)/ N/A N/A 4.85
Intermediate Bond
Service Shares/(17)/ 10.46 N/A 3.15
Investor A Shares/(18)/ 5.35 N/A 4.18
Institutional Shares/(19)/ 10.76 N/A 3.36
Investor B Shares/(20)/ N/A N/A N/A
Government Income
Service Shares N/A N/A N/A
Investor A Shares/(21)/ N/A N/A 9.19
Institutional Shares N/A N/A N/A
Investor B Shares/(22)/ N/A N/A 8.49
Value Equity
Service Shares/(1)/ 25.40 N/A 15.12
Investor A Shares/(23)/ 19.56 N/A 12.36
Institutional Shares/(24)/ 25.73 N/A 14.00
Investor B Shares/(25)/ N/A N/A N/A
Growth Equity
Service Shares/(26)/ 29.43 N/A 11.26
Investor A Shares/(27)/ 23.43 N/A 8.39
Institutional Shares/(3)/ 29.88 12.05 10.17
Investor B Shares/(28)/ N/A N/A N/A
</TABLE>
-100-
<PAGE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
FOR THE 5 SINCE
FOR THE YEAR YEARS ENDED COMMENCEMENT
PORTFOLIOS ENDED 9/30/95 9/30/95 OF OPERATIONS
- ---------- ------------- ----------- -------------
<S> <C> <C> <C>
Small Cap Growth Equity
Service Shares/(29)/ 48.13% N/A 22.29%
Investor A Shares/(29)/ 41.32 N/A 19.38
Institutional Shares/(30)/ 48.50 N/A 22.30
Investor B Shares/(31)/ N/A N/A N/A
Select Equity
Service Shares/(29)/ 23.43 N/A 11.52
Investor A Shares/(32)/ 17.71 N/A 9.53
Institutional Shares/(33)/ 23.76 N/A 11.76
Investor B Shares/(34)/ N/A N/A N/A
Index Equity/(35)/
Service Shares/(1)/ 28.99 N/A 15.50
Investor A Shares/(35)/ 22.92 N/A 11.37
Institutional Shares/(9)/ 29.30 N/A 12.95
Investor B Shares/(36)/ N/A N/A N/A
Small Cap Value Equity
Service Shares/(1)/ 17.17 N/A 13.71
Investor A Shares/(35)/ 11.69 N/A 14.18
Institutional Shares/(37)/ 17.43 N/A 15.56
Investor B Shares/(38)/ N/A N/A 11.77
International Equity
Service Shares/(1)/ 2.19 N/A 8.57
Investor A Shares/(35)/ (2.58) N/A 7.61
Institutional Shares/(39)/ 2.46 N/A 11.21
Investor B Shares/(40)/ N/A N/A (2.80)
International Emerging
Markets
Service Shares/(41)/ 19.91) N/A (12.31)
Investor A Shares/(41)/ 23.74) N/A (15.64)
Institutional Shares/(41)/ 19.72) N/A (12.08)
Investor B Shares/(42)/ N/A N/A N/A
Balanced
Service Shares/(1)/ 19.94 N/A 10.34
Investor A Shares/(43)/ 14.51 12.73 10.14
Institutional Shares/(44)/ 20.32 N/A 11.28
Investor B Shares/(45)/ N/A N/A 14.10
</TABLE>
- ---------------
/(1)/ Commenced operations on July 29, 1993.
/(2)/ Commenced operations on February 5, 1992.
/(3)/ Commenced operations on November 1, 1989.
/(4)/ Class had not commenced operations at September 30, 1995.
/(5)/ Commenced operations on May 14, 1990.
/(6)/ Commenced operations on January 21, 1993.
/(7)/ Class had not commenced operations at September 30, 1995.
/(8)/ Commenced operations on May 11, 1992.
/(9)/ Commenced operations on April 20, 1992.
/(10)/ Class had not commenced operations at September 30, 1995.
/(11)/ Commenced operations on December 1, 1992.
/(12)/ Commenced operations on October 13, 1994.
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<PAGE>
/(13)/ Commenced operations on October 3, 1994.
/(14)/ Commenced operations on September 1, 1993.
/(15)/ Commenced operations on November 17, 1993.
/(16)/ Class had not commenced operations at September 30, 1995.
/(17)/ Commenced operations on September 23, 1993.
/(18)/ Commenced operations on May 20, 1994.
/(19)/ Commenced operations on September 17, 1993.
/(20)/ Class had not commenced operations at September 30, 1995.
/(21)/ Commenced operations on October 4, 1994.
/(22)/ Commenced operations on October 3, 1994.
/(23)/ Commenced operations on May 2, 1992.
/(24)/ Commenced operations on May 20, 1992.
/(25)/ Class had not commenced operations at September 30, 1995.
/(26)/ Commenced operations on July 28, 1993.
/(27)/ Commenced operations on March 14, 1992.
/(28)/ Class had not commenced operations at September 30, 1995.
/(29)/ Commenced operations on September 15, 1993.
/(30)/ Commenced operations on September 14, 1993.
/(31)/ Class had not commenced operations at September 30, 1995.
/(32)/ Commenced operations on October 13, 1993.
/(33)/ Commenced operations on September 13, 1993.
/(34)/ Class had not commenced operations at September 30, 1995.
/(35)/ Commenced operations on June 2, 1992.
/(36)/ Class had not commenced operations at September 30, 1995.
/(37)/ Commenced operations on April 13, 1992.
/(38)/ Commenced operations on October 3, 1994.
/(39)/ Commenced operations on April 27, 1992.
/(40)/ Commenced operations on October 3, 1994.
/(41)/ Commenced operations on June 17, 1994.
/(42)/ Class had not commenced operations at September 30, 1995.
/(43)/ Commenced operations on May 14, 1990.
/(44)/ Commenced operations on May 1, 1992.
/(45)/ Commenced operations on October 3, 1994.
The predecessor portfolio to the International Bond and New Jersey Tax-Free
Income Portfolios each offered and sold only one class of shares. Based on the
foregoing calculation, the average annual total return for the predecessor
portfolios to the International Bond and New Jersey Tax-Free Income Portfolios
for the periods ended February 28, 1995 were as follows:
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<PAGE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
FOR
THE FOR THE 5
YEAR YEARS
ENDED ENDED SINCE COMMENCEMENT
PORTFOLIO 2/28/95 2/28/95 OF OPERATIONS
- --------- ------- ------- ------------------
<S> <C> <C> <C>
Predecessor Portfolio to the (2.31)% N/A 6.47%
New Jersey Tax-Free Income
Portfolio/(1)/
Predecessor Portfolio to the
International Bond Portfolio/(2)/ 1.50 N/A 7.40%
</TABLE>
/(1)/ Commenced operations on July 1, 1991.
/(2)/ Commenced operations on July 1, 1991.
The predecessor portfolio to the Short Government Bond and Core Bond
Portfolios each offered and sold only one class of shares. Based on the
foregoing calculation, the average annual total return for the predecessor
Portfolios to the Short Government Bond and Core Bond Portfolios to the Short
Government Bond and Core Bond Portfolios for the periods ended June 30, 1995
were as follows:
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
FOR FOR THE
THE 5
YEAR YEARS SINCE
ENDED ENDED COMMENCEMENT
PORTFOLIO 6/30/95 6/30/95 OF OPERATIONS
- --------- ------- ------- -------------
<S> <C> <C> <C>
Predecessor Portfolio to the 12.44% N/A 7.17%
Core Bond Portfolio/(1)/
Predecessor Portfolio to the
Short Governmnet Bond Portfolio/(2)/ 7.55 N/A 4.90
</TABLE>
=============================================================================
/(1)/ Commenced operations on December 9, 1992.
/(2)/ Commenced operations on July 17, 1992.
Each class of the Non-Money Market Portfolios may also from time to time
include in advertisements, sales literature, communications to shareholders and
other materials a total return figure that is not calculated according to the
formula set forth above in order to compare more accurately the performance of
each class of a Non-Money Market Portfolio's shares with other performance
measures. For example, in comparing the total return of a Non-Money Market
Portfolio's shares with data published by Lipper Analytical Services, Inc., CDA
Investment Technologies, Inc. or Weisenberger Investment Company Service, or
with the performance of the Standard & Poor's 500 Stock Index, EAFE, the Dow
Jones Industrial Average or the Shearson Lehman Hutton Government Corporate Bond
Index, as appropriate, a Non-Money Market Portfolio may calculate the aggregate
total return for its
-103-
<PAGE>
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 and deferred
sales charges or both, respectively, charged to purchasers of Investor A,
Investor B or Investor C Shares, respectively. The Investor A, Investor B and
Investor C classes of the Portfolio will, however, disclose the maximum
applicable sales charges and will also disclose that the performance data does
not reflect sales charges and that inclusion of sales charges would reduce the
performance quoted.
In addition to average annual total returns, a Non-Money Market Portfolio
may quote unaveraged or cumulative total returns reflecting the simple change in
value of an investment over a stated period. Average annual and cumulative
total returns may be quoted as a percentage or as a dollar amount, and may be
calculated for a single investment, a series of investments, or a series of
redemptions, over any time period. Total returns may be broken down into their
components of income and capital (including capital gains and changes in share
price) in order to illustrate the relationship of these factors and their
contributions to total return. Total returns may be quoted on a before-tax or
after-tax basis and may be quoted with or without taking sales charges into
account. Excluding the sales charge from a total return calculation produces a
higher total return figure. Total returns, yields, and other performance
information may be quoted numerically or in a table, graph or similar
illustration.
NON-MONEY MARKET PORTFOLIO BOND YIELD. The Balanced, Managed Income,
Tax-Free Income, Intermediate Government Bond, Ohio Tax-Free Income,
Pennsylvania Tax-Free Income, New Jersey Tax-Free Income, Short Government
Bond, Intermediate Bond, Government Income, Core Bond and International Bond
Portfolios may advertise their yields on their Service, Investor A, Investor B,
Investor C and Institutional Shares. Under the rules of the SEC, each such
Portfolio advertising the respective yields for its Service, Investor A,
Investor B, Investor C and Institutional Shares must calculate yield using the
following formula:
a-b
YIELD = 2[(----- +1) to the 6th power - 1]
cd
-104-
<PAGE>
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of
the period.
For the purpose of determining net investment income earned during the
period (variable "a" in the formula), dividend income on equity securities held
by a Portfolio is recognized by accruing 1/360th of the stated dividend rate of
the security each day that the security is in the Portfolio. Except as noted
below, interest earned on any debt obligations held by the Portfolio is
calculated by computing the yield to maturity of each obligation held by the
Portfolio based on the market value of the obligation (including actual accrued
interest) at the close of business on the last business day of each month, or,
with respect to obligations purchased during the month, the purchase price (plus
actual accrued interest) and dividing the result by 360 and multiplying the
quotient by the market value of the obligation (including actual accrued
interest) in order to determine the interest income on the obligation for each
day of the subsequent month that the obligation is held by the Portfolio. For
purposes of this calculation, it is assumed that each month contains 30 days.
The maturity of an obligation with a call provision is the next call date on
which the obligation reasonably may be expected to be called or, if none, the
maturity date.
With respect to debt obligations purchased at a discount or premium, the
formula generally calls for amortization of the discount or premium. However,
interest earned on tax-exempt obligations that are issued without original issue
discount and have a current market discount is calculated by using the coupon
rate of interest instead of the yield to maturity. In the case of tax-exempt
obligations that are issued with original issue discount but which have
discounts based on current market value that exceed the then-remaining portion
of the original issue 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.
-105-
<PAGE>
With respect to mortgage or other receivables-backed obligations which are
expected to be subject to monthly payments of principal and interest ("pay
downs"), (a) gain or loss attributable to actual monthly pay downs are accounted
for as an increase or decrease to interest income during the period; and (b) a
Portfolio may elect either (i) to amortize the discount and premium on the
remaining security, based on the cost of the security, to the weighted-average
maturity date, if such information is available, or to the remaining term of the
security, if any, if the weighted-average maturity date is not available, or
(ii) not to amortize discount or premium on the remaining security. The
amortization schedule will be adjusted monthly to reflect changes in the market
values of debt obligations.
Undeclared earned income will be subtracted from the maximum offering price
per share (variable "d" in the formula). Undeclared earned income is the net
investment income which, at the end of the base period, has not been declared as
a dividend, but is reasonably expected to be and is declared and paid as a
dividend shortly thereafter. In the case of Investor A Shares and Investor C
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 as much as 5.00% of the per share
offering price.
Each of the Tax-Free Income, Ohio Tax-Free Income, New Jersey Tax-Free
Income and Pennsylvania Tax-Free Income Portfolios may advertise the tax-
equivalent yield for its shares of a specified class. Under the rules of the
SEC, such a Portfolio advertising its tax-equivalent yield must calculate such
tax-equivalent yield by dividing that portion of the yield of the Portfolio
which is tax-exempt by one minus a stated income tax rate and adding the product
to that portion, if any, of the yield of the Portfolio which is not tax-exempt.
The annualized yield information for the 30-day period ended September 30,
1995 for the Portfolios referenced below was as follows:
-106-
<PAGE>
<TABLE>
<CAPTION>
Before
After Waivers Waivers Tax
------------- ------- ---
TAX-EQUIVALENT TAX-EQUIVALENT
YIELD YIELD
PORTFOLIO YIELD (ASSUMES A YIELD (ASSUMES A
- --------- ----- FEDERAL INCOME ----- FEDERAL INCOME
TAX RATE OF TAX RATE OF
----------- -----------
28%) 28%)
--- ---
<S> <C> <C> <C> <C>
Managed Income
Service Shares 5.76% N/A 5.56% N/A
Investor A Shares 5.27 N/A 5.07 N/A
Institutional Shares 6.07 N/A 5.87 N/A
Tax-Free Income
Service Shares 4.69 6.51% 3.91 5.43%
Investor A Shares 4.26 5.92 3.48 4.83
Institutional Shares 5.00 6.94 4.22 5.86
Intermediate Government Bond
Service Shares 5.42 N/A 5.05 N/A
Investor A Shares 5.15 N/A 4.78 N/A
Insititutional Shares 5.74 N/A 5.37 N/A
Ohio Tax-Free income
Service Shares 5.22 7.25 4.15 5.76
Investor A Shares 4.96 6.89 3.89 5.40
Institutional Shares 5.49 7.63 4.42 6.14
Investor B Shares 4.51 6.26 3.44 4.77
Pennsylvania Tax-Free
Income 5.11 7.10 4.79 6.65
Service Shares 4.73 6.57 4.41 6.13
Investor A Shares 5.38 7.47 5.06 7.03
Institutional Shares 4.42 6.14 4.10 5.69
Intermediate Bond
Service Shares 6.07 N/A 5.73 N/A
Investor A Shares 5.78 N/A 5.44 N/A
Institutional Shares 6.41 N/A 6.07 N/A
Government Income
Investor A Shares 6.69 N/A 5.24 N/A
Investor B Shares 6.37 N/A 4.92 N/A
</TABLE>
The Investor C Class had not commenced operations as of September 30, 1995.
The annualized yield information for the 30-day period ended February
28, 1995 for the predecessor portfolios to the New Jersey Tax-Free Income and
International Bond Portfolios was as follows:
-107-
<PAGE>
<TABLE>
<CAPTION>
Before Waivers After Waivers
-------------- -------------
TAX-EQUIVALENT TAX-EQUIVALENT
YIELD (ASSUMES YIELD (ASSUMES
A FEDERAL A FEDERAL
INCOME TAX INCOME TAX
PORTFOLIO YIELD RATE OF 28%) YIELD RATE OF 28%)
- --------- ----- ------------- ----- ---------------
<S> <C> <C> <C> <C>
Predecessor Portfolio to 4.40% 7.29%
the New Jersey Tax-Free
Income Portfolio
Predecessor Portfolio to 5.27 N/A 5.27% ______%
the International Bond
Portfolio
</TABLE>
The annualized yield information for the 30-day period ended June 30, 1995
for the predecessor portfolios to the Core Bond and Short Government Bond
Portfolios was as follows:
<TABLE>
<CAPTION>
Before Waivers After Waivers
-------------- --------------
PORTFOLIO YIELD YIELD
- --------- ----- -----
<S> <C> <C>
Predecessor Portfolio to the 6.63% ____%
Core Bond Portfolio
Predecessor Portfolio to the 6.80% ____%
Short Government Bond
Portfolio
</TABLE>
OTHER INFORMATION REGARDING INVESTMENT RETURNS. In addition to providing
performance information that demonstrates the total return or yield of shares of
a particular class of a Portfolio over a specified period of time, the Fund may
provide certain 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.
A Chart describing the Compounding Effect of Dividend Reinvestments appears
here.
The Money and Non-Money Market Municipal Portfolios may illustrate in
advertising, sales literature, communications to shareholders and other
materials the benefits of tax-free investing. For example, Table 1 shows
taxpayers how to translate Federal tax savings from investments the income on
which is not subject to Federal income tax into an equivalent yield from a
taxable investment. Similarly, Tables 2, 3, 4, 5 and 6 show
-108-
<PAGE>
Pennsylvania, Ohio, North Carolina, Virginia and New Jersey shareholders the
approximate yield that a taxable investment must earn at various income brackets
to produce after-tax yields equivalent to those of the Pennsylvania Municipal
Money Market and Pennsylvania Tax-Free Income Portfolios, the Ohio Municipal
Money Market and Ohio Tax-Free Income Portfolios, the North Carolina Municipal
Money Market Portfolio, the Virginia Municipal Money Market Portfolio, and the
New Jersey Municipal Money Market and New Jersey Tax-Free Income Portfolios,
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.
-109-
<PAGE>
TABLE 1
- -------
<TABLE>
<CAPTION>
Federal TAX-EXEMPT YIELD
1996 Taxable Marginal
Income Bracket Tax Rate/*/ 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Single Return Joint Return
$ 0 - $24,000 $ 0 - $40,100 15.0% 3.529% 4.118% 4.706% 5.294% 5.882% 6.471% 7.059%
$24,001 - $58,150 $40,101 - $96,900 28.0% 4.167% 4.861% 5.556% 6.250% 6.944% 7.639% 8.333%
$58,151 -$121,300 $96,901 -$147,700 31.0% 4.348% 5.072% 5.797% 6.522% 7.246% 7.971% 8.696%
$121,301-$263,750 $147,701-$263,750 36.0% 4.688% 5.469% 6.250% 7.031% 7.812% 8.594% 9.375%
Over $263,750 Over $263,750 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 1996, taxpayers with adjusted
gross income in excess of a threshold amount of approximately $117,950 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 $117,950 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 1996 is estimated to be from $117,950 to $240,451 and for married
taxpayers filing a joint return from $176,950 to $299,451. 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 1996.
-110-
<PAGE>
TABLE 2
- -------
<TABLE>
<CAPTION>
Approx.
Combined
Federal
and PA TAX-EXEMPT YIELD
1996 Federal Marginal
Taxable Income Bracket Tax Rate/*/ 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Single Return Joint Return
$ 0 - $ 24,000 $ 0 - $40,100 17.380% 3.631% 4.236% 4.841% 5.447% 6.052% 6.657% 7.262%
$24,001 - $ 58,150 $ 40,101 - $96,900 30.016% 4.287% 5.001% 5.716% 6.430% 7.144% 7.859% 8.573%
$58,151 - $121,300 $ 96,901 -$147,700 32.932% 4.473% 5.219% 5.964% 6.710% 7.455% 8.201% 8.946%
$121,301- $263,750 $147,701 -$263,750 37.792% 4.823% 5.626% 6.430% 7.234% 8.038% 8.841% 9.645%
Over $263,750 Over $263,750 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 1996, taxpayers with adjusted gross income in
excess of a threshold amount of approximately $117,950 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 $117,950 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 1996 is
estimated to be from $117,950 to $240,451 and for married taxpayers filing a
joint return from $176,950 to $299,451. 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 1996.
-111-
<PAGE>
TABLE 3
- -------
STATE OF OHIO
1996 TAX YEAR
<TABLE>
<CAPTION>
TAX EXEMPT YIELD
------------------------------------------
3 3.5 4 4.5 5 5.5 6
1996 FEDERAL OHIO
TAXABLE INCOME MARGINAL MARGINAL COMBINED TAXABLE EQUIVALENT YIELD
BRACKETS TAX RATE TAX RATE RATE SINGLE RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 - 24,000 15% 4.457% 18.79% 3.69% 4.31% 4.93% 5.54% 6.16% 6.77% 7.39%
24,001 - 40,000 28% 4.457% 31.21% 4.36% 5.09% 5.81% 6.54% 7.27% 8.00% 8.72%
40,001 - 58,150 28% 5.201% 31.74% 4.40% 5.13% 5.86% 6.59% 7.33% 8.06% 8.79%
58,151 - 80,000 31% 5.201% 34.59% 4.59% 5.35% 6.12% 6.88% 7.64% 8.41% 9.17%
80,001 - 100,000 31% 5.943% 35.10% 4.62% 5.39% 6.16% 6.93% 7.70% 8.47% 9.25%
100,001 - 121,300 31% 6.900% 35.76% 4.67% 5.45% 6.23% 7.01% 7.78% 8.56% 9.34%
121,301 - 200,000 36% 6.900% 40.42% 5.03% 5.87% 6.71% 7.55% 8.39% 9.23% 10.07%
200,001 - 263,750 36% 7.500% 40.80% 5.07% 5.91% 6.76% 7.60% 8.45% 9.29% 10.14%
OVER 263,750 39.6% 7.500% 44.13% 5.37% 6.26% 7.16% 8.05% 8.95% 9.84% 10.74%
<CAPTION>
1996 FEDERAL OHIO
TAXABLE INCOME MARGINAL MARGINAL COMBINED TAXABLE EQUIVALENT YIELD
BRACKETS TAX RATE TAX RATE RATE JOINT RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 - 40,000 15% 4.457% 18.79% 3.69% 4.31% 4.93% 5.54% 6.16% 6.77% 7.39%
</TABLE>
-112-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
40,001 - 40,100 15% 5.201% 19.42% 3.72% 4.34% 4.96% 5.58% 6.20% 6.82% 7.45%
40,101- 80,000 28% 5.201% 31.74% 4.40% 5.13% 5.86% 6.59% 7.33% 8.06% 8.79%
80,001 - 96,900 28% 5.943% 32.28% 4.43% 5.17% 5.91% 6.64% 7.38% 8.12% 8.86%
96,901 - 100,000 31% 5.943% 35.10% 4.62% 5.39% 6.16% 6.93% 7.70% 8.47% 9.25%
100,001 - 147,700 31% 6.900% 35.76% 4.67% 5.45% 6.23% 7.01% 7.78% 8.56% 9.34%
147,701 - 200,000 36% 6.900% 40.42% 5.03% 5.87% 6.71% 7.55% 8.39% 9.23% 10.07%
200,001 - 263,750 36% 7.500% 40.80% 5.07% 5.91% 6.76% 7.60% 8.45% 9.29% 10.14%
OVER 263,750 39.6% 7.500% 44.13% 5.37% 6.26% 7.16% 8.05% 8.95% 9.84% 10.74%
===========================================================================================
</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. No other state tax
credits, exemptions, or local taxes have been taken into account in arriving at
the combined marginal tax rate. The income amount shown is income subject to
Federal income tax reduced by adjustments to income, exemptions, and itemized
deductions (including the deduction for state and local income taxes). If the
standard deduction is taken for Federal income tax purposes, the taxable
equivalent yield required to equal a specified tax-exempt yield is at least as
great as that shown in the table. It is assumed that the investor is not
subject to the alternative minimum tax. Where applicable, investors should
consider that the benefit of certain itemized deductions and the benefit of
personal exemptions are limited in the case of higher income individuals. For
1996, taxpayers with adjusted gross income in excess of a $117,950 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 $117,950 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 1996 is from $117,950 to $240,450 and for married taxpayers filing a
joint return the range is from $176,950 to $299,450. 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 1996.
-113-
<PAGE>
TABLE 4
<TABLE>
<CAPTION>
1995 Taxable North Combined Federal
Income Bracket Federal Carolina and North Carolina Tax-Exempt Yield
Marginal Marginal Marginal
Single Return Joint Return Tax Rate Tax Rate 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 - 34,000 21,251 - 40,100 15.0% 7.00% 20.950% 3.795% 4.428% 5.060% 5.693% 6.325% 6.958% 7.590%
34,001 - 58,150 40,101 - 96,900 28.0% 7.00% 33.040% 4.480% 5.227% 5.974% 6.720% 7.467% 8.214% 8.961%
58,181 - 60,000 96,901 - 100,000 31.0% 7.00% 35.830% 4.675% 5.454% 6.233% 7.013% 7.792% 8.571% 9.350%
60,001 - 121,300 100,001 - 147,700 31.0% 7.75% 36.348% 4.713% 5.499% 6.284% 7.070% 7.855% 8.641% 9.426%
121,301 - 263,700 147,705 - 263,700 36.0% 7.75% 40.960% 5.081% 5.928% 6.775% 7.622% 8.469% 9.316% 10.163%
Over 263,700 Over 263,700 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
1996, taxpayers with adjusted gross income in excess of $107,950 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 $117,900 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 $117,950 to $240,451, and
for married taxpayers filing a joint return the range is from $176,950 to
$299,451. 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.
-114-
<PAGE>
TABLE 5
<TABLE>
<CAPTION>
1995 Taxable Combined Federal
Income Bracket Federal Virginia and Virginia Tax-Exempt Yield
Marginal Marginal Marginal
Single Return Joint Return Tax Rate Tax Rate 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%
12,751 - 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 $114,700 are subject to an overall limitation on certain itemized
deductions, requiring a reduction in such deductions equal to the lesser of (i)
3% of adjusted gross income excess of $114,700 or (ii) 80% of the amount of such
itemized deductions otherwise allowable. The benefit of each personal exemption
is phased out at the rate of two percentage points for each $2,500 (or fraction
thereof) of adjusted gross income in the phase-out zone. For single taxpayers
the range of adjusted gross income comprising the phase-out zone for 1995 is
from $114,700 to $237,201 and for married taxpayers filing a joint return from
$172,050 to $294,551. The Federal tax brackets, the threshold amounts at which
itemized deductions are subject to reduction, and the range over which personal
exemptions are phased out will be further adjusted for inflation for each year
after 1995.
-115-
<PAGE>
<TABLE>
<CAPTION>
TABLE 6
Approximate
Combined
Federal
and NJ
Federal NJ Marginal Tax-Exempt Yield
1996 Taxable Marginal Marginal Tax
Income Bracket* Tax Rate Tax Rate Rate 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0%
- ------------------- -------- -------- ------- ----- ---- ---- ---- ---- ---- ---- ---- ----
Single Return Taxable Yield - Single Return
-------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 - 20,000 15.0% 1.400% 16.190% 3.580% 4.176% 4.773% 5.369% 5.966% 6.562% 7.159% 7.756% 8.352%
20,001 - 24,000 15.0% 1.750% 16.488% 3.592% 4.191% 4.790% 5.388% 5.987% 6.589% 7.185% 7.783% 8.382%
24,001 - 35,000 28.0% 1.750% 29.260% 4.240% 4.948% 5.655% 6.361% 7.068% 7.775% 8.481% 9.189% 9.895%
35,001 - 40,000 28.0% 3.500% 30.520% 4.318% 5.037% 5.757% 6.471% 7.196% 7.916% 8.636% 9.355% 10.075%
40,001 - 58,150 28.0% 5.525% 31.978% 4.410% 5.145% 5.880% 6.616% 7.350% 8.086% 8.820% 9.556% 10.298%
58,151 - 75,000 31.0% 5.525% 34.812% 4.602% 5.369% 6.136% 6.903% 7.670% 8.437% 9.204% 9.971% 10.738%
75,001 - 121,300 31.0% 6.370% 35.395% 4.643% 5.418% 6.191% 6.965% 7.739% 8.513% 9.287% 10.061 10.835%
121,301 - 263,750 36.0% 6.370% 40.077% 5.006% 5.841% 6.675% 7.510% 8.344% 9.178% 10.013% 10.847% 11.682%
OVER 263,750 39.6% 6.370% 43.447% 5.305% 6.189% 7.073% 7.957% 8.841% 9.725% 10.610% 11.494% 12.378%
<CAPTION>
Joint Return Taxable Yield - Joint Return
- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 - 20,000 15.0% 1.400% 16.190% 3.580% 4.176% 4.773% 5.369% 5.966% 6.562% 7.159% 7.756% 8.352%
20,001 - 40,100 15.0% 1.750% 16.488% 3.592% 4.191% 4.790% 5.388% 5.987% 6.589% 7.185% 7.783% 8.382%
40,101 - 50,000 28.0% 1.750% 29.260% 4.240% 4.948% 5.655% 6.361% 7.068% 7.775% 8.481% 9.189% 9.895%
50,001 - 70,000 28.0% 2.450% *29.764% 4.271% 4.983% 5.695% 6.407% 7.189% 7.831% 8.543% 9.255% 9.966%
70,001 - 80,000 28.0% 3.500% 30.520% 4.318% 5.037% 5.757% 6.471% 7.196% 7.916% 8.636% 9.355% 10.075%
80,001 - 96,900 28.0% 5.525% 31.978% 4.410% 5.145% 5.880% 6.616% 7.350% 8.086% 8.820% 9.556% 10.298%
96,901 - 147,700 31.0% 5.525% 34.812% 4.602% 5.369% 6.136% 6.903% 7.670% 8.437% 9.204% 9 10.738%
.971%
147,701 - 150,000 36.0% 5.525% *39.536% 4.961% 5.789% 6.616% 7.442% 8.269% 9.096% 9.923% 10.750 11.577%
150,001 - 263,750 36.0% 6.370% 40.077% 5.006% 5.841% 6.675% 7.510% 8.344% 9.178% 10.013% 10.847% 11.682%
OVER 263,750 39.6% 6.370% 43.447% 5.305% 6.189% 7.073% 7.957% 8.841% 9.725% 10.610% 11.494% 12.378%
</TABLE>
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* The taxable income brackets applicable to New Jersey do not correspond to
the Federal taxable income brackets. The taxable income brackets
presented in this table represent the breakpoints for both the Federal and
New Jersey marginal tax rate changes. When applying these brackets,
Federal taxable income will be different than New Jersey taxable income
because New Jersey does not start with Federal taxable income in computing
its own state income tax base. No state tax credits, exemptions, or local
taxes have been taken into account in arriving at the combined marginal
tax rate. The income amount shown is income subject to Federal income tax
reduced by adjustments to income, exemptions, and itemized deductions
(including the deduction for state and local income taxes). If the
standard deduction is taken for Federal income tax purposes, the taxable
equivalent yield required to equal a specified tax-exempt yield is at
least as great as that shown in the table. It is assumed that the
investor is not subject to the alternative minimum tax. Where applicable,
investors should consider that the benefit of certain itemized deductions
and the benefit of personal exemptions are limited in the case of higher-
income individuals. For 1996, taxpayers with adjusted gross income in
excess of $117,950 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 $117,950 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 1996 is from $117,950 to
$240,451, and for married taxpayers filing a joint return the range is
from $176,950 to $299,451. 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 1996.
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MISCELLANEOUS. Yields on shares of a Portfolio may fluctuate daily and do
not provide a basis for determining future yields. Because such yields will
fluctuate, they cannot be compared with yields on savings account or other
investment alternatives that provide an agreed to or guaranteed fixed yield for
a stated period of time. In comparing the yield of one Portfolio to another,
consideration should be given to each Portfolio's investment policies, including
the types of investments made, lengths of maturities of the portfolio
securities, market conditions, operating expenses 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.
When comparing a Portfolio's performance to stock, bond, and money market
mutual fund performance indices prepared by Lipper or other organizations, it is
important to remember the risk and return characteristics of each type of
investment. For example, while stock mutual funds may offer higher potential
returns, they also carry the highest degree of share price volatility.
Likewise, money market funds may offer greater stability of principal, but
generally do not offer the higher potential returns from stock mutual funds.
From time to time, a Portfolio's performance may also be compared to other
mutual funds tracked by financial or business publications and periodicals. For
example a Portfolio may quote Morningstar, Inc. in its advertising materials.
Morningstar, Inc. is a mutual fund rating service that rates mutual funds on the
basis of risk-adjusted performance. Rankings that compare the performance of
Portfolios to one another in appropriate categories over specific periods of
time may also be quoted in advertising.
Ibbotson Associates of Chicago, Illinois ("Ibbotson") provides historical
returns of the capital markets in the United States, including common stocks,
small capitalization stocks, long-term corporate bonds, intermediate-term
government bonds, long-term government bonds, Treasury bills, the U.S. rate of
inflation (based on the Consumer Price Index), and combinations of various
capital markets. The performance of these capital markets is based on the
returns of different indices. Portfolios may use the performance of these
capital markets in order to demonstrate general risk-versus-reward investment
scenarios. Performance comparisons may also include the value of a hypothetical
investment in any of these capital markets. The risks associated with the
security types in any capital market may or may not correspond directly to those
of the Portfolios. The Portfolios may also compare performance to that of other
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compilations or indices that may be developed and made available in the future.
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,
(including materials that describe general principles of investing, such as
asset allocation, diversification, risk tolerance, and goal setting,
questionnaires designed to help create a personal financial profile, worksheets
used to project savings needs based on assumed rates of inflation and
hypothetical rates of return and action plans offering investment alternatives)
investment management techniques, policies or investment suitability of a
Portfolio (such as value investing, market timing, dollar cost averaging, asset
allocation, constant ratio transfer, automatic account rebalancing, the
advantages and disadvantages of investing in tax-deferred and taxable
investments), economic and political conditions and the relationship between
sectors of the economy and the economy as a whole, 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, sales
literature, communications to shareholders or other materials may summarize the
substance of information contained in shareholder reports (including the
investment composition of a Portfolio), as well as the views of the Portfolios'
adviser and/or sub-advisers as to current market, economy, trade and interest
rate trends, legislative, regulatory and monetary developments, investment
strategies and related matters believed to be of relevance to a Portfolio. In
addition, selected indices may be used to illustrate historic performance of
select asset classes. The Fund may also include in advertisements, sales
literature, communications to shareholders or other materials, 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, advertisements,
shareholder communications or other materials may include a discussion of
certain attributes or benefits to be derived by an investment in a Portfolio
and/or other mutual funds, shareholder profiles and hypothetical investor
scenarios, timely information on financial management, tax and retirement
planning and investment alternative to certificates of deposit and other
financial instruments. Such advertisements or communicators may include
symbols, headlines or other material which highlight or summarize the
information discussed in more
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detail therein. Materials may includes lists of representative clients of the
Portfolios' investment advisers. Materials may refer to the CUSIP numbers of
the various classes of the Portfolios and may illustrate how to find the
listings of the Portfolios in newspapers and periodicals. Materials may also
include discussions of other Portfolios, products, and services.
Charts and graphs using net asset values, adjusted net asset values, and
benchmark indices may be used to exhibit performance. An adjusted NAV includes
any distributions paid and reflects all elements of return. Unless otherwise
indicated, the adjusted NAVs are not adjusted for sales charges, if any.
A Portfolio may illustrate performance using moving averages. A long-term
moving average is the average of each week's adjusted closing NAV for a
specified period. A short-term moving average is the average of each day's
adjusted closing NAV for a specified period. Moving Average Activity Indicators
combine adjusted closing NAVs from the last business day of each week with
moving averages for a specified period to produce indicators showing when an NAV
has crossed, stayed above, or stayed below its moving average.
A Portfolio may quote various measures of volatility and benchmark
correlation in advertising. In addition, a Portfolio may compare these measures
to those of other funds. Measures of volatility seek to compare the historical
share price fluctuations or total returns to those of a benchmark. Measures of
benchmark correlation indicate how valid a comparative benchmark may be. All
measures of volatility and correlation are calculated using averages of
historical data.
Momentum indicators indicate a Portfolio's price movements over specific
periods of time. Each point on the momentum indicator represents the
Portfolio's percentage change in price movements over that period.
A Portfolio may advertise examples of the effects of periodic investment
plans, including the principle of dollar cost averaging. In such a program, an
investor invests a fixed dollar amount in a fund a periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals. In evaluating such
a plan, investors should consider their ability to continue purchasing shares
during periods of low price levels. A Portfolio may be available for purchase
through retirement plans or other programs offering deferral of, or exemption
from, income taxes, which may produce superior after-tax returns over time.
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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.
Please note that for purposes of satisfying certain of the
requirements for taxation as a regulated investment company described below,
upon its conversion to a master fund-feeder fund structure the Index Equity
Portfolio will be deemed to own a proportionate share of the assets and gross
income of the Index Master Portfolio in which the Index Equity Portfolio invests
all of its assets. Also, with respect to the Index Equity Portfolio, the
discussion below that relates to the taxation of futures contracts and other
rules pertaining to the timing and character of income apply to the Index Master
Portfolio.
Each Portfolio has elected and qualified, and intends to continue to
qualify, for taxation 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 investing 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
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investments (including foreign currencies or options, futures or forward
contracts on foreign currencies but only to the extent that such currencies or
options, futures or forward contracts are not directly related to the
Portfolio's principal business of investing in stock or securities) held for
less than three months (the "Short-Short Gain Test"). Future Treasury
regulations may provide that foreign currency gains that are not "directly
related" to a Portfolio's principal business of investing in stock or securities
will not satisfy the Income Requirement. Interest (including original issue
discount and "accrued market discount") received by a Portfolio at maturity or
upon disposition of a security held for less than three months will not be
treated as gross income derived from the sale or other disposition of such
security held for less than three months for purposes of the Short-Short Gain
Test. However, any other income that is attributable to realized market
appreciation 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
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the total revenues derived by all users of such facilities, (b) who occupies
more than 5% of the entire usable area of such facilities, or (c) for whom such
facilities or a part thereof were specifically constructed, reconstructed or
acquired. "Related persons" include certain related natural persons, affiliated
corporations, a partnership and its partners and an S corporation and its
shareholders.
In order for the Money and Non-Money Market Municipal Portfolios to
pay exempt interest dividends for any taxable year, at the close of each quarter
of the taxable year at least 50% of the value of each such Portfolio must
consist of exempt interest obligations. Exempt interest dividends distributed
to shareholders are not included in the shareholder's gross income for regular
Federal income tax purposes. However, gain realized by such Portfolios from the
disposition of a tax-exempt bond that was acquired after April 30, 1993 for a
price less than the principal amount of the bond is taxable to shareholders as
ordinary income to the extent of accrued market discount. Also, 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 rate of 26% (28% on the taxable excess over $175,000) or 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. 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.
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The Ohio Municipal Money Market and Ohio Tax-Free Income Portfolios
are not subject to the Ohio personal income tax, school district income taxes in
Ohio, the Ohio corporation franchise tax, or the Ohio dealers intangibles tax,
provided that, with respect to the Ohio corporation franchise tax and the Ohio
dealers intangibles tax, the Fund timely files the annual report required by
Section 5733.09 of the Ohio Revised Code. Distributions with respect to shares
of the Ohio Municipal Money Market and Ohio Tax-Free Income Portfolios properly
attributable to proceeds of insurance paid to those Portfolios that represent
maturing or matured interest on defaulted Obligations held by those Portfolios
and that are excluded from gross income for federal income tax purposes will not
be subject to Ohio personal income tax or municipal or school district income
taxes in Ohio if, and to the same extent as, such interest would not have been
subject to such taxes if paid in the normal course by the issuer of such
defaulted Obligations.
Distributions of exempt-interest dividends, to the extent attributable
to interest on North Carolina Municipal Obligations and to interest on direct
obligations of the United States (including territories thereof), are not
subject to North Carolina individual or corporate income tax. Distributions of
gains attributable to certain obligations of the State of North Carolina and its
political subdivisions issued prior to July 1, 1995 are not subject to North
Carolina individual or corporate income tax; however, distributions of gains
attributable to such types of obligations that were issued after June 30, 1995
will be subject to North Carolina individual or corporate income tax.
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
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Municipal Portfolios may each purchase securities that do not bear Tax-Exempt
Interest. Any income on such securities recognized by the Portfolio will be
distributed and will be taxable to its shareholders.
Each Portfolio intends to distribute to shareholders any of its excess
of net long-term capital gain over net short-term capital loss ("net capital
gain") for each taxable year. Such gain is distributed as a capital gain
dividend and is taxable to shareholders as long-term capital gain, regardless of
the length of time the shareholder has held his shares, whether such gain was
recognized by the Portfolio prior to the date on which a shareholder acquired
shares of the Portfolio and whether the distribution was paid in cash or
reinvested in shares.
In the case of corporate shareholders, distributions (other than
capital gain dividends) of a Non-Money Market Portfolio for any taxable year
generally qualify for the dividends received deduction to the extent of the
gross amount of "qualifying dividends" received by such Portfolio for the year.
Generally, a dividend will be treated as a "qualifying dividend" if it has been
received from a domestic corporation. Distributions of net investment income
from debt securities and of net realized short-term capital gains will be
taxable to shareholders as ordinary income and will not be treated as
"qualifying dividends" for purposes of the dividends received deduction.
Ordinary income of individuals will be taxable at a maximum nominal
rate of 39.6%, but because of limitations on itemized deductions otherwise
allowable and the phase-out of personal 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. For shareholders of the Non-Money Market
Portfolios, any loss incurred on the sale or exchange of a Portfolio's shares,
held six months or less, will be disallowed to the extent of exempt-interest
dividends paid with respect to such shares, and any loss not so disallowed will
be treated as a long-term capital loss to the extent of capital gain dividends
received 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
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income tax purposes as sold for their fair market value on the last business day
of such year, a process known as "mark-to-market." Forty percent of any gain or
loss resulting from such constructive sale will be treated as short-term capital
gain or loss and 60% of such gain or loss will be treated as long-term capital
gain or loss without regard to the length of time a Portfolio holds the futures
contract ("the 40-60 rule"). The amount of any capital gain or loss actually
realized by a Portfolio in a subsequent sale or other disposition of those
futures contracts will be adjusted to reflect any capital gain or loss taken
into account by the Portfolio in a prior year as a result of the constructive
sale of the contracts. With respect to futures contracts to sell, which will be
regarded as parts of a "mixed straddle" because their values fluctuate inversely
to the values of specific securities held by the Portfolio, losses as to such
contracts to sell will be subject to certain loss deferral rules which limit the
amount of loss currently deductible on either part of the straddle to the amount
thereof which exceeds the unrecognized gain (if any) with respect to the other
part of the straddle, and to certain wash sales regulations. Under short sales
rules, which also will be applicable, the holding period of the securities
forming part of the straddle will (if they have not been held for the long-term
holding period) be deemed not to begin prior to termination of the straddle.
With respect to certain futures contracts, deductions for interest and carrying
charges will not be allowed. Notwithstanding the rules described above, with
respect to futures contracts to sell which are properly identified as such, a
Portfolio may make an election which will exempt (in whole or in part) those
identified futures contracts from being treated for Federal income tax purposes
as sold on the last business day of the Fund's taxable year, but gains and
losses will be subject to such short sales, wash sales, loss deferral rules and
the requirement to capitalize interest and carrying charges. Under temporary
regulations, a Portfolio would be allowed (in lieu of the foregoing) to elect
either (1) to offset gains or losses from portions which are part of a mixed
straddle by separately identifying each mixed straddle to which such treatment
applies, 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
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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 Bond Portfolios and certain transactions of the other Portfolios
that are denominated in terms of a currency other than the U.S. dollar or
determined by reference to the value of one or more currencies other than the
U.S. dollar. The types of transactions covered by the special rules include the
following: (i) the acquisition of, or becoming the obligor under, a bond or
other debt instrument (including, to the extent provided in Treasury
regulations, certain preferred stock); (ii) the accruing of certain trade
receivables and payables; (iii) the entering into or acquisition of any forward
contract or similar financial instruments; and (iv) the entering into or
acquisition of any futures contract, option or similar financial instrument, if
such instrument is not marked-to-market. The disposition of a currency other
than the U.S. dollar by a U.S. taxpayer also is treated as a transaction 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
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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 Bond 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 Bond
Portfolios also may result in the creation of one or more straddles for Federal
income tax purposes, in which case certain loss deferral, short sales, and 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
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percentages of their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses). Each Portfolio intends to make
sufficient distributions or deemed distributions of its ordinary taxable income
and any capital gain net income prior to the end of the each calendar year to
avoid liability for this excise tax.
The Fund will be required in certain cases to withhold and remit to
the United States Treasury 31% of dividends and gross sale proceeds paid to any
shareholder (i) who has provided either an incorrect tax identification number
or no number at all, (ii) who is subject to backup withholding by the Internal
Revenue Service for failure to report the receipt of interest or dividend income
properly, or (iii) who has failed to certify to the Fund that he is not subject
to backup withholding or that he is an "exempt recipient."
Shareholders will be advised annually as to the Federal income tax
consequences of distributions made by the Portfolios each year.
The foregoing general discussion of Federal income tax consequences is
based on the Code and the regulations issued thereunder as in effect on the date
of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.
Although each Portfolio expects to qualify as a "regulated investment
company" and to be relieved of all or substantially all Federal income taxes,
depending upon the extent of its activities in states and localities in which
its offices are maintained, in which its agents or independent contractors are
located or in which it is otherwise deemed to be conducting business, each
Portfolio may be subject to the tax laws of such 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.
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<PAGE>
There will normally be no meetings of shareholders for the purpose of
electing trustees unless and until such time as required by law. At that time,
the trustees then in office will call a shareholders' meeting to elect trustees.
Except as set forth above, the trustees shall continue to hold office and may
appoint successor trustees. The Fund's Declaration of Trust provides that
meetings of the shareholders of the Fund shall be called by the trustees upon
the written request of shareholders owning at least 10% of the outstanding
shares entitled to vote.
The Funds' Declaration of Trust authorizes the Board of Trustees,
without shareholder approval (unless otherwise required by applicable law), to:
(i) sell and convey the assets belonging to a class of shares to another
management investment company for consideration which may include securities
issued by the purchaser and, in connection therewith, to cause all outstanding
shares of such class to be redeemed at a price which is equal to their net asset
value and which may be paid in cash or by distribution of the securities or
other consideration received from the sale and conveyance; (ii) sell and convert
the assets belonging to one or more classes of shares into money and, in
connection therewith, to cause all outstanding shares of such class to be
redeemed at their net asset value; or (iii) combine the assets belonging to a
class of shares with the assets belonging to one or more other classes of shares
if the Board of Trustees reasonably determines that such combination will not
have a material adverse effect on the shareholders of any class participating in
such combination and, in connection therewith, to cause all outstanding shares
of any such class to be redeemed or converted into shares of another class of
shares at their net asset value. However, the exercise of such authority may be
subject to certain restrictions under the 1940 Act. The Board of Trustees may
authorize the termination of any class of shares after the assets belonging to
such class have been distributed to its shareholders.
MISCELLANEOUS
COUNSEL. The law firm of Drinker Biddle & Reath, 1345 Chestnut
Street, Philadelphia, Pennsylvania 19107-3496, serves as the Fund's counsel.
The law firm of Stradley, Ronon, Stevens & Young, LLP, 2600 One Commerce
Square, Philadelphia, Pennsylvania 19103, serves as the Trust's counsel.
INDEPENDENT ACCOUNTANTS. Coopers & Lybrand, LLP, serves as the Fund's
and the Trust's independent accountants.
FIVE PERCENT OWNERS. The name, address and percentage ownership of
each person that on December 18, 1995 owned of record or beneficially 5% or more
of the outstanding shares of a
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<PAGE>
Portfolio which had commenced operations as of that date was as follows:
Money Market Portfolio: BHC Securities, 2005 Market St., Phila., PA 19103, 7.3%;
- ----------------------
PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113, 80.4%; PNC Bank Ohio,
201 E. Fifth Street, Cincinnati, OH 45202, 7.4%; Government Money Market
-----------------------
Portfolio: PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113, 79,3%;
- ---------
Municipal Money Market Portfolio: PNC Bank Pittsburgh, 960 Ft. Duquesne Blvd.,
- --------------------------------
Pittsburgh, PA 15222, 16.9%; PNC Bank Ohio, 201 E. Fifth St., Cincinnati, OH
45202, 8.6%; PNC Bank, Saxon and Co., 200 Stevens Dr., Suite 260, Lester, PA
19113, 68.7%; PNC Bank, 200 Stevens Drive, Lester, PA 19113, 96.6%; Ohio
----
Municipal Money Market Portfolio: BHC Securities, 2005 Market St., Phila., PA
- --------------------------------
19103, 27.7%; PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113, 62.0%;
Wayne County National Bank, P.O. Box 550, Wooster, OH 44691, 6.1%; North
-----
Carolina Municipal Money Market Portfolio: Branch Banking & Trust Company, P.O.
- -----------------------------------------
Box 1847, Wilson, N.C. 27893, 5.5%; Centura Bank, P.O. Box 1220, Rocky Mount, NC
27802, 13.6%; United Carolina Bank Whiteville, P.O. Drawer 632, Whiteville, NC
28472, 23.5%; McWood & Co., First Citizens Bank, P.O. Box 29522, Raleigh, NC
27626, 12.8%; North Carolina Trust Co., 301 North Elm St., Greensboro, NC 27402,
21.64%; Central Carolina Bank & Trust Co., P.O. Box 30010, Durham, NC 27702,
5.3%; Pennsylvania Municipal Money Market Portfolio: BHC Securities, 2005 Market
---------------------------------------------
St., Phila., PA 19103, 9.0%; PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA
19113, 78.2%; Janney Montgomery Scott, 1801 Market Street, Philadelphia, PA
19103, 6.0%; Virginia Municipal Money Market Portfolio: Oldom & Co., First
-----------------------------------------
Virginia Bank Inc., 6400 Arlington Blvd., Falls Church, VA 22042, 71.6%;
Piedmont Company, Piedmont Trust Bank, P.O. Box 4751, Martinsville, VA 24115,
11.1%; Managed Income Portfolio: PNC Bank, 200 Stevens Dr., Suite 260, Lester,
------------------------
PA 19113, 92.5%; Tax-Free Income Portfolio: BHC Securities, 100 N. 20th Street,
-------------------------
Phila., PA 19103, 17.9%; PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113,
44.0%; Ohio Tax-Free Income Portfolio: BHC Securities, 100 N. 20th Street,
------------------------------
Phila., PA 19103, 32.3%; PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113,
59.6%; Pennsylvania Tax-Free Income: BHC Securities, 100 N. 20th St., Phila., PA
----------------------------
19103, 46.0%; PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113, 26.9%;
Intermediate Government Bond Portfolio: PNC Bank, 200 Stevens Dr., Suite 260,
- --------------------------------------
Lester, PA 19113, 91.5%; Short Government Bond Portfolio: Medical Practice
-------------------------------
Account, 1020 Walnut St., Phila., PA 19107, 13.6%; PNC Bank, 200 Stevens Dr.,
Suite 260, Lester, PA 19113, 84.2%; Intermediate-Term Bond Portfolio: PNC Bank,
--------------------------------
200 Stevens Dr., Suite 260, Lester, PA 19113, 94.4%; Government Income
-----------------
Portfolio: BHC Securities, 100 N. 20th St., Phila., PA 19103, 20.9%;
- ---------
International Emerging Markets Portfolio: PNC Bank, 200 Stevens Dr., Suite 260,
- ----------------------------------------
Lester, PA 19113, 88.7%; Growth Equity Portfolio: PNC Bank, 200 Stevens Dr.,
-----------------------
Suite 260, Lester, PA 19113, 96.6%; Index Equity Portfolio: PNC
----------------------
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<PAGE>
Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113, 91.6%; Small Cap Value
---------------
Equity Portfolio: PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113,
- ----------------
81.1%; International Equity Portfolio: PNC Bank, 200 Stevens Dr., Suite 260,
------------------------------
Lester, PA 19113, 91.4%; Balanced Portfolio: BHC Securities, 100 N. 20th St.,
------------------
Phila., PA 19103, 24.8%; PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113,
60.3%; Value Equity Portfolio: PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA
----------------------
19113, 91.0%; Small Cap Growth Equity Portfolio: PNC Bank, 200 Stevens Dr.,
---------------------------------
Suite 260, Lester, PA 19113, 89.1%; and Select Equity Portfolio: PNC Bank, 200
-----------------------
Stevens Dr., Suite 260, Lester, PA 19113, 98.0%; and New Jersey Municipal Money
--------------------------
Market Portfolio: Wheat First Bulcher Singer, Box 1357, Richmond, VA 23211,
- ----------------
35.8%; Janney Montgomery Scott, 1801 Market Street, Philadelphia, PA 19103,
18.4%; BHC Securities, 100 N. 20th Street, Philadelphia, PA 19103, 43.8%.
On December 18, 1995, PNC Bank held of record approximately 77% 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. PAMG, PIMC, BlackRock, PCM, PEAC, PNC Bank 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.
PAMG, PIMC, BlackRock, PCM, PEAC and PNC Bank believe they may perform
the services for the Fund contemplated by their respective agreements with the
Fund without violation of applicable banking laws or regulations. It should be
noted, however, that there have been no cases deciding whether bank and non-bank
subsidiaries of a registered bank holding company may perform services
comparable to those that are to be performed by these companies, and future
changes in either Federal or state
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<PAGE>
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.
Should future legislative, judicial or administrative action prohibit
or restrict the activities of such companies in connection with the provision of
services on behalf of the Fund and the holders of Investor Shares, the Fund
might be required to alter materially or discontinue its arrangements with such
companies and change its method of operations with respect to the Investor
Shares. It is not anticipated, however, that any change in the Fund's method of
operations would affect its net asset value per share or result in a financial
loss to any customer.
SHAREHOLDER APPROVALS. As used in this Statement of Additional
Information and in the Prospectus, a "majority of the outstanding shares" of a
class, series or Portfolio means, with respect to the approval of an investment
advisory agreement, a distribution plan or a change in a fundamental investment
policy, the lesser of (1) 67% of the shares of the particular class, series or
Portfolio represented at a meeting at which the holders of more than 50% of the
outstanding shares of such class, series or Portfolio are present in person or
by proxy, or (2) more than 50% of the outstanding shares of such class, series
or Portfolio.
FINANCIAL STATEMENTS
ALL PORTFOLIOS, EXCEPT THE INTERNATIONAL BOND, NEW JERSEY TAX-FREE
INCOME, NEW JERSEY MUNICIPAL MONEY MARKET, SHORT GOVERNMENT BOND, CORE BOND AND
INDEX MASTER PORTFOLIOS. The audited financial statements and notes thereto in
the Fund's Annual Report to Shareholders for the fiscal year ended September 30,
1995 (the "1995 Annual Report") are incorporated in this Statement of Additional
Information by reference. No other parts of the 1995 Annual Report are
incorporated by reference herein. The financial statements included in the 1995
Annual Report have been audited by the Fund's independent accountants, Coopers &
Lybrand, LLP, whose reports thereon are incorporated herein by reference. Such
financial statements have been incorporated herein in reliance upon such report
given upon their authority as experts in accounting and auditing. Additional
copies of the 1995 Annual Report may be obtained at no charge by telephoning the
Distributor at the telephone number appearing on the front page of this
Statement of Additional Information.
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<PAGE>
SHORT GOVERNMENT BOND AND CORE BOND PORTFOLIOS. The Short Government
Bond and Core Bond Portfolios commenced operations as separate investment
portfolios of The BFM Institutional Trust Inc. (the "Predecessor BFM
Portfolios"). The audited financial statements for the Predecessor BFM
Portfolios contained in their Annual Report to Shareholders dated June 30, 1995
(the "BFM Annual Report") are incorporated by reference into this Statement of
Additional Information. No other parts of the BFM Annual Report are
incorporated by reference herein. Additional copies of the BFM 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.
INTERNATIONAL BOND, NEW JERSEY MUNICIPAL MONEY MARKET AND NEW JERSEY
TAX-FREE INCOME PORTFOLIOS. The International Bond, New Jersey Municipal Money
Market and New Jersey Tax-Free Income Portfolios commenced operations as
separate investment portfolios of The Compass Capital Group of Funds (the
"Predecessor Compass Portfolios"). The unaudited financial statements for the
Predecessor Compass Portfolios contained in their Semi-Annual Report to
Shareholders dated August 31, 1995 (the "Predecessor Compass Semi-Annual
Report") and the audited financial statements for the Predecessor Compass
Portfolios contained in their Annual Report to Shareholders dated February 28,
1995 (the "Predecessor Compass Annual Report") are incorporated by reference
into this Statement of Additional Information. No other parts of the
Predecessor Compass Semi-Annual Report or Annual Report are incorporated by
reference herein. Additional copies of the Predecessor Compass Semi-Annual
Report and Annual Report may be obtained at no charge by telephoning the
Distributor at the telephone number appearing on the front page of this
Statement of Additional Information.
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<PAGE>
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.
A-1
<PAGE>
"Prime-2" - Issuer or related supporting institutions are considered
to have a strong capacity for repayment of short-term promissory obligations.
This will normally be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, will be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternative
liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment. Short-
term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity, and other protection
factors qualify issue as investment grade. Risk
A-2
<PAGE>
factors are larger and subject to more variation. Nevertheless, timely payment
is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years. The following
summarizes the rating categories used by Fitch for short-term obligations:
"F-1+" - Securities possess exceptionally strong credit quality.
Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned this
rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned this
rating have characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned this
rating have characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial and
economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a commercial
bank.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one
A-3
<PAGE>
year or less which is issued by United States commercial banks, thrifts and non-
bank banks; non-United States banks; and broker-dealers. The following
summarizes the ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is regarded as non-
investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1+" - Obligations supported by the highest capacity for timely
repayment.
"A1" - Obligations are supported by the highest capacity for timely
repayment.
"A2" - Obligations are supported by a satisfactory capacity for timely
repayment, although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.
"A3" - Obligations are supported by a satisfactory capacity for timely
repayment. Such capacity is more susceptible to adverse changes in business,
economic or financial conditions than for obligations in higher categories.
"B" - Obligations for which the capacity for timely repayment is
susceptible to adverse changes in business, economic or financial conditions.
A-4
<PAGE>
"C" - Obligations for which there is an inadequate capacity to ensure
timely repayment.
"D" - Obligations which have a high risk of default or which are
currently in default.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
- ----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned by
Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay interest and
repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but currently has
the capacity to meet interest payments and
A-5
<PAGE>
principal repayments. Adverse business, financial or economic conditions will
likely impair capacity or willingness to pay interest and repay principal. The
"B" rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BB" or "BB-" rating.
"CCC" - Debt has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The "C" rating
may be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no interest
is being paid.
"D" - Debt is in payment default. This rating is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S & P believes such payments
will be made during such grace period. "D" rating is also used upon the filing
of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid, and
certain other obligations that S & P believes may experience high volatility or
high variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are
A-6
<PAGE>
generally referred to as "gilt edged." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in
default.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" to "B" in its bond rating system. The modifier 1
indicates that the issuer ranks in the
A-7
<PAGE>
higher end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issuer ranks at the lower end of
its generic rating category.
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt
rated "B" possesses the risk that obligations will not be met when due. Debt
rated "CCC" is well below investment grade and has considerable uncertainty as
to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong
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as bonds rated "AAA." Because bonds rated in the "AAA" and "AA" categories are
not significantly vulnerable to foreseeable future developments, short-term debt
of these issuers is generally rated "F-1+."
"A" - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" -Bonds that possess
one of these ratings are considered by Fitch to be speculative investments. The
ratings "BB" to "C" represent Fitch's assessment of the likelihood of timely
payment of principal and interest in accordance with the terms of obligation for
bond issues not in default. For defaulted bonds, the rating "DDD" to "D" is an
assessment of the ultimate recovery value through reorganization or liquidation.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
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"A" - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions may lead
to increased investment risk.
"BBB" - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
higher categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of
these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree of
speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to
denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis with limited incremental risk compared
to issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB"
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are, however, more vulnerable to adverse developments (both internal and
external) than obligations with higher ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
MUNICIPAL NOTE RATINGS
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A Standard and Poor's rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
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"MIG-2"/"VMIG-2" - Loans bearing this designation are of high quality,
with margins of protection ample although not so large as in the preceding
group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate
quality, carrying specific risk but having protection commonly regarded as
required of an investment security and not distinctly or predominantly
speculative.
"SG" - Loans bearing this designation are of speculative quality and
lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
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