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COMPASS CAPITAL FUNDS(SM)
(formerly, The PNC(R) Fund)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information provides supplementary information
pertaining to 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, Large Cap Value Equity (formerly, the Value
Equity Portfolio), Large Cap Growth Equity (formerly, the Growth Equity
Portfolio), Index Equity, Small Cap Value Equity, Mid-Cap Value Equity,
International Equity, International Emerging Markets, Balanced, Small Cap Growth
Equity, Mid-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, Low Duration Bond (formerly, the Short Government
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 called "Money Market Portfolios," and the other Portfolios
are 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 1, 1997, 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 1, 1997. 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
Special Considerations for State-Specific
Portfolios.................................................... 20
Trustees and Officers.......................................... 49
Investment Advisory, Administration,
Distribution and Servicing Arrangements....................... 61
Portfolio Transactions......................................... 88
Purchase and Redemption Information............................ 93
Valuation of Portfolio Securities.............................. 99
Performance Information........................................ 103
Taxes.......................................................... 134
Additional Information Concerning Shares....................... 143
Miscellaneous.................................................. 145
Financial Statements........................................... 148
Appendix A (Description of Securities Ratings)................. A-1
Appendix B (Description of Futures)............................ B-1
Appendix C (Unaudited Financial Statements for
the U.S. Large Company Series of The DFA
Investment Trust Company)..................................... C-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. Except as indicated, the
information below relates only to those Portfolios that are authorized to invest
in the instruments or securities described below.
The Index Equity Portfolio invests all of its investable assets in The U.S.
Large Company Series (the "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 Investment Strategy
The Large Cap Value Equity, Large Cap Growth Equity, Mid-Cap Value Equity
and Mid-Cap Growth Equity Portfolios will invest primarily in securities of
established companies. For this purpose, an established company is one which,
together with its predecessors, has at least three years of continuous operating
history.
The Low Duration Bond Portfolio will seek to maintain a duration for its
portfolio in a range of +/-20% of the current duration of the Merrill Lynch 1-3
Year Treasury Index. The Government Income Portfolio will seek to maintain an
interest rate sensitivity within a range comparable to that of 7 to 10 year U.S.
Treasury bonds.
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") 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 liquid assets 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
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or sub-adviser will consider the earning power, cash flows and liquidity ratios
of the issuers and guarantors of such instruments and, if the instruments are
subject to a demand feature, will monitor their financial status to meet payment
on demand. Such instruments may include variable amount master demand notes
that permit the indebtedness thereunder to vary in addition to providing for
periodic adjustments in the interest rate. The absence of an active secondary
market with respect to particular variable and floating rate instruments could
make it difficult for a Portfolio to dispose of a variable or floating rate note
if the issuer defaulted on its payment obligation or during periods that the
Portfolio is not entitled to exercise its demand rights, and the Portfolio
could, for these or other reasons, suffer a loss with respect to such
instruments. In determining average-weighted portfolio maturity, an instrument
will be deemed to have a maturity equal to either 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, depending on the type of
instrument involved.
Money Market Obligations of Domestic Banks, Foreign Banks and Foreign
Branches of U.S. Banks. Each 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
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corporation within the Department of Housing and Urban Development. GNMA
certificates also are supported by the authority of GNMA to borrow funds from
the U.S. Treasury to make payments under its guarantee. Mortgage-related
securities issued by the Federal National Mortgage Association ("FNMA") include
FNMA guaranteed Mortgage Pass-Through Certificates (also known as "Fannie Maes")
which are solely the obligations of the FNMA, are not backed by or entitled to
the full faith and credit of the United States and are supported by the right of
the issuer to borrow from the Treasury. FNMA is a government-sponsored
organization owned entirely by private stockholders. Fannie Maes are guaranteed
as to timely payment of principal and interest by FNMA. Mortgage-related
securities issued by the Federal Home Loan Mortgage Corporation ("FHLMC")
include FHLMC Mortgage Participation Certificates (also known as "Freddie Macs"
or "Pcs"). FHLMC is a corporate instrumentality of the United States, created
pursuant to an Act of Congress, which is owned entirely by Federal Home Loan
Banks. Freddie Macs are not guaranteed by the United States or by any Federal
Home Loan Banks and do not constitute a debt or obligation of the United States
or of any Federal Home Loan Bank. Freddie Macs entitle the holder to timely
payment of interest, which is guaranteed by the FHLMC. FHLMC guarantees either
ultimate collection or timely 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, Low Duration 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") and the Balanced Portfolio 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 or commercial 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 CMOs and REMICs, which are known as "regular" interests or
"residual" interests. The residual in a CMO or REMIC structure generally
represents the interest in any excess cash flow remaining after making required
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payments of principal of and interest on the CMOs or REMICs, as well as the
related administrative expenses of the issuer. Residual interests generally are
junior to, and may be significantly more volatile than, "regular" CMO and REMIC
interests. The Portfolios do not currently intend to purchase residual
interests.
Each class of CMOs or REMIC Certificates, often referred to as a "tranche,"
is issued at a specific adjustable or fixed interest rate and must be fully
retired no later than its final distribution date. Principal prepayments on the
Mortgage Assets underlying the CMOs or REMIC Certificates may cause some or all
of the classes of CMOs or REMIC Certificates to be retired substantially earlier
than their final distribution dates. Generally, interest is paid or accrues on
all classes of CMOs or REMIC Certificates on a monthly basis.
The principal of and interest on the Mortgage Assets may be allocated among
the several classes of CMOs or REMIC Certificates in various ways. In certain
structures (known as "sequential pay" CMOs or REMIC Certificates), payments of
principal, including any principal prepayments, on the Mortgage Assets generally
are applied to the classes of CMOs or REMIC Certificates in the order of their
respective final distribution dates. Thus, no payment of principal will be made
on any class of sequential pay CMOs or REMIC Certificates until all other
classes having an earlier final distribution date have been paid in full.
Additional structures of CMOs or REMIC Certificates include, among others,
"parallel pay" CMOs and REMIC Certificates. Parallel pay CMOs or REMIC
Certificates are those which are structured to apply principal payments and
prepayments of the Mortgage Assets to two or more classes concurrently on a
proportionate or disproportionate basis. These simultaneous payments are taken
into account in calculating the final distribution date of each class.
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
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have the highest priority on each payment date after interest due has been paid
to all classes entitled to receive interest currently. Shortfalls, if any, are
added to the amount payable on the next payment date. The PAC Certificate
payment schedule is taken into account in calculating the final distribution
date of each class of PAC. In order to create PAC tranches, one or more
tranches generally must be created that absorb most of the volatility in the
underlying Mortgage Assets. These tranches tend to have market prices and
yields that are much more volatile than the PAC classes.
FNMA REMIC Certificates are issued and guaranteed as to timely distribution
of principal and interest by FNMA. In addition, FNMA will be obligated to
distribute on a timely basis to holders of FNMA REMIC Certificates required
installments of principal and interest and to distribute the principal balance
of each class of REMIC Certificates in full, whether or not sufficient funds are
otherwise available.
For FHLMC REMIC Certificates, FHLMC guarantees the timely payment of
interest, and also guarantees the ultimate payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("Pcs"). Pcs represent undivided interests in specified level payment,
residential mortgages or participations therein purchased by FHLMC and placed in
a PC pool. With respect to principal payments on Pcs, FHLMC generally
guarantees ultimate collection of all principal of the related mortgage loans
without offset or deduction. FHLMC also guarantees timely payment of principal
on certain Pcs, referred to as "Gold Pcs."
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.
In general, the collateral supporting asset-backed securities is of shorter
maturity than mortgage-related securities. Like other fixed-income securities,
when interest rates rise the value of an asset-backed security generally will
decline; however, when interest rates decline, the value of an asset-backed
security with prepayment features may not increase as much as that of other
fixed-income securities.
U.S. Government Obligations. Examples of the types of U.S. Government
obligations which the Portfolios may hold include U.S.
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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 Portfolios 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
chartered to promote economic development.
Lease Obligations. The Portfolios may hold participation certificates in a
lease, an installment purchase contract, or a conditional sales contract ("lease
obligations").
The Sub-Adviser will monitor the credit standing of each municipal borrower
and each entity providing credit support and/or a put option relating to lease
obligations. In determining whether a lease obligation is liquid, the Sub-
Adviser will consider, among other factors, the following: (i) whether the lease
can be cancelled; (ii) the degree of assurance that assets represented by the
lease could be sold; (iii) the strength of the lessee's general credit (e.g.,
its debt, administrative, economic, and financial characteristics); (iv) the
likelihood that the municipality would discontinue appropriating funding for the
leased property because the property is no longer deemed essential to the
operations of the municipality (e.g., the potential for an "event of
nonappropriation"); (v) legal recourse in the event of failure to appropriate;
(vi) whether the security is backed by a credit enhancement such as insurance;
and (vii) any limitations which are imposed on the lease obligor's ability to
utilize substitute property or services other than those covered by the lease
obligation.
The Municipal Money Market, Pennsylvania Municipal Money Market, Ohio
Municipal Money Market, North Carolina Municipal Money Market, Virginia
Municipal Money Market and New Jersey
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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 sub-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 a Portfolio, and could result in a reduction in the value
of the municipal lease experiencing non-payment and a potential decrease in the
net asset value of a Portfolio. Issuers of municipal securities might seek
protection under the bankruptcy laws. In the event of bankruptcy of such an
issuer, a Portfolio could experience delays and limitations with respect to the
collection of principal and interest on such municipal leases and a Portfolio
may not, in all circumstances, be able to collect all principal and interest to
which it is entitled. To enforce its rights in the event of a default in lease
payments, the Fund might take possession of and manage the assets securing the
issuer's obligations on such securities, which may increase a Portfolio's
operating expenses and adversely affect the net asset value of a Portfolio.
When the lease contains a non-appropriation clause, however, the failure to pay
would not be a default and a Portfolio would not have the right to take
possession of the assets. Any income derived from a Portfolio's ownership or
operation of such assets may not be tax-exempt. In addition, a Portfolio's
intention to qualify as a "regulated investment company" under the Internal
Revenue Code of 1986, as amended, may limit the extent to which a Portfolio may
exercise its rights by taking possession of such assets, because as a regulated
investment company a Portfolio 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 which 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 to equal at least the repurchase price
(including accrued interest). In addition, the Portfolio's adviser or sub-
adviser will require that the value of this collateral, after transaction costs
(including loss of interest) reasonably expected to be incurred on a default, be
equal to or greater than the repurchase price (including accrued premium)
provided in the repurchase agreement. The accrued premium is the amount
specified in the repurchase agreement or the daily
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amortization of the difference between the purchase price and the repurchase
price specified in the repurchase agreement. The Portfolio's adviser or sub-
adviser will mark-to-market daily the value of the securities. Securities
subject to repurchase agreements will be held by the Fund's custodian (or sub-
custodian) in the Federal Reserve/Treasury book-entry system or by another
authorized securities depository. Repurchase agreements are considered to be
loans by the Portfolios under the 1940 Act.
The Index Master Portfolio may enter into repurchase agreements, but 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 "U.S. 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 and the Low Duration
Bond, Intermediate Government Bond and Government Income Portfolios, may invest
in "investment grade securities," which are securities rated in the four highest
rating categories of an NRSRO. The Low Duration Bond, Intermediate Government
Bond and Government Income Portfolios may invest in debt securities rated Aaa by
Moody's or AAA by S&P. 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."
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See Appendix A to this Statement of Additional Information for a
description of applicable securities ratings.
When-Issued Purchases and Forward Commitments. The Portfolios may enter
into "when-issued" and "forward" commitments, including "TBA" (to be announced)
purchase commitments, to purchase or sell securities at a fixed price at a
future date. When a Portfolio agrees to purchase securities on this basis, the
custodian will set aside liquid assets equal to the amount of the commitment in
a separate account. Normally, the custodian will set aside portfolio securities
to satisfy a purchase commitment, and in such a case the Portfolio may be
required subsequently to place additional assets in the separate account in
order to ensure that the value of the account remains equal to the amount of the
Portfolio's commitments. It may be expected that the market value of a
Portfolio's net assets will fluctuate to a greater degree when it sets aside
portfolio securities to cover such purchase commitments than when it sets aside
cash. Because 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 forward commitments and
commitments to purchase when-issued or TBA securities will not exceed 25% of the
value of its total assets absent unusual market conditions.
If deemed advisable as a matter of investment strategy, 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, TBA or 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 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. Each equity Portfolio (except
the Index Master Portfolio) and the Balanced Portfolio 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
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period of time. Subscription rights normally have a short life span to
expiration. The purchase of rights or warrants involves the risk that a
Portfolio could lose the purchase value of a right or warrant if the right to
subscribe to additional shares is not exercised prior to the rights' and
warrants' expiration. Also, the purchase of rights and/or warrants involves the
risk that the effective price paid for the right and/or warrant added to the
subscription price of the related security may exceed the value of the
subscribed security's market price such as when there is no movement in the
level of the underlying security. A Portfolio will not invest more than 5% of
its net assets, taken at market value, in warrants, or more than 2% of its net
assets, taken at market value, in warrants not listed on the New York or
American Stock Exchanges. Warrants acquired by a Portfolio in units or attached
to other securities are not subject to this restriction.
Foreign Currency Transactions. Forward foreign currency exchange contracts
involve an obligation to purchase or sell a specified currency at a future date
at a price set at the time of the contract. Forward currency contracts do not
eliminate fluctuations in the values of portfolio securities but rather allow a
Portfolio to establish a rate of exchange for a future point in time. A
Portfolio may 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, a 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 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. 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
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protection from losses resulting from declines in the value of a particular
foreign currency, they also limit potential gains which might result from
increases in the value of such currency. A Portfolio will also incur costs in
connection with forward foreign currency exchange contracts and conversions of
foreign currencies and U.S. dollars.
A Portfolio may also engage in proxy hedging transactions to reduce the
effect of currency fluctuations on the value of existing or anticipated holdings
of portfolio securities. Proxy hedging is often used when the currency to which
the Portfolio is exposed is difficult to hedge or to hedge against the dollar.
Proxy hedging entails entering into a forward contract to sell a currency whose
changes in value are generally considered to be linked to a currency or
currencies in which some or all of the Portfolio's securities are, or are
expected to be, denominated, and to buy U.S. dollars. Proxy hedging involves
some of the same risks and considerations as other transactions with similar
instruments. Currency transactions can result in losses to the Portfolio if the
currency being hedged fluctuates in value to a degree or in a direction that is
not anticipated. In addition, there is the risk that the perceived linkage
between various currencies may not be present or may not be present during the
particular time that a Portfolio is engaging in proxy hedging. A Portfolio may
also cross-hedge currencies by entering into forward contracts to sell one or
more currencies that are expected to decline in value relative to other
currencies to which the Portfolio has or in which the Portfolio expects to have
portfolio exposure. For example, a Portfolio may hold both French government
bonds and German government bonds, and the Adviser or Sub-Adviser may believe
that French francs will deteriorate against German marks. The Portfolio would
sell French francs to reduce its exposure to that currency and buy German marks.
This strategy would be a hedge against a decline in the value of French francs,
although it would expose the Portfolio to declines in the value of the German
mark relative to the U.S. dollar.
In general, currency transactions are subject to risks different from those
of other portfolio transactions, and can result in greater losses to a Portfolio
than would otherwise be incurred, even when the currency transactions are used
for hedging purposes.
A separate account of a Portfolio consisting of liquid assets 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
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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,
liquid assets in such amount as are held in a segregated account by its
custodian) upon conversion or exchange of other securities held by it. For a
call option on an index, the option is covered if a Portfolio maintains with its
custodian liquid assets 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
liquid assets in a segregated account with its custodian.
When a Portfolio purchases a put option, the premium paid by it is recorded
as an asset of the Portfolio. When a Portfolio writes an option, an amount
equal to the net premium (the premium less the commission) received by the
Portfolio is included in the liability section of the Portfolio's statement of
assets and liabilities as a deferred credit. The amount of this asset or
deferred credit will be subsequently marked-to-market to reflect the current
value of the option purchased or written. The current value of the traded
option is the last sale price or, in the absence of a sale, the mean between the
last bid and asked prices. If an option purchased by a Portfolio expires
unexercised the Portfolio realizes a loss equal to the premium paid. If the
Portfolio enters into a closing sale transaction on an option purchased by it,
the Portfolio will realize a gain if the premium received by the Portfolio on
the closing transaction is more than the premium paid to purchase the option, or
a loss if it is less. If an option written by a Portfolio expires on the
stipulated expiration date or if the Portfolio enters into a closing purchase
transaction, it will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the net premium received when the option is sold) and the
deferred credit related to such option will be eliminated. If an option written
by a Portfolio is exercised, the proceeds of the sale will be increased by the
net premium originally received and the Portfolio will realize a gain or loss.
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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). These instruments are described in Appendix B to this Statement of
Additional Information.
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.
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Stand-by commitments will only be entered into with dealers, banks and
broker-dealers which, in a 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, interests in long-term fixed-rate municipal debt
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 debt obligation to a third party at periodic intervals
and to receive the principal amount thereof. In some cases, municipal debt
obligations are represented by custodial receipts evidencing rights to receive
specific future interest payments, principal payments, or both, on the
underlying securities held by the custodian. Under such arrangements, the
holder of the custodial receipt has the option to tender the underlying
securities at their 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 securities' fixed coupon rate and the rate that would
cause the securities, 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 debt 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 opinions of counsel to the sponsors of such derivative securities.
Neither the Fund nor its investment adviser or sub-advisers will review the
proceedings related to the creation of any tax-exempt derivatives or the basis
for such opinions.
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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 may be invested in any of the following instruments: (a) obligations
issued or guaranteed as to principal and interest by the U.S. Government or
agencies or instrumentalities thereof; (b) commercial paper; (c) certificates of
deposit; (d) bankers' acceptances; (e) bilateral and triparty repurchase
agreements with respect to the securities listed in (a) through (d); (f) bank
time deposits issued or guaranteed as to principal and interest by an entity,
except a broker/dealer, named on an "approved list" provided by the investment
adviser or sub-adviser; (g) shares issued by unaffiliated money market funds;
and (h) other high-yielding short-term investments which the adviser or sub-
adviser believes give liquidity to pay back the borrower when the loaned
securities are returned. In any event, cash collateral shall only be invested
in instruments, including repurchase agreements, that mature on or before the
maturity date of the applicable lending transaction.
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 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. A Portfolio's
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adviser or sub-adviser will consider such an event in determining whether the
Portfolio should continue to hold the security.
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. Interest rate swaps involve the exchange by a Portfolio with
another party of their respective commitments to pay or receive interest (e.g.,
an exchange of floating rate payments for fixed rate payments). The purchase of
an interest rate floor entitles the purchaser, to the extent that a specified
index falls below a predetermined interest rate, to receive payments of interest
on a notional principal amount from the party selling such interest rate floor.
The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payments of
interest on a notional principal amount from the party selling such interest
rate cap. The International Bond Portfolio 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 specified 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 or currency
swap on a daily basis and will deliver an amount of liquid assets having an
aggregate net asset value at least equal to the accrued excess to a custodian
that satisfies the requirements of the 1940 Act. If the other party to an
interest rate swap defaults, a Portfolio's risk of loss consists of the net
amount of interest payments that the Portfolio is contractually entitled to
received. Because currency swaps usually involve the delivery of the entire
principal value of one designated currency in exchange for the other designated
currency, the entire principal value of a currency swap is subject to the risk
that the other party to the swap will default on its contractual delivery
obligations. A Portfolio will not enter into any interest rate or currency 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 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 FOR STATE-SPECIFIC PORTFOLIOS
The following information regarding the State-Specific Portfolios is
derived from official statements of certain issuers published in connection with
their issuance of securities and from other publicly available information, and
is believed to be accurate. No independent verification has been made of any of
the following information.
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Special Considerations Regarding Investments in Ohio State-Specific
Obligations. The Ohio Tax-Free Money Market and Ohio Tax-Free Income Portfolios
(the "Ohio Portfolios") will invest most of their respective net assets in
securities issued by or on behalf of (or in certificates of participation in
lease-purchase obligations of) the State of Ohio, political subdivisions of the
State, or agencies or instrumentalities of the State or its political
subdivisions ("Ohio State-Specific Obligations"). The Ohio Portfolios are
therefore susceptible to general or particular economic, political or regulatory
factors that may affect issuers of Ohio State-Specific 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.
Generally, the creditworthiness of Ohio State-Specific 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 State-Specific Obligations or in those
obligations of particular Ohio issuers. It is possible that the investment may
be in particular Ohio State-Specific 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
five years the State rates were below the national rates (4.8% versus 5.6% in
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1995). The unemployment rate and its effects vary among geographic areas of the
State.
There can be no assurance that future national, regional or state-wide
economic difficulties, and the resulting impact on State or local government
finances generally, will not adversely affect the market value of Ohio State-
Specific 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.
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A significant GRF shortfall (approximately $520 million) was then projected
for FY 1993. It was addressed by appropriate legislative and administrative
actions, including the Governor's ordering $300 million in selected GRF spending
reductions and subsequent executive and legislative action (a combination of tax
revisions and additional spending reductions). The June 30, 1993 ending GRF
fund balance was approximately $111 million, of which, 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 was transferred into the BSF (which had an October 7,
1996 balance of over $828 million).
The GRF appropriations act for the current 1996-97 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, was
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 October 7, 1996, $854 million (excluding certain highway bonds
payable primarily from highway use receipts) 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
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be outstanding at any one time ($34.9 million outstanding); (b) $240 million of
obligations authorized for local infrastructure improvements, no more than $120
million of which may be issued in any calendar year ($774.7 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 one
time ($44.2 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.
The Constitution also authorizes the issuance of State obligations for
certain purposes, the owners of which do not have the right to have excises or
taxes levied to pay debt service. Those special obligations include obligations
issued by the Ohio Public Facilities Commission and the Ohio Building Authority,
and certain obligations issued by the State Treasurer, over $4.8 billion of
which were outstanding or sold and awaiting delivery at October 7, 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.)
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
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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 approximately 44% in recent years) of their operating moneys from
State subsidies, but are dependent on local property taxes, and in approximately
120 districts from voter-authorized income taxes, for significant portions of
their budgets. Litigation, similar to that in other states, is pending
questioning the constitutionality of Ohio's system of school funding. 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
case is now pending on appeal in 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 (including $29.5 million for one), and $87.2 million for 20
districts in fiscal year 1996 (including $42.1 million for one).
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 and school districts that on occasion have
faced significant financial problems, there are statutory procedures for a joint
State/local commission to monitor the fiscal affairs and for development of a
financial plan to eliminate deficits and cure any defaults. Since inception for
municipalities 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. The 1996 school district provision has been applied to two
districts.
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
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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 State-Specific
Obligations. The concentration of investments in Pennsylvania State-Specific
Obligations by the Pennsylvania Municipal Money Market and Pennsylvania Tax-Free
Income Portfolios raises special investment considerations. In particular,
changes in the economic condition and governmental policies of the Commonwealth
of Pennsylvania and its municipalities could adversely affect the value of those
Portfolios and their portfolio securities. This section briefly describes
current economic trends in Pennsylvania.
Pennsylvania has historically been dependent on heavy industry, although
recent declines in the coal, steel and railroad industries have led to
diversification of the Commonwealth's economy. Recent sources of economic
growth in Pennsylvania are in the service sector, including trade, medical and
health services, education and financial institutions. Agriculture continues to
be an important component of the Commonwealth's economic structure, with nearly
one-third of the Commonwealth's total land area devoted to cropland, pasture and
farm woodlands.
The population of Pennsylvania experienced a slight increase in the period
1980 through 1990, and has a high proportion of persons 65 or older. The
Commonwealth is highly urbanized, with almost 85% of the 1980 census population
residing in metropolitan statistical areas. The two largest metropolitan
statistical areas, those containing the Cities of Philadelphia and Pittsburgh,
together comprise approximately 50% of the Commonwealth's total population.
The Commonwealth utilizes the fund method of accounting and over 120 funds
have been established for purposes of recording receipts and disbursements of
the Commonwealth, of which the General Fund is the largest. Most of the
Commonwealth's operating and administrative expenses are payable from the
General Fund. The major tax sources for the General Fund are the sales tax, the
personal income tax and the corporate net income tax. Major expenditures of the
Commonwealth include funding for education, public health and welfare,
transportation, and economic development.
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
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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 in
subsequent years; and as of June 30, 1995, the General Fund had a surplus of
$688.3 million. The deficit in the Commonwealth's unreserved/undesignated funds
also had been eliminated.
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; (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 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; and (d) both the Commonwealth and the City of Philadelphia are
involved in Commonwealth Court cases that may result in their being required to
fund remedies for the unintentional racial segregation in the Philadelphia
public schools.
The City of Philadelphia (the "City") has been experiencing severe
financial difficulties which has impaired its access to public credit markets
and a long-term solution to the City's financial crisis is still being sought.
The City experienced a series of General Fund deficits for fiscal years 1988
through 1992. The City has no legal authority to issue deficit reduction bonds
on its own behalf, but state legislation has been enacted to create an
Intergovernmental Cooperation Authority (the "Authority") to provide fiscal
oversight for Pennsylvania cities (primarily Philadelphia) suffering recurring
financial difficulties. The Authority is broadly empowered to assist
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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 30, 1996. The audited balance of the City's General Fund as of
June 30, 1995 was $80.5 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. The Authority had $1,146.2 million in
special revenue bonds outstanding as of June 30, 1996.
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 State-
Specific Obligations. The concentration of investments in North Carolina State-
Specific 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 three major operating funds: the General
Fund, the Highway Fund and the Highway Trust Fund. 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
(currently being phased out). North Carolina receives other non-tax revenues
which are also deposited in the General Fund. The most important are Federal
funds collected by North Carolina agencies, university fees and tuition,
interest earned by the North Carolina Treasurer on investments of General Fund
moneys and revenues from the judicial branch. The proceeds from the motor fuel
tax, highway use tax and motor vehicle license tax are deposited in the Highway
Fund and the Highway Trust Fund.
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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 $292.6 million after certain other reservations. Fiscal year 1996
ended with a positive General Fund balance of approximately $573.4 million. An
additional $153.1 million was available from a reserved fund balance. Of this
aggregate amount, $77.3 million was reserved in the Savings Reserve (bringing
the total reserve to $500.9 million) and $130.0 million was reserved in the
Reserve for Repair and Renovation of State Facilities (bringing the total
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reserve to $151.3 million after prior withdrawals). An additional $47.1 million
was transferred to a newly-created Clean Water Management Trust Fund, $39.5
million was reserved in a Capital Improvement Reserve, and $26.2 million was
transferred to newly-created Federal Retiree Refund and Administration Accounts,
leaving an unrestricted General Fund balance at June 30, 1996 of approximately
$406.1 million.
The foregoing results are presented on a budgetary basis. Accounting
principles applied to develop data on a budgetary basis differ significantly
from those principles used to present financial statements in conformity with
generally accepted accounting principles (GAAP). Based on a modified accrual
basis (GAAP), the General Fund balance at June 30, 1993, 1994, and 1995 was
$681.5 million, $900.6 million, and $1,024.6 million, respectively. The
foregoing amounts for fiscal years 1994 and 1995 reflect adjustments for GASB
Statement No. 22 adopted by the State during fiscal 1995. The foregoing results
for fiscal year 1996 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 disclosure 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.
In the 1996 Special Session, the General Assembly reviewed and adjusted the
fiscal 1997 budget to take into account a General Fund surplus of over $700
million for the 1996 fiscal year. The General Assembly agreed to spend
approximately $415.4 million on new or expanded programs, apply approximately
$143 million to tax cuts and refunds, and reserve approximately $100 million in
various savings and other reserve accounts. Funding for education and salaries
for teachers and other state employees was increased. The tax cuts included a
reduction in North Carolina's corporate income tax, sales tax on food, and
inheritance tax, among other tax cuts. Legislators also
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significantly expanded North Carolina's industrial development policies,
including the adoption of four new tax credits designed to make North Carolina
more competitive in industrial recruitment. Overall, changes were made, or new
credits added, in the following areas: investment tax credit, business tax
credit, worker training tax credit, jobs creation tax credit, and research and
development tax credit. The tax cuts will reduce North Carolina revenues by
approximately $68.4 million for fiscal 1997 and by approximately $337 million
when all cuts are phased in by 2001. The General Assembly also created a Clean
Water Management Trust Fund, which will be used to finance projects to clean up
or prevent surface water pollution. The Fund will receive 6.5% of the General
Fund's unspent credit balance each year. The initial allocation to this Fund
from the fiscal 1996 credit balance was $47.1 million.
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 June 1996, North Carolina ranked
eleventh among the states in non-agricultural employment and eighth in
manufacturing employment. The Commission estimated North Carolina's seasonally
adjusted unemployment rate in August 1996 to be 4.1% of the labor force, as
compared with an unemployment rate of 5.1% 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 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
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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, which petition was denied. 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. Despite these
victories in court, the General Assembly in its 1996 Special Session adopted
legislation allowing for a refund of taxes for federal retirees. Effective for
tax years beginning on or after January 1, 1996, federal retirees are entitled
to a North Carolina income tax credit for taxes paid on their pension benefits
during tax years 1985 through 1988. In the alternative, a partial refund may be
claimed in lieu of a credit for eligible taxpayers.
An additional lawsuit was filed in 1995 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
monetary relief sufficient to equalize the alleged on-going discriminatory
treatment for those years. Potential refunds exceed $300 million. This case
has been suspended pending final judgment in Bailey (discussed below), and no
------
court date has been
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set. The North Carolina Attorney General 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 has appealed 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 was challenged by the plaintiff on grounds
that it violated the Commerce Clause of the United States Constitution by
discriminating against stock issued by corporations that do all or part of their
business outside the State. The plaintiff in the action was a North Carolina
corporation that did all or part of its business outside the State. The
plaintiff sought to invalidate the tax in its entirety and to recover tax paid
on the value of its shares in other corporations. The North Carolina Court of
Appeals invalidated the taxable percentage deduction and excised it from the
statute beginning with the 1994 tax year. The effect of this ruling was to
increase collections by rendering all stock taxable on 100% of its value. The
North Carolina Supreme Court reversed the decision of the Court of
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Appeals, upholding the tax on intangible personal property. The United States
Supreme Court reversed, ruled in the plaintiff's favor that the tax was
discriminatory, and ordered the case back to the State Court for a ruling on the
appropriate remedy. It is anticipated that the State Court will order the State
to pay refunds aggregating between $130 million and $140 million, including
interest, although other alternative remedies are possible. 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.
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 during January
1997.
In its 1996 Short Session, the North Carolina General Assembly approved
additional North Carolina general obligation bonds in the amount of $950 million
for highways and $1.8 billion for schools. These bonds were approved by the
voters of the State in November, 1996.
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 State-Specific
Obligations. The Virginia State-Specific Money Market Portfolio will invest
primarily in Virginia State-Specific Obligations. For this reason, the
Portfolio is affected by political, economic, regulatory or other developments
that constrain the taxing, revenue-collecting and spending authority of Virginia
issuers or otherwise affect the ability of Virginia issuers to pay interest,
principal or any premium. The following information constitutes only a brief
summary of certain of these developments and does not purport to be a complete
description of them. The information has been obtained from recent official
statements prepared by the Commonwealth of Virginia relating to its securities,
and no independent investigation has been
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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, state and local government 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 Virginia's average annual
tax revenues derived from taxes on income and retail sales for the three
preceding fiscal years.
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General Fund revenues are principally comprised of direct taxes. In recent
fiscal years, most of the total tax revenues have been derived from five major
taxes imposed by Virginia on individual and fiduciary income, sales and use,
corporate income, public service 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 Virginia.
The committee reviews the outstanding debt of all agencies, institutions, boards
and authorities of Virginia for which Virginia 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 Virginia that is backed by Virginia'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
Virginia 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 Virginia; and to redeem a previous debt
obligation of Virginia. Total indebtedness issued pursuant to this Section may
not exceed 30 percent of an amount equal to 1.15 times the annual tax revenues
derived from taxes on income and retail sales, as certified by the Auditor of
Public Accounts for the preceding fiscal year.
Section 9(b) provides that the General Assembly may authorize the creation
of general obligation debt for capital projects. Such debt is required to be
authorized by an affirmative vote of a majority of each house of the General
Assembly and approved in a statewide election. The outstanding amount of such
debt is limited to an amount equal to 1.15 times the average annual tax revenues
derived from taxes on income and retail sales, as certified by the Auditor of
Public Accounts for the three preceding fiscal years less the total amount of
bonds outstanding. The amount of 9(b) debt that may be authorized in any single
fiscal year is limited to 25 percent of the limit on all 9(b) debt less the
amount of 9(b) debt authorized in the current and prior three fiscal years.
Section 9(c) provides that the General Assembly may authorize the creation
of general obligation debt for revenue-producing capital projects (so-called
"double-barrel" debt).
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Such debt is required to be authorized by an affirmative vote of two-thirds of
each house of the General Assembly and approved by the Governor. The Governor
must certify before the enactment of the authorizing legislation and again
before the issuance of the debt that the net revenues pledged are expected to be
sufficient to pay principal of and interest on the debt. The outstanding amount
of 9(c) debt is limited to an amount equal to 1.15 times the average annual tax
revenues derived from taxes on income and retail sales, as certified by the
Auditor of Public Accounts for the three preceding fiscal years. While the debt
limits under Sections 9(b) and 9(c) are each calculated as the same percentage
of the same average tax revenues, these debt limits are separately computed and
apply separately to each type of debt.
Article X further provides in Section 9(d) that the restrictions of Section
9 are not applicable to any obligation incurred by Virginia or any of its
institutions, agencies or authorities if the full faith and credit of Virginia
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 is a substantial issuer 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 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
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part by a moral obligation pledge of Virginia. Should the need arise, Virginia
may consider funding deficiencies in the respective debt service reserves for
such moral obligation debt. To date, none of these authorities has advised
Virginia that any such deficiencies exist.
Local government in the Commonwealth is comprised of 95 counties, 40
incorporated cities, and 190 incorporated towns. Virginia is unique among the
several states in that cities and counties are independent, and their land areas
do not overlap. The largest expenditures by local governments in Virginia 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 in five annual installments to Federal
retirees in a settlement of the retirees' claims as a result of Davis. In 1995
and 1996, the General Assembly passed legislation allowing more retirees to
participate in the settlement. As of April 15, 1996, the estimated total cost
to Virginia for the settlement was approximately $316.2 million.
On September 15, 1995, the Virginia Supreme Court rendered its decision in
Harper, reversing the judgment of the trial court, entering final judgment in
- ------
favor of the plaintiff retirees who elected not to settle, and dictating that
the amounts unlawfully collected be refunded with statutory interest. The total
cost to Virginia of the settlement and judgment is approximately $394.9 million,
of which approximately $203.2 million has been paid, leaving $191.7 million
payable in respect of the settlement - approximately $63.2 million in fiscal
year 1997, $62.5 million on March 31, 1998, and (subject to appropriation) $66
million on March 31, 1999.
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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 State-Specific
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.
-39-
<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 1994
legislation that caused changes to the State's funding of several public
employee pension funds
-40-
<PAGE>
and resulted in significant ongoing annual savings to the State; the Court of
Appeals for the Third Circuit has upheld the federal district court's decision
to grant summary judgment on some of the plaintiffs' claims and to deny summary
judgment on the remainder; (ii) the New Jersey Hospital Association and certain
hospitals have challenged the adequacy of Medicaid reimbursement for hospital
services; the Court of Appeals for the Third Circuit has affirmed denial of the
plaintiffs' application for a preliminary injunction; (iii) various hospitals
have challenged the calculation of the hospital assessment authorized by the
Health Care Reform Act of 1992; the case has been remanded by the Appellate
Division to the Department of Health, which held a hearing on August 30, 1995,
and a determination is now pending; (iv) the County of Passaic and other parties
have filed suit alleging the State and the New Jersey Department of
Environmental Protection violated a 1984 consent order concerning the
construction of a resource recovery facility in that county; the plaintiffs have
appealed the trial court's grant of summary judgment to the defendants; (v)
Robert E. Brennan has sued two members of the New Jersey Bureau of Securities
asserting numerous violations of his rights and abuse of state power; he has
appealed the trial court's grant of summary judgment to the defendants; (vi)
several cases filed in the State courts challenge 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; most of those cases are now pending before the Appellate Division;
(vii) a coalition of churches and church leaders in Hudson County have filed
suits asserting the State-owned Liberty State Park in Jersey City violates
environmental standards and seeking injunctive and monetary relief; (viii) 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
redirection orders and a draft permit; and (ix) representatives of the trucking
industry have filed a constitutional challenge to annual hazardous and solid
waste licensure renewal fees, seeking a declaratory judgment, injunctive relief,
a refund of past fees and attorneys fees; they are seeking class certification
of their action.
Although the New Jersey State-Specific Money Market Portfolio generally
intends to invest its assets primarily in New Jersey State-Specific Obligations
rated within the two highest rating categories of an NRSRO, and the New Jersey
Tax-Free Income Portfolio intends to invest its assets primarily in New Jersey
State-Specific Obligations rated within the four 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
-41-
<PAGE>
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 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.
-42-
<PAGE>
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 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.
-43-
<PAGE>
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 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, Low Duration Bond, Intermediate Bond, Government
Income, International Bond, Core 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
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<PAGE>
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, Low Duration
Bond, Intermediate Bond, Government Income, Core Bond, International Bond and
Balanced Portfolios may:
4) Issue senior 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.
-45-
<PAGE>
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 of purchases and
sales of portfolio securities.
7. Purchase or sell commodity contracts, or invest in oil, gas or
mineral exploration or development programs, except that each Portfolio may, to
the extent appropriate to its investment policies, purchase securities (publicly
traded securities in the case of each Money Market Portfolio) of companies
engaging in whole or in part in such activities and may enter into futures
contracts and related options.
8. Make loans, except that each Portfolio may purchase and hold debt
instruments and enter into repurchase agreements in accordance with its
investment objective and policies and may lend portfolio securities.
9. Purchase or sell commodities except that each Portfolio may, to
the extent appropriate to its investment policies, purchase securities of
companies engaging in whole or in part in such activities, may engage in
currency transactions and may enter into futures contracts and related options.
10. 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 (except to the extent a portfolio security may be
subject to a "demand feature" or "put" as permitted under SEC regulations for
money market funds). Prior to making any such investments, a Money Market
Portfolio
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<PAGE>
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 invests 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;
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;
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<PAGE>
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.
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.
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<PAGE>
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: 53 from January 1991 -
February 1995, Bell
Atlantic Corporation (a
diversified telecommuni-
cations company);
Chairman, President and
Chief Executive Officer
from August 1989 -
January 1991, Bell
Atlantic Enterprises
International, Inc.;
Director, Group 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.
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<PAGE>
Principal Occupation
Name and Address Position with Fund During Past Five Years
- ---------------- ------------------ ----------------------
Raymond J. Clark/1/ Trustee, Treasurer of Princeton
Office of the Treasurer President and University since 1987;
Princeton University Treasurer Trustee, The Compass
3 New South Building Capital Group of Funds
P.O. Box 35 from 1987 to 1996;
Princeton, New Jersey 08540 Trustee, United-Way
Age: 61 Princeton Area
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, Vice
USX Corporation Chairman and Chief
600 Grant Street Financial Officer
6105 USX Tower since 1994, Executive
Pittsburgh, PA 15219 Vice President -
Age: 52 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
Health, Education and
Research Foundation;
Director, Marinette
Marine Corporation;
Director, Pittsburgh
Baseball, Inc.; and
Director and Chairman of
- -------------------------
/1/ This trustee may be deemed an "interested person" of the Fund as defined in
the 1940 Act.
-50-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Name and Address Position with Fund During Past Five Years
- ---------------- ------------------ ----------------------
<S> <C> <C>
the Board, RMI Titanium
Company.
Anthony M. Santomero Vice Chairman Deputy Dean from 1990 to 1994,
The Wharton School of the Board Richard K. Mellon Professor
University of Pennsylvania of Finance since April 1984,
Room 2344 Director, Wharton Financial
Steinberg Hall-Dietrich Hall Institutions Center, since
Philadelphia, PA 19104-6367 July 1995, and Dean's Advisory
Age: 49 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 of Municipal
Fund for California Investors,
Inc. and Municipal Fund for New
York Investors, Inc.
David R. Wilmerding, Jr. Chairman of Chairman, Gee, Wilmerding &
One Aldwyn Center the Board Associates, Inc. (investment
Villanova, PA 19085 advisers) since February 1989;
Age: 61 Director, Beaver Management
Corporation;
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Name and Address Position with Fund During Past Five Years
- ---------------- ------------------ ----------------------
<S> <C> <C>
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 and its
affiliates.
Karen H. Sabath Assistant President, Compass Capital
Compass Capital Group Secretary Group, Inc. since 1995;
Inc. Managing Director of BlackRock
345 Park Avenue Financial Management, Inc.
New York, NY 10154 since 1993; prior to 1993, Vice
Age: 31 President of BlackRock
Financial Management, Inc.
Linda Kaufmann Assistant Vice President and Director of
PFPC Inc. Secretary Mutual Fund Accounting for
400 Bellevue Parkway Compass Capital Funds with PFPC
Wilmington, DE 19809 Inc. since 1996; Assistant Vice
Age: 35 President, PFPC, Inc. from
1994-96; Senior Accounting
Officer, PFPC, Inc. from
1990-94.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Name and Address Position with Fund During Past Five Years
- ---------------- ------------------ ----------------------
<S> <C> <C>
Morgan R. Jones Secretary Partner in the law firm of
Philadelphia National Drinker Biddle & Reath,
Bank Building Philadelphia, Pennsylvania.
1345 Chestnut Street
Philadelphia, PA 19107-3496
Age: 56
</TABLE>
The Fund pays trustees who are not affiliated with PNC Asset Management
Group, Inc. ("PAMG") or Compass Distributors, Inc. ("CDI" or "Distributor")
$10,000 annually and $275 per Portfolio for each full meeting of the Board that
they attend. The Fund pays the Chairman and Vice Chairman of the Board an
additional $10,000 and $5,000 per year, respectively, for their service in such
capacities. 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"), CastleInternational Asset Management Limited
("CastleInternational"), 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.
-53-
<PAGE>
The table below sets forth the compensation actually received from the Fund
and the Fund Complex of which the Fund is a part by the trustees for the fiscal
year ended September 30, 1996:
<TABLE>
<CAPTION>
Total
Pension or Compensation
Retirement from Registrant
Aggregate Benefits Estimated and Fund
Compensation Accrued as Annual 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,/*/ $1,875 N/A N/A (4)/2/ $41,325
Trustee
Robert R. Fortune,/*/ $1,875 N/A N/A (6)/2/ $61,325
Trustee
Rodney D. Johnson,/*/ $1,875 N/A N/A (6)/2/ $53,325
Trustee
G. Willing Pepper,/*/ $3,125 N/A N/A (7)/2/ $92,575
Former Chairman of
the Board
Anthony M. Santomero, Vice $38,025 N/A N/A (6)/2/ $58,500
Chairman of the Board
David R. Wilmerding, Jr., $43,025 N/A N/A (7)/2/ $64,750
Chairman of the Board
William O. Albertini, $31,150 N/A N/A (1)/2/ $31,150
Trustee**
Raymond J. Clark, $31,150 N/A N/A (1)/2/ $31,150
Trustee**
Robert M. Hernandez, $31,150 N/A N/A (1)/2/ $31,150
Trustee**
</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.
- ----------------------
1. A Fund Complex means two or more investment companies that hold
themselves out to investors as related companies for purposes of
investment and investor services, or have a common investment
adviser or have an investment adviser that is an affiliated person
of the investment adviser of any of the other investment companies.
2. Total number of investment company boards trustees served on within
the Fund Complex.
-54-
<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 are 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.
<TABLE>
<CAPTION>
Principal Occupation During
Trustees Position with Trust Last Five Years
- -------- ------------------- ---------------
<S> <C> <C>
David G. Booth* Trustee, President President, Chairman-Chief Executive
Santa Monica, and Chairman-Chief Officer and Director of all DFA
CA Executive Officer Entities, except Dimensional Fund
Age: 50 Advisors Ltd., of which he is Chairman
and Director
George M. Trustee Leo Melamed Professor of Finance,
Constantinides Graduate School of Business,
Chicago, IL University of Chicago. Director, DFA
Age: 49 Investment Dimensions Group Inc.,
Dimensional Investment Group Inc. and
Dimensional Emerging Markets Fund Inc.
John P. Gould Trustee Steven G. Rothmeier Distinguished
Chicago, IL Service Professor of Economics,
Age: 58 Graduate School of 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. Executive Vice
President, Lexacon Inc. (economics,
law, strategy, and finance
consulting).
</TABLE>
-55-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation During
Trustees Position with Trust Last Five Years
- -------- ------------------- ---------------
<S> <C> <C>
Roger G. Trustee Professor in Practice of Finance,
Ibbotson Yale School of Management. Director,
New Haven, CT DFA Investment Dimensions Group Inc.,
Age: 53 Dimensional Investment Group Inc.,
Dimensional Emerging Markets Fund
Inc., Hospital Fund, Inc. (investment
management services) and BIRR
Portfolio Analysis, Inc. (software
products). Chairman and President,
Ibbotson Associates, Inc., Chicago, IL
(software, data, publishing and
consulting).
Merton H. Trustee Robert R. McCormick Distinguished
Miller Service Professor Emeritus, Graduate
Chicago, IL School of Business, University of
Age: 73 Chicago. Director, DFA Investment
Dimensions Group Inc., Dimensional
Investment Group Inc. and Dimensional
Emerging Markets Fund Inc. Public
Director, Chicago Mercantile Exchange.
Myron S. Trustee Limited Partner, Long-Term Capital
Scholes Management L.P. (money manager).
Greenwich, CT Frank E. Buck Professor of Finance,
Age: 55 Graduate School of Business and
Professor of Law, Law School, Senior
Research Fellow, Hoover Institution,
(all) Stanford University (on leave).
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.
</TABLE>
-56-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation During
Trustees Position with Trust Last Five Years
- -------- ------------------- ---------------
<S> <C> <C>
Rex A. Trustee, Chairman Chairman, Chief Investment Officer
Sinquefield* and Chief and Director of all DFA Entities,
Santa Monica, Investment Officer except Dimensional Fund Advisors Ltd.,
CA of which he is Chairman, Chief
Age: 52 Executive Officer and Director.
*Interested
Trustees of the
Trust.
- -------------
</TABLE>
-57-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation During
Officers Position with Trust Last Five Years
- -------- ------------------- ---------------
<S> <C> <C>
Arthur Barlow Vice President Vice President of all DFA Entities.
Santa Monica,
CA
Age: 42
Truman Clark Vice President Vice President of all DFA Entities.
Santa Monica, Consultant until October 1995 and
CA Principal and Manager of Product
Age: 55 Development, Wells Fargo Nikko
Investment Advisors from 1990-1994.
Maureen Connors Vice President Vice President of all DFA Entities.
Santa Monica,
CA
Age: 61
Robert Deere Vice President Vice President of all DFA Entities.
Santa Monica,
CA
Age: 40
Irene R. Vice President, Vice President and Secretary of all
Diamant Secretary DFA Entities, except Dimensional Fund
Santa Monica, Advisors Ltd., for which she is Vice
CA President.
Age: 46
Eugene Fama, Vice President Vice President of all DFA Entities.
Jr.
Santa Monica,
CA
Age: 36
David Plecha Vice President Vice President of all DFA Entities.
Santa Monica,
CA
Age: 36
</TABLE>
-58-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation During
Officers Position with Trust Last Five Years
- -------- ------------------- ---------------
<S> <C> <C>
George Sands Vice President Vice President of all DFA Entities.
Santa Monica, Managing Director, Assets Strategy
CA Consulting, Los Angeles, CA from 1991
Age: 40 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 of
Santa Monica, Officer, Controller all DFA Entities.
CA and Treasurer
Age: 42
Cem Severoglu Vice President Vice President of all DFA Entities.
Santa Monica,
CA
Age: 33
Jeanne C. Executive Vice Executive Vice President of all DFA
Sinquefield, President Entities.
Ph.D.
Santa Monica,
CA
Age: 51
</TABLE>
Rex A. Sinquefield, Trustee, Chairman and Chief Investment Officer of the Trust
and Jeanne C. Sinquefield, Executive Vice President of the Trust, are husband
and wife.
Set forth below is a table listing, for each trustee of the Trust entitled
to receive compensation, the compensation received from the Trust during the
fiscal year ended November 30, 1996 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.
-59-
<PAGE>
<TABLE>
<CAPTION>
Total
Pension or Compensation
Retirement from
Aggregate Benefits Estimated Registrant and
Compensation Accrued as Annual Trust Complex/1/
Name of Person, from Part of Trust 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, $5,000 N/A N/A $30,000
Trustee
Roger G. Ibbotson, $5,000 N/A N/A $30,000
Trustee
Merton H. Miller, $5,000 N/A N/A $30,000
Trustee
Myron S. Scholes, $5,000 N/A N/A $30,000
Trustee
</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,
------------------
/1/ A Trust 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.
-60-
<PAGE>
debt, tort, claim, damage, judgment or decree arising out of or connected with
the administration or preservation of the trust property or the conduct of any
business of the Fund; and that no trustee shall be personally liable to any
person for any action or failure to act except by reason of his own bad faith,
willful misfeasance, gross negligence or reckless disregard of his duties as a
trustee. With the exception stated, the Declaration of Trust provides that a
trustee is entitled to be indemnified against all liabilities and expenses
reasonably incurred by him in connection with the defense or disposition of any
proceeding in which he may be involved or with which he may be threatened by
reason of his being or having been a trustee, and that the Fund will indemnify
officers, representatives and employees of the Fund to the same extent that
trustees are entitled to indemnification.
INVESTMENT ADVISORY, ADMINISTRATION,
DISTRIBUTION AND SERVICING ARRANGEMENTS
Advisory and Sub-Advisory Agreements. The advisory and sub-advisory
services provided by PAMG, PIMC, BlackRock, PCM, PEAC, CastleInternational 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 the Portfolios for expenses.
PAMG renders advisory services to each of the Portfolios, except the Index
Equity Portfolio, pursuant to an Investment Advisory Agreement. From the
commencement of operations of each Portfolio (other than the New Jersey
Municipal Money Market, New Jersey Tax-Free Income, Core Bond, Low Duration Bond
and International Bond Portfolios) until January 4, 1996 (June 1, 1996 in the
case of the Index Equity Portfolio), PIMC served as adviser.
From July 1, 1991 to December 31, 1995, Midlantic Bank, N.A. ("Midlantic
Bank") served as investment adviser to the predecessor portfolios of the
International Bond, New Jersey Tax-Free Income and New Jersey Municipal Money
Market Portfolios. From January 1, 1996 through January 12, 1996 (February 12,
1996 with respect to the predecessor portfolio of the International Bond
Portfolio): (i) PAMG and Morgan Grenfell Investment Services Limited ("Morgan
Grenfell") served as investment adviser and sub-adviser, respectively, to the
predecessor portfolio to the International Bond Portfolio; (ii) PIMC served as
investment adviser to the predecessor portfolio to the New Jersey Municipal
Money Market Portfolio; and (iii) BlackRock served as investment adviser to the
predecessor portfolio to the New Jersey Tax-Free
-61-
<PAGE>
Income Portfolio pursuant to interim advisory and sub-advisory agreements
approved by the shareholders of the Compass Capital Group of Funds. 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 Low Duration Bond Portfolio.
PCM renders sub-advisory services to the Balanced, Large Cap Value Equity,
Mid-Cap Value Equity, Small Cap Value Equity and Select Equity Portfolios
pursuant to Sub-Advisory Agreements. CastleInternational renders sub-advisory
services to the International Equity and International Emerging Markets
Portfolios pursuant to a Sub-Advisory Agreement. PIMC renders sub-advisory
services to the Money Market, U.S. Treasury Money Market, 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 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, Low Duration Bond, Intermediate Bond, New Jersey
Tax-Free Income, Core Bond, Government Income and International Bond Portfolios
pursuant to Sub-Advisory Agreements. PEAC renders sub-advisory services to the
Large Cap Growth Equity, Mid-Cap Growth Equity and Small Cap Growth Equity
Portfolios pursuant to Sub-Advisory Agreements. DFA renders advisory services
to the Index Master Portfolio, the registered investment company in which the
Index Equity Portfolio invests all of its assets, pursuant to an Investment
Management Agreement. The Investment Advisory Agreement with PAMG, the
Investment Management Agreement with DFA and the above-referenced 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 Large Cap Growth Equity Portfolios. From April 20, 1992 to
September 10, 1993, PCM served as sub-adviser to the Intermediate Government
Bond 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 Bond and Large Cap 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
-62-
<PAGE>
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. PCM served as sub-adviser to the International
Equity and International Emerging Markets Portfolios from commencement of
operations (April 27, 1992 in the case of the International Equity Portfolio;
June 17, 1994 in the case of the International Emerging Markets Portfolio) to
April 19, 1996.
PNC Bank served as sub-adviser for the Money 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 January 4, 1996; and for the New Jersey Municipal Money Market
Portfolio from January 13, 1996 to June 6, 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 March 29, 1995 to June 1, 1996,
PEAC served as sub-adviser to the Index Equity Portfolio. From July 1, 1996
through December 31, 1996, Morgan Grenfell served as sub-adviser to the
International Bond Portfolio.
Under the relevant Advisory Contracts, PAMG, PIMC, PCM, PEAC, BlackRock and
CastleInternational 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, CastleInternational 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'
-63-
<PAGE>
written notice to PAMG, PIMC, PCM, PEAC, BlackRock or CastleInternational, as
the case may be. PAMG, PIMC, PCM, PEAC, BlackRock and CastleInternational 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.
For the period from October 1, 1995 through January 4, 1996, the Fund paid
PIMC advisory fees, and PIMC waived advisory fees and reimbursed expenses, as
follows:
<TABLE>
<CAPTION>
Fees Paid
(After Reimburse-
Portfolios Waivers) Waivers ments
- ---------- ---------- ------- ----------
<S> <C> <C> <C>
Money Market $321,268 $1,818,401 $ 0
Municipal Money Market 46,804 304,226 0
U.S. Treasury Money Market 114,639 745,150 0
Ohio Municipal Money Market 11,052 71,841 0
Pennsylvania Municipal Money Market 64,257 417,675 0
North Carolina Municipal Money 11,026 71,666 0
Market
Virginia Municipal Money Market 0 7,024 0
Managed Income 520,724 223,168 0
Government Income 0 17,234 0
Tax-Free Income 3,933 11,137 0
Intermediate Government Bond 114,345 130,122 0
Ohio Tax-Free Income 723 10,100 0
Pennsylvania Tax-Free Income 43,145 37,663 0
Intermediate Bond $136,544 119,059 $ 0
Large Cap Value Equity 829,764 147,027 0
Large Cap Growth Equity 361,240 95,914 0
Small Cap Growth Equity 304,284 23,327 0
Select Equity 369,071 97,791 0
Index Equity 4,647 88,292 0
Small Cap Value Equity 320,588 24,942 0
International Equity 697,319 127,354 0
International Emerging Markets 144,937 11,380 0
Balanced 201,642 53,929 0
</TABLE>
-64-
<PAGE>
For the period from January 5, 1996 (February 1, 1996 in the case of the
New Jersey Tax-Free Income and New Jersey Municipal Money Market Portfolios;
February 13, 1996 in the case of the International Bond Portfolio; and April 1,
1996 in the case of the Core Bond and Low Duration Bond Portfolios) through
September 30, 1996 (June 1, 1996 in the case of the Index Equity Portfolio), the
Fund paid PAMG (PIMC in the case of the Index Equity Portfolio) advisory fees,
and PAMG (PIMC in the case of the Index Equity Portfolio) waived advisory fees
and reimbursed expenses, as follows:
<TABLE>
<CAPTION>
Fees Paid
(After Reimburse-
Portfolios Waivers) Waivers ments
- ---------- --------- ------- ----------
<S> <C> <C> <C>
Money Market $1,443,913 $6,290,596 $ 0
Municipal Money Market 158,379 1,029,459 0
U.S. Treasury Money Market 691,448 3,584,858 0
Ohio Municipal Money Market 32,275 209,784 0
Pennsylvania Municipal Money Market 240,350 1,562,271 0
North Carolina Municipal Money 45,997 298,983 0
Market
Virginia Municipal Money Market 0 180,685 14,604
New Jersey Municipal Money Market 32,663 176,636 0
Managed Income 1,796,762 770,041 0
Government Income 0 52,817 7,027
Tax-Free Income 109,211 74,939 0
Intermediate Government Bond 425,069 283,380 0
Ohio Tax-Free Income 4,764 31,253 3,479
Pennsylvania Tax-Free Income 185,302 123,326 0
Intermediate Bond 514,322 342,880 0
New Jersey Tax-Free Income 184,448 122,966 0
International Bond 133,797 4,580 0
Core Bond $ 424,691 $ 283,127 $ 0
Low Duration Bond 338,287 225,525 0
Large Cap Value Equity 4,159,395 421,173 0
Large Cap Growth Equity 2,109,685 210,969 0
Small Cap Growth Equity 1,596,126 7,204 0
Select Equity 1,457,052 145,705 0
Index Equity 28,380 174,535 0
Small Cap Value Equity 1,223,651 0 0
International Equity 2,836,323 202,595 0
International Emerging Markets 740,140 63,810 0
Balanced 917,400 91,740 0
</TABLE>
-65-
<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
(After Reimburse-
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
Large Cap Value Equity 2,832,644 746,727 0
Large Cap 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:
-66-
<PAGE>
<TABLE>
<CAPTION>
Fees Paid
(After
Portfolios Waivers) Waivers Reimbursements
---------- ---------- ------- --------------
<S> <C> <C> <C>
Money Market $951,230 $3,359,847 $ 0
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 368,546 552,819 0
Bond
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
Large Cap Value Equity 2,306,672 865,002 0
Large Cap 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 period from October 1, 1995 through January 4, 1996, PIMC paid sub-
advisory fees to the specified Portfolios' sub-
-67-
<PAGE>
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 $235,363
Municipal Money Market 0 38,613
U.S. Treasury Money Market 0 94,577
Ohio Municipal Money Market 0 9,118
Pennsylvania Municipal Money 0 53,013
Market
North Carolina Municipal Money 0 9,096
Market
Virginia Municipal Money Market 0 773
Managed Income 497,581 82,654
Government Income 0 12,063
Tax-Free Income 3,693 9,207
Intermediate Government Bond 73,585 97,542
Ohio Tax-Free Income 3,258 4,318
Pennsylvania Tax-Free Income 24,323 32,242
Intermediate Bond 76,937 101,986
Large Cap Value Equity 213,057 0
Large Cap Growth Equity 333,722 0
Small Cap Growth Equity 239,156 0
Select Equity 340,809 0
Index Equity 12,385 73,920
Small Cap Value Equity 252,237 0
International Equity 659,738 0
International Emerging Markets 137,559 0
Balanced 186,567 0
</TABLE>
For the period from January 5, 1996 (February 1, 1996 in the case of the
New Jersey Tax-Free Income and New Jersey Municipal Money Market Portfolios;
February 13, 1996 in the case of the International Bond Portfolio; and April 1,
1996 in the case of the Core Bond and Low Duration Bond Portfolios) through
September 30, 1996 (June 1, 1996 in the case of the Index Equity Portfolio),
PAMG (PIMC in the case of the Index Equity Portfolio) paid sub-advisory fees to
the specified Portfolios' sub-advisers, after waivers, and such sub-advisers
waived sub-advisory fees as follows:
-68-
<PAGE>
<TABLE>
<CAPTION>
Fees Paid
(After
Portfolios Waivers) Waivers
- ---------- ----------- ----------
<S> <C> <C>
Money Market $1,443,913 $5,342,421
Municipal Money Market 158,382 897,064
U.S. Treasury Money Market 694,221 3,095,647
Ohio Municipal Money Market 32,275 182,796
Pennsylvania Municipal Money Market 240,350 1,361,445
North Carolina Municipal Money Market 45,997 260,560
Virginia Municipal Money Market 0 160,601
New Jersey Municipal Money Market 32,663 149,411
Managed Income 1,488,836 248,415
Government Income 0 36,973
Tax-Free Income 95,609 50,559
Intermediate Government Bond 412,698 2,499
Ohio Tax-Free Income 1,428 23,786
Pennsylvania Tax-Free Income 170,395 84,589
Intermediate Bond 402,873 188,333
New Jersey Tax-Free Income 153,707 61,483
International Bond 106,486 0
Core Bond 353,907 141,564
Low Duration Bond 281,905 112,763
Large Cap Value Equity 3,314,383 0
Large Cap Growth Equity 1,686,503 0
Small Cap Growth Equity 1,164,980 0
Select Equity 1,164,368 0
Index Equity 20,642 123,200
Small Cap Value Equity 888,986 0
International Equity 2,431,134 0
International Emerging Markets 707,475 0
Balanced 733,223 0
</TABLE>
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:
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<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
Large Cap Value Equity 2,060,105 543,074
Large Cap 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:
<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
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Fees Paid
Portfolios (After Waivers) Waivers
- ---------- --------------- --------
<S> <C> <C>
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
Large Cap Value Equity 2,018,338 288,334
Large Cap 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 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,
1994, 1995 and 1996, the Index Master Portfolio paid advisory fees to DFA
totalling $10,833, $18,816 and $62,405, respectively. The Index Equity
Portfolio did not invest in the Index Master Portfolio until June 2, 1996.
The predecessor portfolio to the New Jersey Tax-Free Income Portfolio was
advised by Midlantic Bank from July 1, 1991 through December 31, 1995, and by
BlackRock from January 1, 1996 through January 12, 1996. For the period from
January 1, 1996 through January 12, 1996, the predecessor portfolio to the New
Jersey Tax-Free Income Portfolio paid $20,165 in advisory fees to BlackRock.
For the period from March 1, 1995 through December 31, 1995 and for the fiscal
years ended February 28, 1995 and 1994, the predecessor portfolio to the New
Jersey Tax-Free Income Portfolio paid $496,305, $607,485 and $159,582,
respectively, in investment advisory fees to Midlantic Bank pursuant to its
prior investment advisory contract. In addition, during the period from March
1, 1995 through December 31, 1995 and during the fiscal years ended February 28,
1995 and 1994, Midlantic Bank waived $0, $2,451 and $318,099, respectively, in
investment advisory fees. During the period from January 13, 1996 through
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<PAGE>
January 31, 1996, the New Jersey Tax-Free Income Portfolio paid PAMG $12,779 in
investment advisory fees, and PAMG waived $8,520 in investment advisory fees.
During the period from January 13, 1996 through January 31, 1996, PAMG paid
BlackRock $8,945 in sub-advisory fees with respect to the New Jersey Tax-Free
Income Portfolio and BlackRock waived $5,964 in sub-advisory fees.
The predecessor portfolio to the International Bond Portfolio was advised
by Midlantic Bank from July 1, 1991 through December 31, 1995, and by PAMG from
January 1, 1996 through February 12, 1996. For the period from February 1, 1996
through February 12, 1996, the predecessor portfolio to the International Bond
Portfolio paid $4,134 in advisory fees to PAMG, and PAMG waived advisory fees
and reimbursed expenses totalling $0 and $0, respectively. For the period from
February 1, 1996 through February 12, 1996, PAMG paid Morgan Grenfell $4,898 in
sub-advisory fees with respect to the predecessor portfolio to the International
Bond Portfolio, and Morgan Grenfell waived sub-advisory fees totalling $0. For
the period from January 1, 1996 through January 31, 1996, the predecessor
portfolio to the International Bond Portfolio paid $24,832 in advisory fees to
PAMG. For the period from January 1, 1996 through January 31, 1996, PAMG paid
Morgan Grenfell $20,176 in sub-advisory fees with respect to the predecessor
portfolio to the International Bond Portfolio. For the period from March 1,
1995 through December 31, 1995 and for the fiscal years ended February 28, 1995
and 1994, the predecessor portfolio to the International Bond Portfolio paid
$305,176, $361,620 and $346,865, 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 from July 1, 1991 through December 31,
1995, and by PIMC from January 1, 1996 through January 12, 1996. For the period
from January 1, 1996 through January 12, 1996, the predecessor portfolio to the
New Jersey Municipal Money Market Portfolio paid $8,000 in advisory fees to
PIMC. For the period from March 1, 1995 through December 31, 1995 and for the
fiscal years ended February 28, 1995 and 1994, the predecessor portfolio to the
New Jersey Municipal Money Market Portfolio paid $155,696, $158,240 and
$158,536, respectively, in investment advisory fees to Midlantic Bank pursuant
to its prior investment advisory contract. During the period from January 13,
1996 through January 31, 1996, the New Jersey Municipal Money Market Portfolio
paid PIMC $2,128 in investment advisory fees, and PIMC waived $13,826 in
investment advisory fees. During the period from January 13, 1996 through
January 31, 1996, PNC Bank waived all of the sub-advisory fees (in the amount of
$1,125) with respect to the New Jersey Municipal Money Market Portfolio.
-72-
<PAGE>
The predecessor portfolio to the Core Bond Portfolio was advised by
BlackRock. For the period from July 1, 1995 through January 12, 1996, the
predecessor portfolio to the Core Bond Portfolio paid BlackRock $53,125 in
investment advisory fees and BlackRock waived $21,255 in investment advisory
fees. For the fiscal years ended June 30, 1995 and 1994, BlackRock waived its
investment advisory fee with respect to the predecessor portfolio to the Core
Bond Portfolio in the amounts of $56,894 and $34,010, respectively, and
reimbursed expenses amounting to $137,364 and $137,179, respectively. During
the period from January 13, 1996 through March 31, 1996, the Core Bond Portfolio
paid PAMG $182,709 in investment advisory fees, and PAMG waived $121,806 in
investment advisory fees. During the period from January 13, 1996 through March
31, 1996, PAMG paid BlackRock $127,896 in sub-advisory fees with respect to the
Core Bond Portfolio, and BlackRock waived $85,264 in sub-advisory fees.
The predecessor portfolio to the Low Duration Bond Portfolio was advised by
BlackRock. For the period from July 1, 1995 through January 12, 1996, the
predecessor portfolio to the Low Duration Bond Portfolio paid BlackRock $56,481
in investment advisory fees and BlackRock waived $11,186 in investment advisory
fees. For the fiscal years ended June 30, 1995 and 1994, BlackRock waived its
investment advisory fee with respect to the predecessor portfolio to the Low
Duration Bond Portfolio in the amounts of $102,707 and $110,232, respectively,
and reimbursed expenses amounting to $61,195 and $55,582, respectively. During
the period from January 13, 1996 through March 31, 1996, the Low Duration Bond
Portfolio paid PAMG $149,488 in investment advisory fees, and PAMG waived
$99,659 in investment advisory fees. During the period from January 13, 1996
through March 31, 1996, PAMG paid BlackRock $104,642 in sub-advisory fees with
respect to the Low Duration Bond Portfolio, and BlackRock waived $69,761 in sub-
advisory fees.
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. As stated in the Prospectuses, the Administrators may
from time to time voluntarily waive administration fees with respect to a
Portfolio and may voluntarily reimburse the Portfolios for expenses.
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
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<PAGE>
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 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 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.
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. For its services, PFPC is entitled to
compensation from the Index Master Portfolio at the annual rate of .015% of the
Index Master Portfolio's average daily net assets. In addition, PFPC charges
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. CCG became
an Administrator to the Fund on December 1, 1995. For the period from October
1, 1995 through January 13, 1996, the Fund paid CCG, PFPC and PDI combined
administration fees (after waivers), and CCG, PFPC and PDI waived combined
administration fees and reimbursed expenses, as follows:
<TABLE>
<CAPTION>
Fees Paid
(After Reimburse-
Portfolios Waivers) Waivers ments
- ---------- ---------- ------- ----------
<S> <C> <C> <C>
Money Market $645,001 $51,681 $0
Municipal Money Market 117,010 8,088 0
U.S. Treasury Money Market 242,075 52,266 0
Ohio Municipal Money Market 17,189 12,366 0
Pennsylvania Municipal
Money Market 143,962 28,455 0
North Carolina Municipal
Money Market 11,644 17,455 0
Virginia Municipal Money
Market 0 12,768 0
Managed Income 226,271 82,078 0
Government Income 353 6,893 0
</TABLE>
-74-
<PAGE>
<TABLE>
<CAPTION>
Fees Paid
(After Reimburse-
Portfolios Waivers) Waivers ments
- ---------- ---------- ------- ----------
<S> <C> <C> <C>
Tax-Free Income $ 1,455 $ 4,890 $0
Intermediate Government Bond 69,369 33,385 0
Ohio Tax-Free Income 604 3,942 0
Pennsylvania Tax-Free Income 23,054 10,922 0
Intermediate Bond 70,091 37,396 0
Large Cap Value Equity 287,181 75,970 0
Large Cap Growth Equity 142,578 32,289 0
Small Cap Growth Equity 105,681 19,886 0
Select Equity 150,292 28,337 0
Index Equity 32,455 65,337 0
Small Cap Value Equity 127,936 4,181 0
International Equity 200,396 30,791 0
International Emerging Markets 26,329 0 0
Balanced 73,163 24,504 0
</TABLE>
For the period from January 14, 1996 (February 1, 1996 in the case of
the New Jersey Tax-Free Income and New Jersey Municipal Money Market Portfolios;
February 13, 1996 in the case of the International Bond Portfolio; and April 1,
1996 in the case of the Core Bond and Low Duration Bond Portfolios) through
September 30, 1996, the Fund paid the Administrators combined administration
fees (after waivers), and the Administrators waived combined administration fees
and reimbursed expenses, as follows:
<TABLE>
<CAPTION>
Fees Paid
(After Reimburse-
Portfolios Waivers) Waivers ments
- ---------- ----------- ------- ----------
<S> <C> <C> <C>
Money Market $2,319,935 $460,119 $ 0
Municipal Money Market 303,192 171,943 0
U.S. Treasury Money Market 1,325,463 264,620 0
Ohio Municipal Money Market 57,595 37,497 0
Pennsylvania Municipal
Money Market 576,488 139,781 0
North Carolina Municipal
Money Market 57,612 78,873 0
Virginia Municipal Money
Market 0 60,792 4,868
New Jersey Municipal Money
Market 47,930 52,585 0
Managed Income 740,845 412,076 0
</TABLE>
-75-
<PAGE>
<TABLE>
<CAPTION>
Fees Paid
(After Reimburse-
Portfolios Waivers) Waivers ments
- ---------- ----------- -------- ----------
<S> <C> <C> <C>
Government Income $ 1,394 $ 22,902 $ 0
Tax-Free Income 47,371 37,838 0
Intermediate Government Bond 207,399 118,488 0
Ohio Tax-Free Income 10,045 6,523 0
Pennsylvania Tax-Free Income 85,441 56,528 0
Intermediate Bond 221,810 172,503 0
New Jersey Tax-Free Income 68,934 69,374 0
International Bond 27,454 28,993 0
Core Bond 196,853 128,743 0
Low Duration Bond 175,769 83,391 0
Large Cap Value Equity 1,589,313 235,958 0
Large Cap Growth Equity 729,234 236,170 0
Small Cap Growth Equity 652,784 17,700 0
Select Equity 471,931 198,312 0
Index Equity 55,265 345,636 0
Small Cap Value Equity 512,358 3,984 0
International Equity 727,738 201,501 0
International Emerging Markets 147,927 0 0
Balanced 339,671 80,233 0
</TABLE>
For the year or periods ended September 30, 1995, 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 $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
North Carolina Municipal
Money Market 24,058 114,630 1,666
Managed Income 751,452 267,310 0
Tax-Free Income 0 19,868 2,132
Intermediate Government Bond 244,417 135,117 0
</TABLE>
-76-
<PAGE>
<TABLE>
<CAPTION>
Fees Paid
(After
Portfolios Waivers) Waivers Reimbursements
- ---------- ----------- -------- --------------
<S> <C> <C> <C>
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
Large Cap Value Equity 1,083,967 187,474 0
Large Cap 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:
-77-
<PAGE>
<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
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
Large Cap Value Equity 1,075,209 61,908 0
Large Cap 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.
The predecessor portfolios 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 period from March 1, 1995 through January 12, 1996 and during the
fiscal years ended February 28, 1995 and 1994, the predecessor portfolio to the
New Jersey Municipal Money Market Portfolio paid $73,663, $44,863 and $43,497,
respectively, in administration fees to SEI pursuant to the prior administration
agreement, and SEI waived $0, $26,345 and $27,844, respectively, in
administration fees. During the
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<PAGE>
period from January 13, 1996 through January 31, 1996, the New Jersey Municipal
Money Market Portfolio paid the Administrators $3,050 in administration fees,
and the Administrators waived $3,691 in administration fees. During the period
from March 1, 1995 through January 12, 1996 and during the fiscal years ended
February 28, 1995 and 1994, the predecessor portfolio to the New Jersey Tax-Free
Income Portfolio paid $154,232, $105,029 and $79,454, respectively, in
administrative fees to SEI pursuant to the prior administration agreement, and
SEI waived $4, $77,951 and $63,850, respectively, in administrative fees.
During the period from January 13, 1996 through January 31, 1996, the New Jersey
Tax-Free Income Portfolio paid the Administrators $4,443 in administration fees,
and the Administrators waived $5,347 in administration fees. During the period
from March 1, 1995 through January 12, 1996 and during the fiscal years ended
February 28, 1995 and 1994, the predecessor portfolio to the International Bond
Portfolio paid $77,924, $81,364 and $78,033, respectively, in administrative
fees to SEI pursuant to the prior administration agreement. During the period
from January 13, 1996 through January 31, 1996, the predecessor portfolio to the
International Bond Portfolio paid the Administrators $2,141 in administrative
fees. During the period from February 1, 1996 through February 12, 1996, the
predecessor portfolio to the International Bond Portfolio paid the
Administrators $2,357 in administrative fees, and the Administrators waived fees
and reimbursed expenses totalling $1,212 and $0, respectively.
The predecessor portfolios to the Low Duration Bond and Core Bond
Portfolios received administrative services from State Street Bank and Trust
Company ("State Street"). During the period from July 1, 1995 through January
12, 1996 and during the fiscal years ended June 30, 1995 and 1994, the
predecessor portfolio to the Core Bond Portfolio paid $29,752, $73,257 and
$40,261, respectively, in administrative fees to State Street pursuant to the
prior administration agreement, and State Street waived $0, $0 and $32,500,
respectively, in administrative fees. During the period from January 13, 1996
through March 31, 1996, the Core Bond Portfolio paid the Administrators $79,269
in administration fees, and the Administrators waived $60,808 in administration
fees. During the period from July 1, 1995 through January 12, 1996 and during
the fiscal years ended June 30, 1995 and 1994, the predecessor portfolio to the
Low Duration Bond Portfolio paid $31,578, $69,234 and $79,160, respectively, in
administrative fees to State Street pursuant to the prior administration
agreement. During the period from January 13, 1996 through March 31, 1996, the
Low Duration Bond Portfolio paid the Administrators $74,552 in administration
fees, and the Administrators waived $40,055 in administration fees.
The Fund and its service providers may engage third party plan
administrators who provide trustee, administrative and recordkeeping services
for certain employee benefit, profit-
-79-
<PAGE>
sharing and retirement plans as agent for the Fund with respect to such plans,
for the purpose of accepting orders for the purchase and redemption of shares of
the Fund.
Custodian and Transfer Agency Agreements. PNC Bank is custodian of the Fund's
assets pursuant to a custodian agreement (the "Custodian Agreement"). Under the
Custodian Agreement, PNC Bank or a sub-custodian (i) maintains a separate
account or accounts in the name of each Portfolio, (ii) holds and transfers
portfolio securities on account of each Portfolio, (iii) accepts receipts and
makes disbursements of money on behalf of each Portfolio, (iv) collects and
receives all income and other payments and distributions on account of each
Portfolio's securities and (v) makes periodic reports to the Board of Trustees
concerning each Portfolio's operations. PNC Bank is authorized to select one or
more banks or trust companies to serve as sub-custodian on behalf of the Fund,
provided that, with respect to sub-custodians other than sub-custodians for
foreign securities, PNC Bank remains responsible for the performance of all its
duties under the Custodian Agreement and holds the Fund harmless from the acts
and omissions of any sub-custodian. The Chase Manhattan Bank, N.A., State
Street Bank and Trust Company, Barclays Bank PLC and Citibank, N.A. serve as the
international sub-custodians for various Portfolios of the Fund.
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 has undertaken to waive its custody fees with
respect to the Index Equity Portfolio, which invests substantially all of 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
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<PAGE>
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
series of Investor Shares in each Portfolio, plus disbursements. Until further
notice, the transfer agency fees for each series of Investor Shares in each
Portfolio will not exceed the annual rate of .10% of the series' average daily
net assets.
PNC Bank serves as the Trust's custodian and PFPC serves as the Trust's
transfer and dividend disbursing agent. The Index Equity Portfolio bears its
pro rata portion of the Index Master Portfolio's custody and transfer and
dividend disbursing fees and expenses.
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 brokers, dealers, financial institutions and industry professionals
(collectively, "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
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<PAGE>
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 Trustees, or by vote of the holders of
a majority of the shares of such class.
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. 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, as well as
to cover ongoing commission payments to broker/dealers. 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, as well as
to cover ongoing commission payments to the broker/dealers. The contingent
deferred sales charge is calculated to charge the investor with any shortfall
that would occur if Investor C Shares are redeemed within 12 months of purchase.
The Fund is not required or permitted under the Plan to make distribution
payments with respect to Service or Institutional Shares. However, the Plan
permits CDI, PAMG, the Administrators and other companies that receive fees from
the Fund to make payments relating to distribution and sales support activities
out of their past profits or other sources available to them. The Distributor,
CCG and their affiliates may pay financial institutions, broker/dealers and/or
their salespersons certain compensation for the sale and distribution of shares
of the Fund or for services to the Fund. These payments ("Additional
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<PAGE>
Payments") would be in addition to the payments by the Fund described in the
Fund's Prospectuses and this Statement of Additional Information for
distribution and shareholder servicing and processing, and would also be in
addition to the sales commissions payable to dealers as set forth in the
Prospectuses for Investor Shares. These Additional Payments may take the form
of "due diligence" payments for a dealer's examination of the Portfolios and
payments for providing extra employee training and information relating to
Portfolios; "listing" fees for the placement of the Portfolios on a dealer's
list of mutual funds available for purchase by its customers; "finders" or
"referral" fees for directing investors to the Fund; "marketing support" fees
for providing assistance in promoting the sale of the Funds' shares; and
payments for the sale of shares and/or the maintenance of share balances. In
addition, the Distributor, CCG and their affiliates may make Additional Payments
for subaccounting, administrative and/or shareholder processing services that
are in addition to the shareholder servicing and processing fees paid by the
Fund. The Additional Payments made by the Distributor, CCG and their affiliates
may be a fixed dollar amount, may be based on the number of customer accounts
maintained by a financial institution or broker/dealer, or may be based on a
percentage of the value of shares sold to, or held by, customers of the
financial institutions or dealers involved, and may be different for different
institutions and dealers. Furthermore, the Distributor, CCG and their
affiliates may contribute to various non-cash and cash incentive arrangements to
promote the sale of shares, and may sponsor various contests and promotions
subject to applicable NASD regulations in which participants may receive prizes
such as travel awards, merchandise and cash. The Distributor, CCG and their
affiliates may also pay for the travel expenses, meals, lodging and
entertainment of broker/dealers, financial institutions and their salespersons
in connection with educational and sales promotional programs subject to
applicable NASD regulations.
Service Organizations may charge their clients additional fees for account-
related services.
The Fund intends to enter into service arrangements with Service
Organizations pursuant to which Service Organizations 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 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
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<PAGE>
Service Shares beneficially owned by their Customers, Service Organizations may
provide general shareholder 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 Customers' 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, Service Organizations 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) providing
sub-transfer agency services; and (xiv) providing such other similar services as
the Fund or a Customer may request.
For the twelve months ended September 30, 1996 (from February 1, 1996
through September 30, 1996 in the case of the New Jersey Municipal Money Market,
New Jersey Tax-Free Income and International Bond Portfolios; from April 1, 1996
through September 30, 1996 in the case of the Low Duration Bond and Core Bond
Portfolios), the Portfolios' share classes bore the following distribution,
shareholder servicing and shareholder processing fees under the Portfolios'
current and prior plans:
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<PAGE>
<TABLE>
<CAPTION>
Distribution Shareholder Shareholder
Portfolios - Investor A Shares Fees Servicing Fees Processing Fees
- -------------------------------- ---- -------------- ---------------
<S> <C> <C> <C>
Money Market $103,161 $213,632 $130,936
Municipal Money Market 295 452 277
U.S. Treasury Money Market 6,942 14,341 8,790
Ohio Municipal Money Market 3,631 6,256 3,834
Pennsylvania Municipal Money 50,277 126,379 77,458
Market
New Jersey Municipal Money 9,018 26,105 16,000
Market
North Carolina Municipal Money 76 162 99
Market
Low Duration Bond 0 1,103 676
Core Bond 0 213 131
Managed Income 15,672 20,986 12,863
Intermediate Government Bond 7,190 12,127 7,432
Tax-Free Income 8,456 10,003 6,130
Government Income 2,329 6,058 3,714
International Bond 0 56 34
Ohio Tax-Free Income 2,669 5,488 3,363
Pennsylvania Tax-Free Income 56,090 70,041 42,929
New Jersey Tax-Free Income 0 881 540
Intermediate Bond 586 1,563 958
Large Cap Value Equity 20,739 38,989 23,896
Large Cap Growth Equity 12,142 24,562 15,054
Small Cap Growth Equity 10,312 33,465 20,511
Select Equity 4,866 9,387 5,754
Index Equity 9,668 18,249 10,872
Small Cap Value Equity 24,929 41,446 25,403
International Equity 20,239 33,709 20,661
Balanced 80,100 125,055 76,647
International Emerging Markets 2,753 4,953 3,035
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Distribution Shareholder Shareholder
Portfolios - Investor B Shares Fees Servicing Fees Processing Fees
- ------------------------------ ------------ -------------- ---------------
<S> <C> <C> <C>
Money Market $ 532 $ 110 $ 68
Core Bond 2,194 725 444
Tax-Free Income 15 5 3
Government Income 79,887 22,587 13,845
International Bond 131 43 26
Ohio Tax-Free Income 880 265 162
Pennsylvania Tax-Free Income 40,968 12,601 7,724
New Jersey Tax-Free Income 61 20 13
Large Cap Value Equity 4,427 1,464 897
Large Cap Growth Equity 4,165 1,378 844
Small Cap Growth Equity 12,394 4,101 2,513
Select Equity 1,752 579 355
Index Equity 4,025 1,342 805
Small Cap Value Equity 13,927 4,237 2,597
International Equity 12,362 3,808 2,334
Balanced 34,959 10,777 6,605
International Emerging Markets 323 107 65
</TABLE>
<TABLE>
<CAPTION>
Distribution Shareholder Shareholder
Portfolios - Investor C Shares Fees Servicing Fees Processing Fees
- ------------------------------ ------------ -------------- ---------------
<S> <C> <C> <C>
International Bond $ 3 $ 1 $ 1
Large Cap Value Equity 120 40 24
Small Cap Growth Equity 67 22 14
Select Equity 0 0 0
Index Equity 119 40 24
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Distribution Shareholder Shareholder
Portfolios - Service Shares Fees Servicing Fees Processing Fees
- --------------------------- ------------ -------------- ---------------
<S> <C> <C> <C>
Money Market N/A $2,413,153 $2,413,153
Municipal Money Market N/A 442,130 442,130
U.S. Treasury Money Market N/A 1,496,137 1,496,137
Ohio Municipal Money Market N/A 68,218 68,218
Pennsylvania Municipal Money N/A 337,504 337,504
Market
New Jersey Municipal Money N/A 61,928 61,928
Market
North Carolina Municipal Money N/A 8,092 8,092
Market
Virginia Municipal Money Market N/A 14,003 14,003
Low Duration Bond N/A 101,813 101,813
Core Bond N/A 129,459 129,459
Managed Income N/A 215,217 215,217
Intermediate Government Bond N/A 72,572 72,572
Tax-Free Income N/A 39,737 39,737
Government Income N/A 0 0
International Bond N/A 24,722 24,722
Ohio Tax-Free Income N/A 8,631 8,631
Pennsylvania Tax-Free Income N/A 42,224 42,224
New Jersey Tax-Free Income N/A 91,130 91,130
Intermediate Bond N/A 62,978 62,978
Large Cap Value Equity N/A 625,393 625,393
Large Cap Growth Equity N/A 287,504 287,504
Small Cap Growth Equity N/A 179,174 179,174
Select Equity N/A 154,100 154,100
Index Equity N/A 129,601 129,601
Small Cap Value Equity N/A 108,248 108,248
International Equity N/A 226,778 226,778
Balanced N/A 187,602 187,602
International Emerging Markets N/A 37,267 37,267
</TABLE>
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 and the Administrators, transfer agency fees, fees
and expenses of officers and trustees who are not affiliated with PAMG, the
Distributor or any of their affiliates, taxes, interest, legal fees, custodian
fees, auditing fees, distribution fees, shareholder processing fees, shareholder
servicing fees, fees and expenses in registering and qualifying the Portfolios
and their shares for distribution under federal and state securities laws,
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<PAGE>
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 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, the sub-advisers and the Administrators expect to waive
voluntarily a portion of their respective advisory, sub-advisory and
administration fees during the Portfolios' current fiscal year.
PORTFOLIO TRANSACTIONS
In executing portfolio transactions, the adviser and sub-advisers seek
to obtain the best price and most favorable 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 same
transaction, provided that the adviser or sub-adviser
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<PAGE>
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, 1996, the following Portfolios
paid brokerage commissions as follows:
<TABLE>
<CAPTION>
Portfolios Brokerage Commissions
- ---------- ---------------------
<S> <C>
Large Cap Value Equity $1,455,318
Large Cap Growth Equity 696,494
Small Cap Growth Equity 165,153
Select Equity 443,114
Index Equity 44,380
Small Cap Value Equity 380,356
International Equity 1,912,522
Balanced 95,277
International Emerging Markets 588,860
</TABLE>
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<PAGE>
For the year or period ended September 30, 1995, the following Portfolios
paid brokerage commissions as follows:
<TABLE>
<CAPTION>
Portfolios Brokerage Commissions
- ---------- ---------------------
<S> <C>
Large Cap Value Equity $ 364,680
Large Cap 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>
Large Cap Value Equity $ 431,232
Large Cap 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 Index Master Portfolio's fiscal years ended November 30, 1994,
1995, and 1996, the Index Master Portfolio paid brokerage commissions totalling
$10,610, $15,289 and $72,562, respectively.
Over-the-counter issues, including corporate debt and U.S. Government
securities, are normally traded on a "net" basis without a stated commission,
through dealers acting for their own account and not as brokers. The Portfolios
will primarily engage in transactions with these dealers or deal directly with
the issuer unless a better price or execution could be obtained by using a
broker. Prices paid to a dealer with respect to both foreign and domestic
securities will generally include a "spread," which is the difference between
the prices at which the dealer is willing to purchase and sell the specific
security at the time, and includes the dealer's normal profit.
-90-
<PAGE>
Purchases of money market instruments by a Portfolio are made from dealers,
underwriters and issuers. The Portfolios do not currently expect to incur any
brokerage commission expense on such transactions because money market
instruments are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission. The price of the
security, however, usually includes a profit to the dealer. Each Money Market
Portfolio intends to purchase only securities with remaining maturities of 13
months or less as determined in accordance with the rules of the SEC. As a
result, the portfolio turnover rates of a Money Market Portfolio will be
relatively high. However, because brokerage commissions will not normally be
paid with respect to investments made by a Money Market Portfolio, the turnover
rates should not adversely affect the Portfolio's net asset values or net
income.
Securities purchased in underwritten offerings include a fixed amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount. When securities are purchased or sold directly from or
to an issuer, no commissions or discounts are paid.
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 such 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 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, CastleInternational, 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
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<PAGE>
securities be purchased from or sold to PAMG, PIMC, BlackRock, PNC Bank, PCM,
PEAC, CastleInternational, 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, 1996,
the following Portfolios held the following securities:
<TABLE>
<CAPTION>
Portfolio Security Value
- --------- -------- -----
<S> <C> <C>
Money Market
- ------------
Goldman Sachs, LP Variable Rate Obligation $ 47,000,000
Lehman Brothers Variable Rate Obligation 50,000,000
Merrill Lynch & Co. Medium Term Note 49,997,964
Merrill Lynch & Co. Commercial Paper 49,663,333
Morgan Stanley & Co. Commercial Paper 114,310,431
U.S. Treasury Money Market
- --------------------------
Goldman Sachs, LP Repurchase Agreement $ 24,000,000
Morgan Stanley & Co. Repurchase Agreement 280,300,000
Nikko Securities Co. Repurchase Agreement 55,000,000
Managed Income
- --------------
Salomon Brothers, Inc. Corporate Bond $ 6,616,282
Merrill Lynch & Co. Corporate Bond 6,904,866
Morgan Stanley & Co. Corporate Bond 5,106,250
Paine Webber, Inc. Corporate Bond 4,919,063
Balanced
- --------
Salomon Brothers, Inc. Corporate Bond $ 315,480
Merrill Lynch & Co. Corporate Bond 1,448,661
Portfolio Security Value
- --------- -------- -----
Low Duration Bond
- -----------------
Lehman Brothers Corporate Bonds $ 3,685,520
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Merrill Lynch & Co. Corporate Bonds $ 71,118
Morgan Stanley & Co. Corporate Bonds 413,409
Core Bond
- ---------
Goldman Sachs, LP Corporate Bonds $ 2,827,706
Merrill Lynch & Co. Corporate Bonds 374,118
Intermediate Bond
- -----------------
Goldman Sachs, LP Corporate Bonds $ 1,884,978
Merrill Lynch & Co. Corporate Bonds 1,196,431
</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 the respective Non-Money Market
Portfolios, based on the value of such Portfolios' net assets as of September
30, 1996, follows:
TABLE
-----
<TABLE>
<CAPTION>
Large Cap Large Cap
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......................... $26,190,321 $16,579,152 $27,954,075 $ 6,227,831 $12,752,111
Outstanding
Shares............................. 1,706,757 1,109,844 1,288,710 459,447 913,386
=========== =========== =========== =========== ===========
Net Asset Value
Per Share......................... $ 15.35 $ 14.94 $ 21.69 $ 13.56 $ 13.96
Maximum Sales Charge,
4.50% of offering price
(4.71% of net asset
value per share)/*/............... $ .72 $ .70 $ 1.02 $ .64 $ .43
----------- ----------- ----------- ----------- -----------
Offering to Public................. $ 16.07 $ 15.64 $ 22.71 $ 14.20 $ 14.39
=========== =========== =========== =========== ===========
</TABLE>
- -----------
/*/ 3.00%/3.09% for Index Equity Portfolio.
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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.................. $24,605,308 $19,842,197 $71,899,325 $11,193,072 $ 4,872,905
Outstanding
Shares...................... 1,540,306 1,485,086 4,762,624 1,109,756 449,699
=========== =========== =========== =========== ===========
Net Asset Value
Per Share................... $ 15.97 $ 13.36 $ 15.10 $ 10.09 $ 10.84
Maximum Sales Charge,
4.50% of offering price
(4.71% of net asset
value per share)/*/......... $ .75 $ .70 $ .71 $ .48 $ .45
----------- ----------- ----------- ----------- -----------
Offering to Public.......... $ 16.72 $ 14.06 $ 15.81 $ 10.57 $ 11.29
=========== =========== =========== =========== ===========
</TABLE>
- ----------
/*/ 5.00%/5.26% for International Equity Portfolio; 4.00%/4.17% for Tax-Free
Income Portfolio.
<TABLE>
<CAPTION>
Intermediate Pennsylvania Low
Government Ohio Tax- Tax-Free Duration Intermediate
Bond Free Income Income Bond Bond
Portfolio Portfolio Portfolio Portfolio Portfolio
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Assets....................... $ 5,902,721 $ 9,619,203 $38,027,710 $937,658 $935,485
Outstanding
Shares.......................... 594,767 947,248 3,642,501 95,732 100,344
======= ======= ========= ====== =======
Net Asset Value
Per Share....................... $9.92 $10.15 $10.44 $9.79 $9.32
Maximum Sales Charge,
4.00% of offering price
(4.17% of net asset
value per share)/*/............. $ .41 $ .42 $ .44 $ .30 $ .39
---- ---- ---- ---- ----
Offering to Public............... $10.33 $10.57 $10.88 $10.09 $9.71
===== ===== ===== ===== ====
</TABLE>
- --------------
/*/3.00%/3.09% for Low Duration Bond Portfolio.
<TABLE>
<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....................... $3,650,842 $175,812 $2,995,584 $893,803 $319,914
Outstanding
Shares........................... 358,070 15,017 343,864 79,324 33,503
======= ====== ======= ====== ======
Net Asset Value
Per Share........................ $10.20 $11.71 $8.71 $11.27 $9.55
Maximum Sales Charge,
4.00% of offering price
(4.17% of net asset
value per share)/*/.............. $ .48 $ .62 $ .46 $ .47 $ .40
---- ---- ---- ---- ----
Offering to Public............... $10.68 $12.33 $9.71 $11.74 $9.95
===== ===== ==== ===== ====
</TABLE>
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<PAGE>
- --------------
/*/4.50%/4.71% for Government Income Portfolio; 5.00%/5.26% for International
Bond and International Emerging Markets Portfolios.
<TABLE>
<CAPTION>
Mid-Cap Mid-Cap
Value Growth
Equity Equity
Portfolio Portfolio
--------- ---------
<S> <C> <C>
Net Assets................ $100 $100
Outstanding
Shares................... 10 10
=== ===
Net Asset Value
Per Share................ $10.00 $10.00
Maximum Sales Charge,
4.50% of offering price
(4.71% of net asset
value per share)......... $ .47 $ .47
------ -----
Offering to Public........ $10.47 $10.47
===== =====
</TABLE>
Total front-end sales charges paid by shareholders of Investor A Shares of the
Portfolios for the year or period ended September 30, 1996 (for the period from
February 1, 1996 through September 30, 1996 in the case of the New Jersey Tax-
Free Income and International Bond Portfolios; for the period from April 1, 1996
through September 30, 1996 in the case of the Low Duration Bond and Core Bond
Portfolios) were as follows:
<TABLE>
<CAPTION>
Portfolios Front-End Sales Charges
---------- -----------------------
<S> <C>
Managed Income $ 43,417
Tax-Free Income 9,109
Intermediate Government Bond 22,989
Ohio Tax-Free Income 4,649
Pennsylvania Tax-Free Income 81,436
Intermediate Bond 8,598
Large Cap Value Equity 141,011
Large Cap Growth Equity 95,694
Small Cap Growth Equity 344,911
Select Equity 44,112
Index Equity 78,263
Small Cap Value Equity 51,676
International Equity 85,795
Balanced 143,547
International Emerging Markets 18,147
Government Income 30,034
Core Bond 8,481
New Jersey Tax Free Income 17,606
Low Duration Bond 6,294
</TABLE>
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<TABLE>
<CAPTION>
Portfolios Front-End Sales Charges
---------- -----------------------
<S> <C>
International Bond $ 7,565
</TABLE>
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
Large Cap Value Equity 68,289
Large Cap 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
Large Cap Value Equity 195,675
Large Cap 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
</TABLE>
-96-
<PAGE>
<TABLE>
<CAPTION>
Portfolios Front-End Sales Charges
---------- -----------------------
<S> <C>
Balanced $1,213,056
International Emerging Markets 130,755
</TABLE>
For the period from January 13, 1996 through January 31, 1996, the
total front-end sales charges paid by the shareholders of Investor A Shares of
the New Jersey Tax-Free Income Portfolio were $435. For the period from January
13, 1996 through March 31, 1996, the total front-end sales charges paid by the
shareholders of Investor A Shares of the Low Duration Bond and Core Bond
Portfolios were $3,848 and $1,723, respectively.
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 offering
price or the asset value of the shares on the 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.
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 12 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 without
a sales charge.
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
-97-
<PAGE>
charge applies) when Investor Shares of a Money Market Portfolio are redeemed
and the proceeds are used to purchase Investor A 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 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
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<PAGE>
1940. Investors, such as the Portfolio, may incur brokerage charges and other
transaction costs selling securities that were received in payment of
redemptions.
The Fund will accept and process purchase and redemption orders with
respect to the Large Cap Value Equity, Large Cap Growth Equity, Index Equity,
Small Cap Value Equity, Small Cap Growth Equity, Mid-Cap Value Equity, Mid-Cap
Growth Equity, Select Equity, International Equity, International Emerging
Markets and Balanced Portfolios on days on which the Federal Reserve Bank of
Philadelphia is closed if the New York Stock Exchange (the "NYSE") is open for
business.
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
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 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
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<PAGE>
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
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.
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 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.
-100-
<PAGE>
Equity Portfolios. Net asset value is calculated separately for each class
of shares of each Equity Portfolio as of the close of regular trading hours on
the NYSE (currently 4:00 p.m. Eastern Time) on each Business Day by dividing the
value of all securities, cash and other assets owned by a Portfolio that are
allocated to a particular class of shares, less the liabilities charged to that
class, by the total number of outstanding shares of the class.
Valuation of securities held by each Equity 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 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
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
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<PAGE>
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.
Certain of the securities acquired by the International Equity and
International Emerging Markets Portfolios may be traded on foreign exchanges or
over-the-counter markets on days on which a Portfolio's net asset value is not
calculated. In such cases, the net asset value of the Portfolio's shares may be
significantly affected on days when investors can neither purchase nor redeem
shares of the Portfolio.
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. Net asset value is calculated separately for each class
of shares of each Bond Portfolio as of the close of regular trading hours on the
NYSE on each Business Day by dividing the value of all securities, cash and
other assets owned by a Portfolio that are allocated to a particular class of
shares, less the liabilities charged to that class, by the total number of
outstanding shares of the class.
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
quotations or the equivalent thereof received from dealers; an option or futures
contract is valued at the last sales price
-102-
<PAGE>
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.
Certain of the securities acquired by the International Bond Portfolio may
be traded on foreign exchanges or over-the-counter markets on days on which the
Portfolio's net asset value is not calculated. In such cases, the net asset
value of the Portfolio's shares may be significantly affected on days when
investors can neither purchase nor redeem shares of the Portfolio.
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 Performance. 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
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Portfolio's yield for shares (as calculated above) that is exempt from Federal
or state income tax by one minus a stated Federal or state income tax rate; and
(b) adding the figure resulting from (a) above to that portion, if any, of the
yield that is not exempt from Federal and state income tax.
The annualized yield information for each Money Market Portfolio for the
seven-day period ended September 30, 1996 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 4.61% 4.72% N/A
Investor A Shares 4.52 4.62 N/A
Institutional Shares 4.91 5.03 N/A
Investor B Shares 3.83 3.90 N/A
Municipal Money Market
Service Shares 2.77% 2.81% 3.84%
Investor A Shares 2.60 2.63 3.61
Institutional Shares 3.07 3.12 4.26
U.S. Treasury Money Market
Service Shares 4.39% 4.49% N/A
Investor A Shares 2.64 4.31 N/A
Institutional Shares 3.12 4.80 N/A
Ohio Municipal Money Market
Service Shares 2.82% 2.86% 3.92%
Investor A Shares 2.64 2.67 3.67
Institutional Shares 3.12 3.17 4.33
Pennsylvania Municipal Money
Market
Service Shares 2.78% 2.82% 3.86%
Investor A Shares 2.60 2.63 3.61
Institutional Shares 3.08 3.13 4.28
North Carolina Municipal
Money Market
Service Shares 2.78% 2.82% 3.86%
Investor A Shares 2.61 2.64 3.63
Institutional Shares 3.08 3.13 4.28
Virginia Municipal Money
Market
Service Shares 2.64% 2.67% 3.67%
Institutional Shares 2.94 2.98 4.08
New Jersey Municipal Money
Market Portfolio
Service Shares 2.58% 2.61% 3.58%
Investor A Shares 2.33 2.36 3.24
Institutional Shares 2.88 2.92 4.00
</TABLE>
The Investor B Class had not commenced operations as of September 30, 1996,
except with respect to the Money Market Portfolio. The Investor C Class had not
commenced operations as of September 30, 1996.
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<PAGE>
The annualized yield information for each Money Market Portfolio for the
seven-day period ended September 30, 1996 after 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 4.88 5.00 N/A
Institutional Shares 5.27 5.41 N/A
Investor B Shares 4.19 4.28 N/A
Municipal Money Market
Service Shares 3.21% 3.26% 4.46%
Investor A Shares 3.04 3.09 4.22
Institutional Shares 3.51 3.57 4.88
U.S. Treasury Money Market
Service Shares 4.79% 4.90% N/A
Investor A Shares 4.62 4.73 N/A
Institutional Shares 5.09 5.22 N/A
Ohio Municipal Money Market
Service Shares 3.28% 3.33% 4.56%
Investor A Shares 3.10 3.15 4.31
Institutional Shares 3.58 3.65 4.97
Pennsylvania Municipal Money
Market
Service Shares 3.20% 3.25% 4.44%
Investor A Shares 3.02 3.07 4.19
Institutional Shares 3.50 3.56 4.86
North Carolina Municipal
Money Market
Service Shares 3.22% 3.29% 4.47%
Investor A Shares 3.05 3.10 4.24
Institutional Shares 3.52 3.58 4.89
Virginia Municipal Money
Market
Service Shares 3.32% 3.37% 4.61%
Institutional Shares 3.62 3.68 5.03
New Jersey Municipal Money
Market Portfolio
Service Shares 3.07% 3.12% 4.26%
Investor A Shares 2.82 2.86 3.92
Institutional Shares 3.37 3.43 4.68
</TABLE>
The Investor B Class had not commenced operations as of September 30, 1996,
except with respect to the Money Market Portfolio. The Investor C Class had not
commenced operations as of September 30, 1996.
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<PAGE>
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.
From time to time, in advertisements, sale literature, reports to
shareholders and other materials, the yields of a Money Market 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 relevant securities 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. In addition, each Money Market Portfolio may quote from time to time
its total return in accordance with SEC regulations.
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, 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:
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<PAGE>
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 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 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.
Performance information presented for the following Non-Money Market
Portfolios includes performance information for a corresponding predecessor
portfolio which transferred its assets and liabilities to the related Non-Money
Market Portfolio pursuant to a reorganization consummated on January 13, 1996
(February 13, 1996 with respect to the International Bond Portfolio):
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<PAGE>
Commencement of
Non-Money Market Predecessor Operations of
Portfolio Portfolio Predecessor Portfolio
- --------- --------- ---------------------
New Jersey Tax-Free Income Compass Capital Group July 1, 1991
Portfolio New Jersey Municipal Bond
Fund
International Bond Portfolio Compass Capital Group July 1, 1991
International Fixed Income
Fund
Core Bond Portfolio BFM Institutional Trust December 9, 1992
Core Fixed Income
Portfolio
Low Duration Bond Portfolio BFM Institutional Trust July 17, 1992
Short Duration Portfolio
Each Non-Money Market Portfolio presents performance information for each
class thereof since the commencement of operations of that Portfolio (or the
related predecessor portfolio), rather than the date such class was introduced.
Performance information for each class introduced after the commencement of
operations of the related Portfolio (or predecessor portfolio) is therefore
based on the performance history of a predecessor class or predecessor classes.
If a class of shares in a Portfolio (the "Subsequent Class") has more than one
predecessor class, the performance data predating the introduction of the
Subsequent Class is based initially on the performance of the Portfolio's first
operational predecessor class (the "Initial Class"); thereafter, the performance
of the Subsequent Class is based upon the performance of any other predecessor
class or classes which were introduced after the Initial Class and which had
total operating expenses more similar to those of the Subsequent Class.
Performance information is restated to reflect the current maximum front-end
sales charge (in the case of Investor A Shares) or the maximum contingent
deferred sales charge (in the case of Investor B Shares) when presented
inclusive of sales charges. Additional performance information is presented
which does not reflect the deduction of sales charges. Historical expenses
reflected in performance information are based upon the distribution,
shareholder servicing and processing fees and other expenses actually incurred
during the periods presented and have not been restated, in cases in which the
performance information for a particular class includes the performance history
of a predecessor class or
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<PAGE>
predecessor classes, to reflect the ongoing expenses currently borne by the
particular class.
Based on the foregoing, the average annual total returns for each Non-Money
Market Portfolio for periods ended September 30, 1996 were as follows*:
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<PAGE>
<TABLE>
<CAPTION>
Investor A Shares
----------------------------------------------------------------------
Investor A Shares
Total Return (NAV)
--------------------------------------------------------------------------------------
Fund Inception Class Intro Since Fund
Date Date 1 Year 3 Year Ann. 5 Year Ann. Inception Ann.
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balanced 05/14/90 05/14/90 13.98% 10.77% 12.05% 11.66%
Index Equity 04/20/92 06/02/92 19.31% 16.41% N/A 14.12%
Select Equity 09/13/93 10/13/93 19.23% 14.24% N/A 13.88%
Large Cap Growth Equity 11/01/89 03/14/92 18.18% 10.62% 11.61% 11.14%
Large Cap Value Equity 04/20/92 05/02/92 20.52% 15.96% N/A 15.23%
Small Cap Value Equity 04/13/92 06/02/92 12.06% 11.56% N/A 14.55%
Small Cap Growth Equity 09/14/93 09/15/93 44.79% 27.48% N/A 28.94%
International Equity 04/27/92 06/02/92 7.58% 6.55% N/A 10.16%
Int'l Emerging Markets 06/17/94 06/17/94 6.49% N/A N/A -4.67%
Low Duration Bond 07/17/92 01/13/96 4.51% 5.01% N/A 5.04%
Intermediate Government Bond 04/20/92 05/11/92 4.36% 3.51% N/A 5.51%
Intermediate Bond 09/17/93 05/20/94 4.74% 3.58% N/A 3.57%
Core Bond 12/09/92 01/31/96 4.30% 4.81% N/A 6.45%
Managed Income 11/01/89 02/05/92 3.83% 3.33% 6.70% 7.48%
Tax - Free Income 05/14/90 05/14/90 6.94% 4.38% 7.39% 7.78%
NJ Tax - Free Income 07/01/91 01/26/96 4.51% 3.88% 6.85% 7.22%
Pa Tax -Free Income 12/01/92 12/01/92 5.81% 4.20% N/A 6.26%
Oh Tax - Free Income 12/01/92 12/01/92 5.66% 3.96% N/A 5.44%
Government Income 10/03/94 10/03/94 4.43% N/A N/A 9.26%
International Bond 07/01/91 04/22/96 11.72% 7.98% 9.05% 9.32%
--------------------------------------------------------------------------------------
<CAPTION>
------------------------------------------------------------------------
Total Return (Load adjusted)
------------------------------------------------------------------------
Fund Inception Since Fund
Date 1 Year 3 Year Ann. 5 Year Ann. Inception Ann.
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balanced 05/14/90 8.82% 9.07% 11.02% 10.86%
Index Equity 04/20/92 15.73% 15.23% N/A 13.34%
Select Equity 09/13/93 13.86% 12.50% N/A 12.18%
Large Cap Growth Equity 11/01/89 12.89% 8.92% 10.58% 10.40%
Large Cap Value Equity 04/20/92 15.07% 14.20% N/A 14.05%
Small Cap Value Equity 04/13/92 7.04% 9.85% N/A 13.37%
Small Cap Growth Equity 09/14/93 38.24% 25.55% N/A 27.00%
International Equity 04/27/92 2.18% 4.74% N/A 8.89%
Int'l Emerging Markets 06/17/94 1.18% N/A N/A -6.80%
Low Duration Bond 07/17/92 1.37% 3.95% N/A 4.28%
Intermediate Government Bond 04/20/92 0.16% 2.12% N/A 4.55%
Intermediate Bond 09/17/93 0.58% 2.18% N/A 2.19%
Core Bond 12/09/92 0.13% 3.39% N/A 5.31%
Managed Income 11/01/89 -0.85% 1.74% 5.73% 6.77%
Tax - Free Income 05/14/90 2.68% 2.97% 6.52% 7.09%
NJ Tax - Free Income 07/01/91 0.33% 2.48% 5.98% 6.39%
Pa Tax -Free Income 12/01/92 1.58% 2.78% N/A 5.12%
Oh Tax - Free Income 12/01/92 1.42% 2.55% N/A 4.32%
Government Income 10/03/94 -0.24% N/A N/A 6.78%
International Bond 07/01/91 6.13% 6.15% 7.94% 8.26%
------------------------------------------------------------------------
</TABLE>
-110-
<PAGE>
<TABLE>
<CAPTION>
Investor B Shares
-------------------------------------------------------------------------------
Investor B Shares
Total Return (NAV)
-----------------------------------------------------------------------------------------------
Fund Inception Class Intro Since Fund
Date Date 1 Year 3 Year Ann. 5 Year Ann. Inception Ann.
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balanced 05/14/90 10/03/94 13.14% 10.27% 11.74% 11.42%
Index Equity 04/20/92 02/07/96 18.94% 16.28% N/A 14.04%
Select Equity 09/13/93 03/27/96 18.86% 14.13% N/A 13.77%
Large Cap Growth Equity 11/01/89 01/24/96 17.46% 10.40% 11.47% 11.04%
Large Cap Value Equity 04/20/92 01/18/96 19.97% 15.79% N/A 15.11%
Small Cap Value Equity 04/13/92 10/03/94 11.34% 11.10% N/A 14.25%
Small Cap Growth Equity 09/14/93 01/18/96 43.75% 27.17% N/A 28.63%
International Equity 04/27/92 10/03/94 6.81% 6.08% N/A 9.83%
Int'l Emerging Markets 06/17/94 04/25/96 6.24% N/A N/A -4.75%
Core Bond 12/09/92 03/18/96 3.91% 4.68% N/A 6.34%
Tax - Free Income 05/14/90 07/18/96 6.77% 4.31% 7.35% 7.74%
NJ Tax - Free Income 07/01/91 07/02/96 4.32% 3.82% 6.81% 7.18%
Pa Tax - Free Income 12/01/92 10/03/94 5.04% 3.70% N/A 5.89%
Oh Tax - Free Income 12/01/92 10/13/94 4.87% 3.40% N/A 5.01%
Government Income 10/03/94 10/03/94 3.68% N/A N/A 8.52%
International Bond 07/01/91 04/19/96 11.37% 7.87% 8.98% 9.26%
----------------------------------------------------------------------------------------------
<CAPTION>
Total Return (Load adjusted)
--------------------------------------------------------------------------
Fund Inception Since Fund
Date 1 Year 3 Year Ann. 5 Year Ann. Inception Ann.
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balanced 05/14/90 8.02% 8.97% 11.28% 11.42%
Index Equity 04/20/92 13.59% 14.90% N/A 13.52%
Select Equity 09/13/93 13.51% 12.78% N/A 12.64%
Large Cap Growth Equity 11/01/89 12.17% 9.09% 11.02% 11.04%
Large Cap Value Equity 04/20/92 14.57% 14.42% N/A 14.59%
Small Cap Value Equity 04/13/92 6.34% 9.79% N/A 13.74%
Small Cap Growth Equity 09/14/93 37.28% 25.67% N/A 27.35%
International Equity 04/27/92 1.97% 4.83% N/A 9.33%
Int'l Emerging Markets 06/17/94 1.46% N/A N/A -6.22%
Core Bond 12/09/92 -0.77% 3.44% N/A 5.50%
Tax - Free Income 05/14/90 1.97% 3.08% 6.92% 7.74%
NJ Tax - Free Income 07/01/91 -0.37% 2.59% 6.38% 6.98%
Pa Tax -Free Income 12/01/92 0.31% 2.47% N/A 5.05%
Oh Tax - Free Income 12/01/92 0.11% 2.18% N/A 4.18%
Government Income 10/03/94 -0.99% N/A N/A 6.32%
International Bond 07/01/91 6.36% 6.60% 8.54% 9.05%
--------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Investor C Shares
---------------------------------------------------------------------
Investor C Shares
Total Return (NAV)
--------------------------------------------------------------------------------------
Fund Inception Class Intro Since Fund
Date Date 1 Year 3 Year Ann. 5 Year Ann. Inception Ann.
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Index Equity 04/20/92 08/14/96 18.94% 16.28% N/A 14.04%
Select Equity 09/13/93 09/27/96 18.86% 14.13% N/A 13.77%
Large Cap Value Equity 04/20/92 08/16/96 19.97% 15.79% N/A 15.11%
Small Cap Growth Equity 09/14/93 09/06/96 43.75% 27.17% N/A 28.63%
International Bond 07/01/91 09/11/96 11.37% 7.87% 8.98% 9.26%
--------------------------------------------------------------------------------------
<CAPTION>
Total Return (Load adjusted)
---------------------------------------------------------------------
Fund Inception Since Fund
Date 1 Year 3 Year Ann. 5 Year Ann. Inception Ann.
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Index Equity 04/20/92 17.75% 14.90% N/A 13.52%
Select Equity 09/13/93 13.51% 12.78% N/A 12.64%
Large Cap Value Equity 04/20/92 18.77% 14.42% N/A 14.59%
Small Cap Growth Equity 09/14/93 42.31% 25.67% N/A 27.35%
International Bond 07/01/91 10.26% 6.60% 8.54% 9.05%
---------------------------------------------------------------------
</TABLE>
-112-
<PAGE>
<TABLE>
<CAPTION>
Service Shares
-------------------------------------------------------------------------
Service shares
Total Return (NAV)
--------------------------------------------------------------------------------------------
Fund Inception Class Intro Since Fund
Date Date 1 Year 3 Year Ann. 5 Year Ann. Inception Ann.
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balanced 05/14/90 07/29/93 14.11% 10.89% 12.12% 11.72%
Index Equity 04/20/92 07/29/93 19.45% 16.58% N/A 14.24%
Select Equity 09/13/93 09/15/93 19.43% 14.39% N/A 14.04%
Large Cap Growth Equity 11/01/89 07/29/93 18.34% 10.80% 11.73% 11.23%
Large Cap Value Equity 04/20/92 07/29/93 20.68% 16.14% N/A 15.33%
Small Cap Value Equity 04/13/92 07/29/93 12.30% 11.71% N/A 14.68%
Small Cap Growth Equity 09/14/93 09/15/93 45.14% 27.71% N/A 29.16%
International Equity 04/27/92 07/29/93 7.71% 6.70% N/A 10.26%
Int'l Emerging Markets 06/17/94 06/17/94 6.61% N/A N/A -4.47%
Low Duration Bond 07/17/92 01/12/96 4.64% 5.05% N/A 5.07%
Intermediate Government Bond 04/20/92 07/29/93 4.51% 3.58% N/A 5.56%
Intermediate Bond 09/17/93 09/23/93 4.79% 3.65% N/A 3.64%
Core Bond 12/09/92 01/13/96 4.43% 4.85% N/A 6.49%
Managed Income 11/01/89 07/29/93 4.05% 3.57% 6.84% 7.58%
Tax - Free Income 05/14/90 07/29/93 7.14% 4.59% 7.53% 7.88%
NJ Tax - Free Income 07/01/91 07/01/91 4.68% 3.94% 6.89% 7.25%
Pa Tax - Free Income 12/01/92 07/29/93 5.97% 4.27% N/A 6.33%
Oh Tax - Free Income 12/01/92 07/29/93 5.80% 3.91% N/A 5.40%
International Bond 07/01/91 07/01/91 11.80% 8.01% 9.07% 9.34%
--------------------------------------------------------------------------------------------
</TABLE>
-113-
<PAGE>
<TABLE>
<CAPTION>
Institutional Shares
-----------------------------------------------------------------------
Institutional Shares
Total Return (NAV)
----------------------------------------------------------------------------------------
Fund Inception Class Intro Since Fund
Date Date 1 Year 3 Year Ann. 5 Year Ann. Inception Ann.
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balanced 05/14/90 05/01/92 14.43% 11.21% 12.32% 11.88%
Index Equity 04/20/92 04/20/92 19.82% 16.88% N/A 14.45%
Select Equity 09/13/93 09/13/93 19.84% 14.72% N/A 14.34%
Large Cap Growth Equity 11/01/89 11/01/89 18.67% 11.05% 11.91% 11.36%
Large Cap Value Equity 04/20/92 04/20/92 21.01% 16.44% N/A 15.53%
Small Cap Value Equity 04/13/92 04/13/92 12.64% 12.02% N/A 14.89%
Small Cap Growth Equity 09/14/93 09/14/93 45.87% 28.13% N/A 29.56%
International Equity 04/27/92 04/27/92 8.01% 7.01% N/A 10.48%
Int'l Emerging Markets 06/17/94 06/17/94 6.97% N/A N/A -4.19%
Low Duration Bond 07/17/92 07/17/92 4.89% 5.14% N/A 5.13%
Intermediate Government Bond 04/20/92 04/20/92 4.82% 3.86% N/A 5.76%
Intermediate Bond 09/17/93 09/17/93 5.10% 3.95% N/A 3.93%
Core Bond 12/09/92 12/09/92 4.60% 4.91% N/A 6.53%
Managed Income 11/01/89 11/01/89 4.33% 3.83% 7.02% 7.71%
Tax - Free Income 05/14/90 01/21/93 7.45% 4.87% 7.71% 8.03%
Pa Tax - Free Income 12/01/92 12/01/92 6.29% 4.56% N/A 6.51%
Oh Tax - Free Income 12/01/92 12/01/92 6.12% 4.20% N/A 5.62%
International Bond 07/01/91 06/10/96 11.89% 8.04% 9.08% 9.35%
----------------------------------------------------------------------------------------
</TABLE>
-114-
<PAGE>
/*/Notes
--------
Performance information presented for Investor A, Investor B, Investor
C and Service Shares of a Portfolio prior to their introduction dates
does not reflect shareholder servicing and processing and/or
distribution fees and certain other expenses borne by these share
classes which, if reflected, would reduce the performance quoted.
Performance information presented assumes the reinvestment of
dividends and distributions. Performance information presented for
Investor A, Investor B, Investor C and Service Shares of a Portfolio
prior to their introduction as indicated in the table above is based
upon historical expenses of the predecessor class or classes which do
not reflect the actual expenses that an investor would incur as a
holder of shares of these classes of the Portfolios. The ongoing fees
and expenses borne by Investor B Shares and Investor C Shares are
greater than those borne by Investor A Shares; the ongoing fees and
expenses borne by a Portfolio's Investor A, Investor B and Investor C
Shares are greater than those borne by the Portfolio's Service Shares;
and the ongoing fees and expenses borne by a Portfolio's Investor A,
Investor B, Investor C and Service Shares are greater than those
borne by the Portfolio's Institutional Shares. Performance
information presented for Institutional Shares of the Balanced, Tax-
Free Income, New Jersey Tax-Free Income and International Bond
Portfolios prior to their introduction dates is based upon historical
expenses of predecessor classes which are higher than the actual
expenses that an investor would incur as a holder of Institutional
Shares of the above-mentioned Portfolios. Accordingly, the
performance information may be used in assessing each Portfolio's
performance history but does not reflect how the distinct classes
would have performed on a relative basis prior to the introduction of
these classes, which would require an adjustment to the ongoing
expenses.
The original class or classes of shares of each Portfolio were as
follows: Balanced - Investor A Shares; Index Equity - Institutional
Shares; Select Equity - Institutional Shares; Large Cap Growth Equity
- Institutional Shares; Large Cap Value Equity -Institutional Shares;
Small Cap Value Equity -Institutional Shares; Small Cap Growth Equity
-Institutional Shares; International Equity -Institutional Shares;
International Emerging Markets -Investor A, Institutional and Service
Shares; Low
-115-
<PAGE>
Duration Bond - Institutional Shares; Intermediate Government Bond -
Institutional Shares; Intermediate Bond - Institutional Shares; Core
Bond - Institutional Shares; Managed Income - Institutional Shares;
Tax-Free Income - Investor A Shares; New Jersey Tax-Free Income -
Service Shares; Pennsylvania Tax-Free Income -Investor A and
Institutional Shares; Ohio Tax-Free Income - Investor A and
Institutional Shares; Government Income - Investor A Shares; and
International Bond - Service Shares.
The performance quoted reflects fee waivers that subsidize and reduce
the total operating expenses of each Portfolio. The Portfolios'
returns would have been lower if there were not such waivers. PAMG
and the Portfolio's Administrators are under no obligation to waive or
continue waiving their fees, but have informed the Fund that they
expect to waive fees as necessary to maintain each Portfolio's total
operating expenses during the remainder of the current fiscal year at
the levels set forth in the applicable Prospectus.
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 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 may not, for these purposes, deduct from
the initial value invested or the ending value any amount representing front-end
and deferred sales charges charged to purchasers of Investor A, Investor B or
Investor C Shares. The Investor A, Investor B and Investor C classes of the
Portfolio will, however, disclose, if appropriate, the maximum applicable sales
charges and will also disclose that
-116-
<PAGE>
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 Yield. The Balanced, Managed Income, Tax-Free
Income, Intermediate Government Bond, Ohio Tax-Free Income, Pennsylvania Tax-
Free Income, New Jersey Tax-Free Income, Low Duration Bond, Intermediate Bond,
Government Income, Core Bond and International Bond Portfolios may advertise the
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)/6/ - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of
the period.
For the purpose of determining net investment income earned during the
period (variable "a" in the formula), dividend income
-117-
<PAGE>
on equity securities held by a Portfolio is recognized by accruing 1/360th of
the stated dividend rate of the security each day that the security is in the
Portfolio. Except as noted below, interest earned on any debt obligations held
by the Portfolio is calculated by computing the yield to maturity of each
obligation held by the Portfolio based on the market value of the obligation
(including actual accrued interest) at the close of business on the last
business day of each month, or, with respect to obligations purchased during the
month, the purchase price (plus actual accrued interest) and dividing the result
by 360 and multiplying the quotient by the market value of the obligation
(including actual accrued interest) in order to determine the interest income on
the obligation for each day of the subsequent month that the obligation is held
by the Portfolio. For purposes of this calculation, it is assumed that each
month contains 30 days. The maturity of an obligation with a call provision is
the next call date on which the obligation reasonably may be expected to be
called or, if none, the maturity date.
With respect to debt obligations purchased at a discount or premium, the
formula generally calls for amortization of the discount or premium. However,
interest earned on tax-exempt obligations that are issued without original issue
discount and have a current market discount is calculated by using the coupon
rate of interest instead of the yield to maturity. In the case of tax-exempt
obligations that are issued with original issue discount but which have
discounts based on current market value that exceed the then-remaining portion
of the original issue discount (market discount), the yield to maturity is the
imputed rate based on the original issue discount calculation. On the other
hand, in the case of tax-exempt obligations that are issued with original issue
discount but which have discounts based on current market value that are less
than the then-remaining portion of the original issue discount (market premium),
the yield to maturity is based on the market value.
With respect to mortgage or other receivables-backed obligations which are
expected to be subject to monthly payments of principal and interest ("pay
downs"), (a) gain or loss attributable to actual monthly pay downs are accounted
for as an increase or decrease to interest income during the period; and (b) a
Portfolio may elect either (i) to amortize the discount and premium on the
remaining security, based on the cost of the security, to the weighted-average
maturity date, if such information is available, or to the remaining term of the
security, if any, if the weighted-average maturity date is not 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.
-118-
<PAGE>
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 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 shares of a specified class. Under the rules of the SEC, 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,
1996 for the Portfolios referenced below was as follows:
<TABLE>
<CAPTION>
After Waivers Before Waivers
------------------- -----------------
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 6.44% N/A 6.21% N/A
Investor A Shares 6.26 N/A 6.03 N/A
Institutional Shares 6.74 N/A 6.51 N/A
Tax-Free Income
Service Shares 5.16% 7.17% 4.83% 6.70%
Investor A Shares 4.98 6.92 4.65 6.45
Institutional Shares 5.46 7.58 5.13 7.13
Investor B Shares 4.22 5.86 3.89 5.40
Intermediate Government
Bond
Service Shares 5.69% N/A 5.39% N/A
Investor A Shares 5.51 N/A 5.21 N/A
Institutional Shares 5.99 N/A 5.69 N/A
</TABLE>
-119-
<PAGE>
<TABLE>
<CAPTION>
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>
Ohio Tax-Free Income
Service Shares 4.34% 6.03% 3.75% 5.21%
Investor A Shares 4.17 5.80 3.58 4.98
Institutional Shares 4.65 6.46 4.06 5.63
Investor B Shares 3.40 4.72 2.81 3.90
Pennsylvania Tax-Free
Income
Service Shares 5.10% 7.08% 4.80% 6.68%
Investor A Shares 4.96 6.89 4.66 6.47
Institutional Shares 5.40 7.50 5.10 7.08
Investor B Shares 4.16 5.77 3.86 5.36
Intermediate Bond
Service Shares 5.59% N/A 5.29% N/A
Investor A Shares 5.42 N/A 5.12 N/A
Institutional Shares 5.90 N/A 5.60 N/A
Government Income
Investor A Shares 6.81% N/A 6.05% N/A
Investor B Shares 6.04 N/A 5.28 N/A
New Jersey Tax-Free Income
Portfolio
Service Shares 4.41% 6.13% 4.09% 5.68%
Investor A Shares 4.24 5.89 3.92 5.44
Investor B Shares 3.47 4.82 3.15 3.62
International Bond
Portfolio
Service Shares 4.54% N/A 4.14% N/A
Investor A Shares 4.37 N/A 3.97 N/A
Investor B Shares 3.62 N/A 3.22 N/A
Institutional 4.84 N/A 4.40 N/A
Investor C Shares ____ N/A ____ ____
Low Duration Bond
Service Shares 4.43% N/A 4.15% N/A
Investor A Shares 4.26 N/A 3.98 N/A
Institutional Shares 4.73 N/A 4.45 N/A
Core Bond
Service Shares 6.42% N/A 6.13% N/A
Investor A Shares 6.25 N/A 5.96 N/A
Investor B Shares 5.50 N/A 5.21 N/A
Institutional Shares 6.73 N/A 6.44 N/A
</TABLE>
Other Information Regarding Investment Returns. In addition to providing
performance information that demonstrates the total return or yield of shares of
a particular class of a Portfolio
-120-
<PAGE>
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 dividends in a
dividend reinvestment plan or the impact of tax-free investing. As illustrated
below, the Fund may demonstrate, using certain specified hypothetical data, the
compounding effect of dividend reinvestment on investments in a Non-Money Market
Portfolio.
- --------------------------------------------------------------------------------
The Power of Reinvested Dividends
Based on a $10,000 investment in the Lehman Brothers Municipal Bond Index
from January 1, 1980 to June 30, 1991.
[LINE GRAPH APPEARS HERE]
- --------------------------------------------------------------------------------
-121-
<PAGE>
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 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.
-122-
<PAGE>
TABLE 1 - Federal Only
- ------- ------------
<TABLE>
<CAPTION>
Federal TAX-EXEMPT YIELD
1997 Taxable Marginal
Income Bracket Tax Rate* 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
- --------------------------------------------------------------------------------------------------------------------------
Single Return Joint Return
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - $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 1997, 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 1997 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 1997.
-123-
<PAGE>
TABLE 2 - Federal and Pennsylvania
- ------- ------------------------
<TABLE>
<CAPTION>
Approx.
Combined
Federal
and PA TAX-EXEMPT YIELD
1997 Federal Marginal
Taxable Income Bracket Tax Rate* 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
- -----------------------------------------------------------------------------------------------------------------------------
Single Return Joint Return
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - $ 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 1997, 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 1997 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 1997.
-124-
<PAGE>
TABLE 3 - Federal and Ohio
- ------- ----------------
<TABLE>
<CAPTION>
TAX EXEMPT YIELD
-------------------------------------------------------------------
3 3.5 4 4.5 5 5.5 6
1997 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 - 24,650 15% 4.457% 18.79% 3.69% 4.31% 4.93% 5.54% 6.16% 6.77% 7.39%
24,651 - 40,000 28% 4.457% 31.21% 4.36% 5.09% 5.81% 6.54% 7.27% 8.00% 8.72%
40,001 - 59,750 28% 5.201% 31.74% 4.40% 5.13% 5.86% 6.59% 7.33% 8.06% 8.79%
59,751 - 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 - 124,650 31% 6.900% 35.76% 4.67% 5.45% 6.23% 7.01% 7.78% 8.56% 9.34%
124,651 - 200,000 36% 6.900% 40.42% 5.03% 5.87% 6.71% 7.55% 8.39% 9.23% 10.07%
200,001 - 271,050 36% 7.500% 40.80% 5.07% 5.91% 6.76% 7.60% 8.45% 9.29% 10.14%
OVER 271,050 39.6% 7.500% 44.13% 5.37% 6.26% 7.16% 8.05% 8.95% 9.84% 10.74%
</TABLE>
-125-
<PAGE>
<TABLE>
<CAPTION>
1997 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%
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 - 99,600 28% 5.943% 32.28% 4.43% 5.17% 5.91% 6.64% 7.38% 8.12% 8.86%
99,601 - 100,000 31% 5.943% 35.10% 4.62% 5.39% 6.16% 6.93% 7.70% 8.47% 9.25%
100,001 - 151,750 31% 6.900% 35.76% 4.67% 5.45% 6.23% 7.01% 7.78% 8.56% 9.34%
151,751 - 200,000 36% 6.900% 40.42% 5.03% 5.87% 6.71% 7.55% 8.39% 9.23% 10.07%
200,001 - 271,050 36% 7.500% 40.80% 5.07% 5.91% 6.76% 7.60% 8.45% 9.29% 10.14%
OVER 271,050 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. In 1996, due to the state having surplus
revenue, a 6.609% across the board reduction in the Ohio income tax rates for
1996 only was effected pursuant to Ohio Revised Code sections 131.44 and
5747.02. These Mandatory tax rate reduction provisions will expire after 1997.
It is not yet known whether a reduction in the Ohio income tax rates will occur
in 1997. A reduction in Ohio income tax rates, such as the 1996 reduction, has
the effect of reducing the after-tax advantage of Ohio tax-exempt securities
relative to taxable securities. 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
1997, taxpayers with adjusted gross income in excess of a $121,200 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 $121,200 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 1997 is from $121,200 to $243,700 and for married taxpayers filing a
joint return the range is from $181,800 to $304,300. 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 1997.
-126-
<PAGE>
Table 4 - Federal and North Carolina
- ------- --------------------------
<TABLE>
<CAPTION>
Combined
Federal
1997 Taxable North and North
Income Bracket Federal Carolina 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 - 24,650 21,251 - 41,200 15.0% 7.00% 20.950% 3.795% 4.428% 5.060% 5.693% 6.325% 6.958% 7.590%
24,651 - 59,750 41,201 - 99,600 28.0% 7.00% 33.040% 4.480% 5.227% 5.974% 6.720% 7.467% 8.214% 8.961%
59,751 - 60,000 99,601 - 100,000 31.0% 7.00% 35.830% 4.675% 5.454% 6.233% 7.013% 7.792% 8.571% 9.350%
60,001 - 124,650 100,001 - 151,750 31.0% 7.75% 36.348% 4.713% 5.499% 6.284% 7.070% 7.855% 8.641% 9.426%
124,651 - 271,050 151,751 - 271,050 36.0% 7.75% 40.960% 5.081% 5.928% 6.775% 7.622% 8.469% 9.316% 10.163%
Over 271,050 Over 271,050 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
1997, taxpayers with adjusted gross income in excess of $121,200 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 $121,200 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 1997 is from $121,200 to $243,701, and
for married taxpayers filing a joint return the range is from $181,800 to
$304,301. 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 1997.
-127-
<PAGE>
Table 5 - Federal and Virginia
- ------- --------------------
<TABLE>
<CAPTION>
Combined
Federal
1997 Taxable and
Income Bracket Federal Virginia 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.
-128-
<PAGE>
Table 6 - Federal and New Jersey
- ------- ----------------------
<TABLE>
<CAPTION>
Approximate
Combined
Federal
Federal NJ and NJ Tax-Exempt Yield
1997 Taxable Marginal Marginal Marginal
Income Bracket* Tax Rate Tax Rate Tax 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 - 24,650 15.0% 1.750% 16.488% 3.592% 4.191% 4.790% 5.388% 5.987% 6.589% 7.185% 7.783% 8.382%
24,651 - 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 - 59,750 28.0% 5.525% 31.978% 4.410% 5.145% 5.880% 6.616% 7.350% 8.086% 8.820% 9.556% 10.298%
59,751 - 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 - 124,650 31.0% 6.370% 35.395% 4.643% 5.418% 6.191% 6.965% 7.739% 8.513% 9.287% 10.061 10.835%
124,651 - 271,050 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 271,050 39.6% 6.370% 43.447% 5.305% 6.189% 7.073% 7.957% 8.841% 9.725% 10.610% 11.494% 12.378%
Joint Return Taxable Yield - Joint Return
------------
$ 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 - 41,200 15.0% 1.750% 16.488% 3.592% 4.191% 4.790% 5.388% 5.987% 6.589% 7.185% 7.783% 8.382%
40,201 - 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 - 99,600 28.0% 5.525% 31.978% 4.410% 5.145% 5.880% 6.616% 7.350% 8.086% 8.820% 9.556% 10.298%
99,601 - 150,000 31.0% 5.525% 34.812% 4.602% 5.369% 6.136% 6.903% 7.670% 8.437% 9.204% 9.971% 10.738%
150,001 - 151,750 36.0% 5.525% *39.536% 4.961% 5.789% 6.616% 7.442% 8.269% 9.096% 9.923% 10.750 11.577%
151,751 - 271,050 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 271,050 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>
-129-
<PAGE>
* 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 1997, 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 1997 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 1997.
-130-
<PAGE>
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 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
-131-
<PAGE>
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 include lists of representative clients of the
Portfolios' investment adviser and sub-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 at 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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A Portfolio may advertise its current interest rate sensitivity, duration,
weighted average maturity or similar maturity characteristics.
Advertisements and sales materials relating to a Portfolio may include
information regarding the background, experience and expertise of the investment
adviser and/or portfolio manager for the Portfolio.
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, the Index Equity
Portfolio is 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 intends 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
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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 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
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not be an appropriate investment for entities which are "substantial users" of
facilities financed by private activity bonds or "related person" thereof.
"Substantial user" is defined under U.S. Treasury Regulations to include a non-
exempt person who regularly uses a part of such facilities in his trade or
business and (a) whose gross revenues derived with respect to the facilities
financed by the issuance of bonds are more than 5% of the total revenues derived
by all users of such facilities, (b) who occupies more than 5% of the entire
usable area of such facilities, or (c) for whom such facilities or a part
thereof were specifically constructed, reconstructed or acquired. "Related
persons" include certain related natural persons, affiliated corporations, a
partnership and its partners and an S corporation and its shareholders.
In order for the Money and Non-Money Market Municipal Portfolios to pay
exempt interest dividends for any taxable year, at the close of each quarter of
the taxable year at least 50% of the value of each such Portfolio must consist
of exempt interest obligations. Exempt interest dividends distributed to
shareholders are not included in the shareholder's gross income for regular
Federal income tax purposes. However, 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. 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
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taxable year, no deduction generally will be allowed for any interest expense on
indebtedness incurred to purchase or carry shares of such Portfolio.
Individuals and estates that are subject to Ohio personal income tax or
municipal or school district income taxes in Ohio will not be subject to such
taxes on distributions from the Ohio Municipal Money Market Portfolio or Ohio
Tax-Free Income Portfolio to the extent that such distributions are properly
attributable to interest on Ohio State-Specific Obligations or obligations
issued by the U.S. Government, its agencies, instrumentalities or territories if
the interest on such obligations is exempt from state income taxation under the
laws of the United States (collectively with Ohio State-Specific Obligations,
the "Obligations")if (a) the Portfolio continues to qualify as a regulated
investment company for Federal income tax purposes and (b) at all times at least
50% of the value of the total assets of the Portfolio consists of Ohio State-
Specific Obligations or similar obligations of other states or their
subdivisions. 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 dealer in
intangibles tax, provided that, with respect to the Ohio corporation franchise
tax and the Ohio dealer in intangibles tax, the Fund timely files the annual
report required by Section 5733.09 of the Ohio Revised Code. The Ohio Tax
Commissioner, however, has waived this annual filing requirement for each year
(including 1996) since it was originally enacted in 1989. 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, nor included in the net income base of
the Ohio corporation franchise tax.
Distributions of exempt-interest dividends, to the extent attributable to
interest on North Carolina State-Specific 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,
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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.
As a regulated investment company, the Virginia Municipal Money Market
Portfolio may distribute dividends that are exempt from the Virginia income tax
to its shareholders if the Portfolio satisfies all requirements for conduit
treatment under Federal law and, at the close of each quarter of its taxable
year, at least 50% of the value of its total assets consists of obligations the
interest on which is exempt from taxation under Federal law. If the Portfolio
fails to qualify, no part of its dividends will be exempt from the Virginia
income tax. To the extent any portion of the dividends are derived from taxable
interest for Virginia purposes or from net short-term capital gains, such
portion will be taxable to the shareholders as ordinary income. The character
of long-term capital gains realized and distributed by the Portfolio will follow
through to its shareholders regardless of how long the shareholders have held
their shares. Generally, interest on indebtedness incurred by shareholders to
purchase or carry shares of the Portfolio will not be deductible for Virginia
income tax purposes.
To be classified as a qualified investment fund for New Jersey personal
income tax purposes, at least 80% of the investments of the New Jersey Municipal
Money Market Portfolio and New Jersey Tax-Free Income Portfolio must consist of
New Jersey State-Specific Obligations or direct U.S. Government obligations; the
Portfolios must have no investments other than interest-bearing obligations,
obligations issued at a discount, and cash and cash items (including
receivables); and the Portfolios must satisfy certain reporting obligations and
provide certain information to shareholders.
Distributions of investment company taxable income will be taxable (other
than the possible allowance of the dividends received deduction described below)
to shareholders as ordinary income, regardless of whether such distributions are
paid in cash or are reinvested in shares. Shareholders receiving any
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 and
Non-Money Market 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.
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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 marginal 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%.
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 income tax purposes as sold
for their fair market value on the last business day of such year, a process
known as "marking-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
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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 less than three months (the "Short-Short Gain Test"). 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 for purposes of the Short-Short
Gain Test as being derived from a security held for three months or more
regardless of the actual period for which the contract is held if
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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 marking-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 Short-Short Gain 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 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
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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 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
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net income prior to the end of 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 when required to do so
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.
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
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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.
Rule 18f-2 under the 1940 Act provides that any matter required by the
provisions of the 1940 Act or applicable state law, or otherwise, to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Fund shall not be deemed to have been effectively acted upon
unless approved by the holders of a majority of the outstanding shares of each
investment portfolio affected by such matter. Rule 18f-2 further provides that
an investment portfolio shall be deemed to be affected by a matter unless the
interests of each investment portfolio in the matter are substantially identical
or the matter does not affect any interest of the investment portfolio. Under
the Rule, the approval of an investment advisory agreement, a distribution plan
subject to Rule 12b-1 under the 1940 Act or any change in a fundamental
investment policy would be effectively acted upon with respect to an investment
portfolio only if approved by a majority of the outstanding shares of such
investment portfolio. However, the Rule also provides that the ratification of
the appointment of independent accountants, the approval of principal
underwriting contracts and the election of Trustees may be effectively acted
upon by shareholders of the Fund voting together in the aggregate without regard
to a particular investment portfolio.
The proceeds received by each Portfolio for each issue or sale of its
shares, and all net investment income, realized and unrealized gain and proceeds
thereof, subject only to the rights of creditors, will be specifically allocated
to and constitute the underlying assets of that Portfolio. The underlying
assets of each Portfolio will be segregated on the books of account, and will be
charged with the liabilities in respect to that Portfolio and with a share of
the general liabilities of the Fund. As stated in the Prospectuses, certain
expenses of a Portfolio may be charged to a specific class of shares
representing interests in that Portfolio.
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
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<PAGE>
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. The Board of Trustees may authorize the liquidation and
termination of any Portfolio or class of shares. Upon any liquidation of a
Portfolio, Shareholders of each class of the Portfolio are entitled to share pro
rata in the net assets belonging to that class available for distribution.
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 L.L.P. 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 November 30, 1996 owned of record or beneficially 5% or more of
the outstanding shares of a Portfolio which had commenced operations as of that
date was as follows:
Money Market Portfolio: PNC Bank, Attn: Income Collect 76-A-260, Airport
- ----------------------
Business Center/Int'l Court 2, 200 Stevens Dr., Lester, PA 19113, 80.91%; BHC
Securities Inc., One Commerce Square, 2005 Market Street, Philadelphia, PA
19103, 7.12%; U.S. Treasury Money Market Portfolio: PNC Bank, Attn: Income
------------------------------------
Collect 76-A-260, Airport Business Center/Int'l Court 2, 200 Stevens Dr.,
Lester, PA 19113, 20.66%; Municipal Money Market Portfolio: PNC Bank, Attn:
--------------------------------
Income Collect 76-A-260, Airport Business Center/Int'l Court 2, 200 Stevens Dr.,
Lester, PA 19113, 80.18%; PNC Bank Ohio, 201 E. Fifth St., 9th Floor,
Cincinnati, OH 45202, 5.91%; Ohio Municipal Money Market Portfolio: Wayne County
-------------------------------------
National Bank, P.O. Box 757/1776 Beall Avenue, Wooster, OH 44691, 5.30%; BHC
Securities, One Commerce Square, 2005 Market St, Philadelphia, PA 19103, 23.89%;
PNC Bank/Saxon & Co., Mutual Fund Processing, 2nd Floor, P.O. Box 7780-1888,
Philadelphia, PA 19182, 1.66%; PNC Bank, Attn: Income Collect 76-A-260, Airport
Business Center/Int'l Court 2, 200 Stevens Dr., Lester, PA 19113, 52.18%; North
-----
Carolina Municipal Money Market Portfolio: Branch
- -----------------------------------------
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<PAGE>
Banking & Trust Company, P.O. Box 1847, Wilson, NC 27893, 5.21%; United Carolina
Bank Whiteville, P.O. Drawer 632, Whiteville, NC 28472, 21.45%; First Citizens
Bank, P.O. Box 29522, Raleigh, NC 27626, 16.78%; North Carolina Trust Co., 301
North Elm St., P.O. Box 1108, Greensboro, NC 27402, 36.71%; Central Carolina
Bank & Trust Co., P.O. Box 30010, Durham, NC 27702-3010, 5.07%; Pennsylvania
------------
Municipal Money Market Portfolio: PNC Bank, Attn: Income Collect 76-A-260,
- --------------------------------
Airport Business Center/Int'l Court 2, 200 Stevens Dr., Lester, PA 19113,
70.07%; BHC Securities, One Commerce Square, 2005 Market St, Phila., PA 19103,
5.81%; Janney Montgomery Scott, 1801 Market Street, 9th Floor, Philadelphia, PA
19103, 10.54%; Virginia Municipal Money Market Portfolio: First Virginia Bank
-----------------------------------------
Inc., 6400 Arlington Blvd., Falls Church, VA 22042, 49.07%; North Carolina
Trust Co., 301 North Elm St., P.O. Box 1108, Greensboro, NC 27402, 7.88%; PNC
Bank, 200 Stevens Dr., Lester, PA 19113, 21.64%; American National Bank & Trust
Co., 628 Main St., P.O. Box 191, Danville, VA 24543, 6.59%; New Jersey Municipal
--------------------
Money Market Portfolio: PNC Bank, Attn: Income Collect 76-A-260, Airport
- ----------------------
Business Center/Int'l Court 2, 200 Stevens Dr., Lester, PA 19113, 73.11%; Janney
Montgomery Scott, 1801 Market Street, 9th Floor, Phila., PA 19103, 15.34%;
Managed Income Portfolio: PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA
- ------------------------
19113, 90.63%; Government Income Portfolio: BHC Securities, Inc., One Commerce
Square, 2005 Market St., Philadelphia, PA 19103-3212, 17.55%; Tax-Free Income
---------------
Portfolio: PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113, 85.44%; Ohio
- --------- ----
Tax-Free Income Portfolio: PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA
- -------------------------
19113, 62.66%; BHC Securities, Inc., One Commerce Square, 2005 Market Street,
Philadelphia, PA 19103-3212, 25.09%; Pennsylvania Tax-Free Income Portfolio: PNC
--------------------------------------
Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113, 38.65%; BHC Securities,
Inc., One Commerce Square, 2005 Market St., Philadelphia, PA 19103-3212, 30.49%;
New Jersey Tax-Free Income Portfolio: PNC Bank, 200 Stevens Dr., Suite 260,
- ------------------------------------
Lester, PA 19113, 53.14%; BHC Securities, Inc., One Commerce Square, 2005 Market
Street, Philadelphia, PA 19103-3212, 5.40%; Multi-Sector Portfolio: Harris Trust
----------------------
& Savings Bank, Trst Ameritech Pension Trust, 111 West Monroe 5W, Chicago, IL
60603, 99.98%; Intermediate Government Bond Portfolio: PNC Bank, 200 Stevens
--------------------------------------
Dr., Suite 260, Lester, PA 19113, 93.16%; Low Duration Bond Portfolio: PNC Bank,
---------------------------
200 Stevens Dr., Suite 260, Lester, PA 19113, 81.74%; Intermediate Bond
-----------------
Portfolio: PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113, 96.87%; Core
- --------- ----
Bond Portfolio: PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113, 79.98%;
- --------------
International Bond Portfolio: PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA
- ----------------------------
19113, 91.22%; International Emerging Markets Portfolio: PNC Bank, 200 Stevens
----------------------------------------
Dr., Suite 260, Lester, PA 19113, 92.74%; Large Cap Growth Equity Portfolio: PNC
---------------------------------
Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113, 98.07%; Index Equity
------------
Portfolio: PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113, 89.57%; Small
- --------- -----
Cap Value Equity Portfolio: PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA
- --------------------------
19113, 76.00%; Humanay Retirement/Savings Trust, National City Bank Kentucky,
P.O. Box
-146-
<PAGE>
94777, Cleveland, OH 44101, 8.38%; International Equity Portfolio: PNC Bank, 200
------------------------------
Stevens Dr., Suite 260, Lester, PA 19113, 91.01%; Balanced Equity Portfolio:
-------------------------
PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113, 68.15%; BHC Securities,
Inc., 100 N. 20th St., Philadelphia, PA 19103, 18.04%; Large Cap Value Equity
----------------------
Portfolio: PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA 19113, 87.73%; Small
- --------- -----
Cap Growth Equity Portfolio: PNC Bank, 200 Stevens Dr., Suite 260, Lester, PA
- ---------------------------
19113, 80.71%; and Select Equity Portfolio: PNC Bank, 200 Stevens Dr., Suite
-----------------------
260, Lester, PA 19113, 94.55%.
On November 30, 1996, PNC Bank held of record approximately 70% 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,
CastleInternational, PNC Bank and other institutions that are banks or bank
affiliates are subject to such banking laws and regulations.
PAMG, PIMC, BlackRock, PCM, PEAC, CastleInternational and PNC Bank believe
they may perform the services for the Fund contemplated by their respective
agreements with the Fund without violation of applicable banking laws or
regulations. It should be noted, however, that there have been no cases
deciding whether bank and non-bank subsidiaries of a registered bank holding
company may perform services comparable to those that are to be performed by
these companies, and future changes in either Federal or state statutes and
regulations relating to permissible activities of banks and their subsidiaries
or affiliates, as well as further judicial or administrative decisions or
interpretations of present and future statutes and regulations, could prevent
these companies from continuing to perform such services for the Fund. If such
were to occur, it is expected that the Board of Trustees would recommend that
the Fund enter into new agreements or would consider the possible termination of
the Fund. Any new advisory or sub-advisory agreement would
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<PAGE>
normally be subject to shareholder approval. It is not anticipated that any
change in the Fund's method of operations as a result of these occurrences would
affect its net asset value per share or result in a financial loss to any
shareholder.
Shareholder Approvals. As used in this Statement of Additional
Information and in the Prospectuses, 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
Compass Capital Funds. The audited financial statements and notes thereto
in the Fund's Annual Report to Shareholders for the fiscal year ended September
30, 1996 (the "1996 Annual Report") are incorporated in this Statement of
Additional Information by reference. No other parts of the 1996 Annual Report
are incorporated by reference herein. The financial statements included in the
1996 Annual Report have been audited by the Fund's independent accountants,
Coopers & Lybrand, L.L.P., except for the statements of changes in net assets
for the year ended June 30, 1995 for the Core Bond Portfolio and Short
Government Bond Portfolio (now known as Low Duration Bond Portfolio) and the
financial highlights for the periods ended June 30, 1995, 1994 and 1993 for
those same Portfolios which have been audited by other auditors. The reports of
Coopers & Lybrand L.L.P. are incorporated herein by reference. Such financial
statements have been incorporated herein in reliance upon such reports given
upon their authority as experts in accounting and auditing. Additional copies
of the 1996 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.
The financial highlights included in the 1996 Annual Report for each of
the two years in the period ended June 30, 1995, and for the period from July
17, 1992 through June 30, 1993 for the Short Government Bond Portfolio (now
known as the Low Duration Bond Portfolio) and the period from December 9, 1992
through June 30, 1993 for the Core Bond Portfolio, and the statements of changes
in net assets for the year ended June 30, 1995 for those same Portfolios have
been audited by the former independent accountants of the Predecessor BFM
Portfolios, Deloitte & Touche, L.L.P., whose report thereon is also incorporated
herein by
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<PAGE>
reference. Such financial statements have been incorporated herein by reference
in reliance on the reports of Coopers & Lybrand L.L.P. and Deloitte & Touche,
L.L.P. given upon their authority as experts in accounting and auditing.
Index Master Portfolio. The audited financial statements for the U.S.
Large Company Series of The DFA Investment Trust Company (the "Trust") for the
fiscal year ended November 30, 1995 (the "1995 Index Master Report") are
incorporated by reference into this Statement of Additional Information, and the
unaudited financial statements for the Trust's U.S. Large Company Series for the
period ended September 30, 1996 (the "1996 Index Master Report") are included
herein as Appendix C. No other parts of the 1995 Index Master Report or 1996
Index Master Report are incorporated by reference herein. The financial
statements included in the 1995 Index Master Report have been audited by the
Trust's independent accountants, Coopers & Lybrand L.L.P., whose reports thereon
are incorporated herein by reference. Such financial statements have been
incorporated herein by reference in reliance upon such reports given upon their
authority as experts in accounting and auditing. Additional copies of the 1995
Index Master Report and 1996 Index Master Report may be obtained at no charge by
telephoning the Trust at (310) 395-8005.
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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 in
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 generally 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 are 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 which posses a particularly strong credit feature
are 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.
"A3" - Obligations are supported by a satisfactory capacity for timely
repayment.
"B" - Obligations for which there is an uncertainty as to the capacity
to ensure timely repayment.
"C" - Obligations for which there is a high risk of default or which
are currently in default.
A-4
<PAGE>
Corporate and Municipal Long-Term Debt Ratings
- ----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned by
Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay interest and
repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
A-5
<PAGE>
"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 that 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 absence of an "r" symbol
should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are
A-6
<PAGE>
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.
(P)... - When applied to forward delivery bonds, indicates that the
rating is provisional pending delivery of the bonds. The rating may be revised
prior to delivery if changes occur in the legal documents or the underlying
credit quality of the bonds.
A-7
<PAGE>
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols, Aa1, A1, Ba1 and B1.
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt
rated "B" possesses the risk that obligations will not be met when due. Debt
rated "CCC" is well below investment grade and has considerable uncertainty as
to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds rated
in the "AAA" and "AA"
A-8
<PAGE>
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 "BBB" 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, such that adverse changes in business, economic or financial
conditions may increase investment risk, albeit not very significantly.
A-9
<PAGE>
"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
other categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of
these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree of
speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to
denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis with limited incremental risk compared
to issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB"
A-10
<PAGE>
are, however, more vulnerable to adverse developments (both internal and
external) than obligations with higher ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
Municipal Note Ratings
- ----------------------
A Standard and Poor's rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
A-11
<PAGE>
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high quality,
with margins of protection ample although not so large as in the preceding
group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate
quality, carrying specific risk but having protection commonly regarded as
required of an investment security and not distinctly or predominantly
speculative.
"SG" - Loans bearing this designation are of speculative
quality and lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
A-12
<PAGE>
APPENDIX B
As stated in the Prospectus, the Portfolios may enter into certain
futures transactions. Such transactions are described in this Appendix.
I. Interest Rate Futures Contracts
-------------------------------
Use of Interest Rate Futures Contracts. Bond prices are established
--------------------------------------
in both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the future
for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, a Portfolio may use interest rate
futures contracts as a defense, or hedge, against anticipated interest rate
changes and not for speculation. As described below, this would include the use
of futures contract sales to protect against expected increases in interest
rates and futures contract purchases to offset the impact of interest rate
declines.
A Portfolio could accomplish a similar result to that which it hopes
to achieve through the use of futures contracts by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling short-term bonds and investing in
long-term bonds when interest rates are expected to decline. However, because
of the liquidity that is often available in the futures market, the protection
is more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by the Portfolio, by using futures contracts.
Description of Interest Rate Futures Contracts. An interest rate
----------------------------------------------
futures contract sale would create an obligation by a Portfolio, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by a Portfolio, as purchaser, to take delivery of the
specific type of financial instrument at a specific future time at a specific
price. The specific securities delivered or taken, respectively, at settlement
date, would not be determined until at or near that date. The determination
would be in accordance with the rules of the exchange on which the futures
contract sale or purchase was made.
B-1
<PAGE>
Although interest rate futures contracts by their terms call for
actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract sale is effected by the Portfolio
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
of the sale exceeds the price of the offsetting purchase, the Portfolio is
immediately paid the difference and thus realizes a gain. If the offsetting
purchase price exceeds the sale price, the Portfolio pays the difference and
realizes a loss. Similarly, the closing out of a futures contract purchase is
effected by the Portfolio entering into a futures contract sale. If the
offsetting sale price exceeds the purchase price, the Portfolio realizes a gain,
and if the purchase price exceeds the offsetting sale price, the Portfolio
realizes a loss.
Interest rate futures contracts are traded in an auction environment
on the floors of several exchanges -- principally, the Chicago Board of Trade,
the Chicago Mercantile Exchange and the New York Futures Exchange. Each
exchange guarantees performance under contract provisions through a clearing
corporation, a nonprofit organization managed by the exchange membership.
A public market now exists in futures contracts covering various
financial instruments including long-term U.S. Treasury Bonds and Notes;
Government National Mortgage Association (GNMA) modified pass-through mortgage
backed securities; three-month U.S. Treasury Bills; and ninety-day commercial
paper. The Portfolios may trade in any interest rate futures contracts for
which there exists a public market, including, without limitation, the foregoing
instruments.
With regard to each Portfolio, the Adviser also anticipates engaging
in transactions, from time to time, in foreign stock index futures such as the
ALL-ORDS (Australia), CAC-40 (France), TOPIX (Japan) and the FTSE-100 (United
Kingdom).
II. Index Futures Contracts
-----------------------
General. A stock or bond index assigns relative values to the stocks
-------
or bonds included in the index, which fluctuates with changes in the market
values of the stocks or bonds included. Some stock index futures contracts are
based on broad market indexes, such as Standard & Poor's 500 or the New York
Stock Exchange Composite Index. In contrast, certain exchanges offer futures
contracts on narrower market indexes, such as the Standard & Poor's 100 or
indexes based on an industry or market indexes, such as Standard & Poor's 100 or
indexes based on an industry or market segment, such as oil and gas stocks.
Futures
B-2
<PAGE>
contracts are traded on organized exchanges regulated by the Commodity Futures
Trading Commission. Transactions on such exchanges are cleared through a
clearing corporation, which guarantees the performance of the parties to each
contract. With regard to each Portfolio, to the extent consistent with its
investment objective, the Adviser anticipates engaging in transactions, from
time to time, in foreign stock index futures such as the ALL-ORDS (Australia),
CAC-40 (France), TOPIX (Japan) and the FTSE-100 (United Kingdom).
A Portfolio may sell index futures contracts in order to offset a
decrease in market value of its portfolio securities that might otherwise result
from a market decline. A Portfolio may do so either to hedge the value of its
portfolio as a whole, or to protect against declines, occurring prior to sales
of securities, in the value of the securities to be sold. Conversely, a
Portfolio may purchase index futures contracts in anticipation of purchases of
securities. A long futures position may be terminated without a corresponding
purchase of securities.
In addition, a Portfolio may utilize index futures contracts in
anticipation of changes in the composition of its portfolio holdings. For
example, in the event that a Portfolio expects to narrow the range of industry
groups represented in its holdings it may, prior to making purchases of the
actual securities, establish a long futures position based on a more restricted
index, such as an index comprised of securities of a particular industry group.
A Portfolio may also sell futures contracts in connection with this strategy, in
order to protect against the possibility that the value of the securities to be
sold as part of the restructuring of the portfolio will decline prior to the
time of sale.
III. Futures Contracts on Foreign Currencies
---------------------------------------
A futures contract on foreign currency creates a binding obligation on
one party to deliver, and a corresponding obligation on another party to accept
delivery of, a stated quantity of foreign currency, for an amount fixed in U.S.
dollars (or another currency). Foreign currency futures may be used by a
Portfolio to hedge against exposure to fluctuations in exchange rates between
different currencies arising from multinational transactions.
IV. Margin Payments
---------------
Unlike purchase or sales of portfolio securities, no price is paid or
received by a Portfolio upon the purchase or sale of a futures contract.
Initially, a Portfolio will be required to deposit with the broker or in a
segregated account with a custodian an amount of liquid assets known as initial
margin, based on the value of the contract. The nature of
B-3
<PAGE>
initial margin in futures transactions is different from that of margin in
security transactions in that futures contract margin does not involve the
borrowing of funds by the customer to finance the transactions. Rather, the
initial margin is in the nature of a performance bond or good faith deposit on
the contract which is returned to the Portfolio upon termination of the futures
contract assuming all contractual obligations have been satisfied. Subsequent
payments, called variation margin, to and from the broker, will be made on a
daily basis as the price of the underlying instruments fluctuates making the
long and short positions in the futures contract more or less valuable, a
process known as marking-to-the-market. For example, when a particular
Portfolio has purchased a futures contract and the price of the contract has
risen in response to a rise in the underlying instruments, that position will
have increased in value and the Portfolio will be entitled to receive from the
broker a variation margin payment equal to that increase in value. Conversely,
where the Portfolio has purchased a futures contract and the price of the future
contract has declined in response to a decrease in the underlying instruments,
the position would be less valuable and the Portfolio would be required to make
a variation margin payment to the broker. Prior to expiration of the futures
contract, the Adviser may elect to close the position by taking an opposite
position, subject to the availability of a secondary market, which will operate
to terminate the Portfolio's position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid by or released to the Portfolio, and the Portfolio realizes a loss or
gain.
V. Risks of Transactions in Futures Contracts
------------------------------------------
There are several risks in connection with the use of futures by a
Portfolio as a hedging device. One risk arises because of the imperfect
correlation between movements in the price of the futures and movements in the
price of the instruments which are the subject of a hedge. The price of the
future may move more than or less than the price of the instruments being
hedged. If the price of the futures moves less than the price of the
instruments which are the subject of the hedge, the hedge will not be fully
effective but, if the price of the instruments being hedged has moved in an
unfavorable direction, the Portfolio would be in a better position than if it
had not hedged at all. If the price of the instruments being hedged has moved
in a favorable direction, this advantage will be partially offset by the loss on
the futures. If the price of the futures moves more than the price of the
hedged instruments, the Portfolio involved will experience either a loss or gain
on the futures which will not be completely offset by movements in the price of
the instruments which are the subject of the hedge. To compensate for the
imperfect correlation of movements in the price of instruments being hedged and
movements in the price of
B-4
<PAGE>
futures contracts, a Portfolio may buy or sell futures contracts in a greater
dollar amount than the dollar amount of instruments being hedged if the
volatility over a particular time period of the prices of such instruments has
been greater than the volatility over such time period of the futures, or if
otherwise deemed to be appropriate by the Adviser. Conversely, a Portfolio may
buy or sell fewer futures contracts if the volatility over a particular time
period of the prices of the instruments being hedged is less than the volatility
over such time period of the futures contract being used, or if otherwise deemed
to be appropriate by the Adviser. It is also possible that, where a Portfolio
has sold futures to hedge its portfolio against a decline in the market, the
market may advance and the value of instruments held in the Portfolio may
decline. If this occurred, the Portfolio would lose money on the futures and
also experience a decline in value in its portfolio securities.
When futures are purchased to hedge against a possible increase in the
price of securities or a currency before a Portfolio is able to invest its cash
(or cash equivalents) in an orderly fashion, it is possible that the market may
decline instead; if the Portfolio then concludes not to invest its cash at that
time because of concern as to possible further market decline or for other
reasons, the Portfolio will realize a loss on the futures contract that is not
offset by a reduction in the price of the instruments that were to be purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
instruments being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortion in the
futures market, and because of the imperfect correlation between the movements
in the cash market and movements in the price of futures, a correct forecast of
general market trends or interest rate movements by the adviser may still not
result in a successful hedging transaction over a short time frame.
B-5
<PAGE>
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the
Portfolios intend to purchase or sell futures only on exchanges or boards of
trade where there appear to be active secondary markets, there is no assurance
that a liquid secondary market on any exchange or board of trade will exist for
any particular contract or at any particular time. In such event, it may not be
possible to close a futures investment position, and in the event of adverse
price movements, a Portfolio would continue to be required to make daily cash
payments of variation margin. However, in the event futures contracts have been
used to hedge portfolio securities, such securities will not be sold until the
futures contract can be terminated. In such circumstances, an increase in the
price of the securities, if any, may partially or completely offset losses on
the futures contract. However, as described above, there is no guarantee that
the price of the securities will in fact correlate with the price movements in
the futures contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary market
in a futures contract may be adversely affected by "daily price fluctuation
limits" established by commodity exchanges which limit the amount of fluctuation
in a futures contract price during a single trading day. Once the daily limit
has been reached in the contract, no trades may be entered into at a price
beyond the limit, thus preventing the liquidation of open futures positions.
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 activity, which could at times make it difficult or
impossible to liquidate existing positions or to recover excess variation margin
payments.
Successful use of futures by a Portfolio is also subject to the
Adviser's ability to predict correctly movements in the direction of the market.
For example, if a particular 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
offsetting losses in its futures positions. In addition, in such situations, if
the 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
B-6
<PAGE>
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.
VI. Options on Futures Contracts
----------------------------
A Portfolio may purchase and write options on the futures contracts
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of the
option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer,
of an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing an option of the same series,
at which time the person entering into the closing transaction will realize a
gain or loss. A Portfolio will be required to deposit initial margin and
variation margin with respect to put and call options on futures contracts
written by it pursuant to brokers' requirements similar to those described
above. Net option premiums received will be included as initial margin
deposits. As an example, in anticipation of a decline in interest rates, a
Portfolio may purchase call options on futures contracts as a substitute for the
purchase of futures contracts to hedge against a possible increase in the price
of securities which the Portfolio intends to purchase. Similarly, if the value
of the securities held by a Portfolio is expected to decline as a result of an
increase in interest rates, the Portfolio might purchase put options or sell
call options on futures contracts rather than sell futures contracts.
Investments in futures options involve some of the same considerations
that are involved in connection with investments in futures contracts (for
example, the existence of a liquid secondary market). In addition, the purchase
or sale of an option also entails the risk that changes in the value of the
underlying futures contract will not correspond to changes in the value of the
option purchased. Depending on the pricing of the option compared to either the
futures contract upon which it is
B-7
<PAGE>
based, or upon the price of the securities or currencies being hedged, an option
may or may not be less risky than ownership of the futures contract or such
securities or currencies. In general, the market prices of options can be
expected to be more volatile than the market prices on the underlying futures
contract. Compared to the purchase or sale of futures contracts, however, the
purchase of call or put options on futures contracts may frequently involve less
potential risk to a Portfolio because the maximum amount at risk is the premium
paid for the options (plus transaction costs). The writing of an option on a
futures contract involves risks similar to those risks relating to the sale of
futures contracts.
VII. Other Matters
-------------
Accounting for futures contracts will be in accordance with generally
accepted accounting principles.
B-8
<PAGE>
APPENDIX C
THE DFA INVESTMENT TRUST COMPANY
THE U.S. LARGE COMPANY SERIES
Ten Months Ended September 30, 1996
(Unaudited)
Year Ended November 30, 1995
C-1
<PAGE>
The DFA Investment Trust Company
The U.S. Large Company Series
Ten Months Ended September 30, 1996
(Unaudited)
Year Ended November 30, 1995
Table of Contents
Page
------
Statements of Net Assets................................. C-3
Statements of Operations................................. C-16
Statements of Changes in Net Assets...................... C-17
Financial Highlights..................................... C-18
Notes to Financial Statements............................ C-19
This report is submitted for the information of the Fund's shareholders. It is
not authorized for distribution to prospective investors unless preceded or
accompanied by an effective prospectus.
C-2
<PAGE>
THE DFA INVESTMENT TRUST COMPANY
STATEMENTS OF NET ASSETS
THE U.S. LARGE COMPANY SERIES
<TABLE>
<CAPTION>
September 30, 1996 November 30, 1995
-------------------- --------------------
(Unaudited)
Shares Value+ Shares Value+
------ ------ ------ ------
<S> <C> <C> <C> <C>
COMMON STOCKS - (99.7% and 99.50%, respectively)
AMP, Inc. ..................................... 16,904 $ 655,030 4,640 $ 186,180
AMR Corp. ..................................... 6,900 549,413 * 1,800 137,925 *#
AON Corp. ..................................... 8,250 447,563 - -
AT & T Corp. .................................. 124,939 6,528,063 34,219 2,258,454
Abbott Laboratories............................ 60,500 2,979,625 17,100 694,687
Advanced Micro Devices, Inc. .................. 10,500 154,875 * 2,300 47,150
Aetna, Inc. ................................... 11,537 811,916 2,500 183,438
Ahmanson (H.F.) & Co. ......................... 8,800 246,400 2,500 66,875 #
Air Products & Chemicals, Inc. ................ 8,500 495,125 2,500 138,750
Airtouch Communications, Inc. ................. 38,300 1,058,038 * 10,700 311,637 *
Alberto-Culver Co. Class B. ................... 2,100 91,088 200 6,450
Albertson's Inc. .............................. 19,500 821,438 5,500 169,125
Alcan Aluminum, Ltd. .......................... 17,500 525,000 4,900 162,312
Alco Standard Corp. ........................... 9,800 488,775 2,200 95,700
Alexander & Alexander Services, Inc. .......... 3,500 58,188 900 19,687
Allegheny Teledyne, Inc. ...................... 13,600 307,700 * - -
Allergan, Inc. ................................ 4,900 186,813 1,200 37,200
AlliedSignal, Inc. ............................ 21,900 1,442,663 6,100 288,225
Allstate Corp. ................................ 34,227 1,685,680 9,838 403,357
Alltel Corp. .................................. 14,500 404,188 4,200 123,900
Aluminium Co. of America ...................... 13,700 808,300 3,800 222,300
Alza Corp. .................................... 6,400 172,000 * 1,600 36,800 *
Amdahl Corp. .................................. 9,100 85,881 * 2,600 24,700 *
Amerada Hess Corp. ............................ 7,100 375,413 2,100 99,750 #
American Brands, Inc. ......................... 13,600 574,600 4,200 175,350
American Electric Power Co., Inc. ............. 14,500 589,063 4,100 154,262
American Express Co. .......................... 37,400 1,729,750 10,500 446,250
American General Corp. ........................ 16,100 607,775 4,500 152,437 #
American Greetings Corp. Class A. ............. 5,700 163,519 1,600 43,700
American Home Products Corp. .................. 49,300 3,142,875 6,600 602,250
American International Group, Inc. ............ 36,362 3,663,472 10,300 924,425
American Stores Co. ........................... 11,500 460,000 3,300 86,625
Ameritech Corp. ............................... 42,900 2,257,613 12,000 660,000
Amgen, Inc. ................................... 20,600 1,301,663 * 5,600 278,250 *
Amoco Corp. ................................... 38,400 2,707,200 10,800 731,700
Andrew Corp. .................................. 4,562 227,530 * 750 32,531 *
Anheuser-Busch Companies, Inc. ................ 39,200 1,474,900 5,400 357,750
Apple Computer, Inc. .......................... 9,700 215,219 2,600 99,287
Applied Materials, Inc. ....................... 14,000 387,625 * 4,000 194,250 *
Archer-Daniels Midland Co. .................... 42,178 811,927 11,692 201,687
Armco, Inc. ................................... 8,200 36,900 * 2,300 13,225 *
Armstrong World Industries, Inc. .............. 2,800 174,650 900 53,887
</TABLE>
C-3
<PAGE>
THE DFA INVESTMENT TRUST COMPANY
THE U.S. LARGE COMPANY SERIES
(Continued)
<TABLE>
<CAPTION>
September 30, 1996 November 30, 1995
-------------------- --------------------
(Unaudited)
Shares Value+ Shares Value+
------ ------ ------ ------
<S> <C> <C> <C> <C>
Asarco, Inc. .................................. 3,450 $ 91,856 1,100 $ 38,912
Ashland, Inc. ................................. 4,900 194,775 1,400 48,825
Atlantic Richfield Co. ........................ 12,300 1,568,250 3,500 379,313
Autodesk, Inc. ................................ 3,600 93,375 1,200 42,450
Automatic Data Processing, Inc. ............... 22,400 977,200 3,100 246,837
Avery Dennison Corp. .......................... 4,000 222,000 1,200 57,150
Avon Products, Inc. ........................... 10,500 521,063 1,400 101,675
Baker Hughes, Inc. ............................ 10,900 331,088 3,100 63,162
Ball Corp. .................................... 2,400 58,800 600 17,175
Bally Entertainment Corp. ..................... 3,800 107,825 * 1,200 14,550 *
Baltimore Gas & Electric Co. .................. 11,350 296,519 3,050 81,206 #
Banc One Corp. ................................ 34,711 1,423,151 8,502 324,139
Bank of Boston Corp. .......................... 12,100 700,288 2,400 111,300
Bank of New York Co., Inc. .................... 30,000 881,250 4,000 188,500
BankAmerica Corp. ............................. 28,168 2,313,297 8,156 518,926
Bankers Trust New York Corp. .................. 6,100 479,613 1,800 16,775
Bard (C.R.), Inc. ............................. 4,400 136,950 1,300 37,537
Barnett Banks, Inc. ........................... 14,400 486,000 2,200 132,275
Barrick Gold Corp. ............................ 27,500 690,938 7,800 205,725
Battle Mountain Gold Co. ...................... 17,400 134,850 - -
Bausch & Lomb, Inc. ........................... 4,400 161,700 1,400 50,575
Bay Networks, Inc. ............................ 14,400 392,400 * - -
Baxter International, Inc. .................... 21,000 981,750 6,100 256,200
Becton Dickinson & Co. ........................ 9,800 433,650 1,600 111,600
Bell Atlantic Corp. ........................... 33,700 2,017,788 9,500 598,500
Bellsouth Corp. ............................... 77,200 2,856,400 21,600 839,700
Bemis Co., Inc. ............................... 4,100 138,888 1,300 33,962
Beneficial Corp. .............................. 4,300 247,250 1,200 60,900
Bethlehem Steel Corp. ......................... 8,700 87,000 * 2,500 35,000 *
Beverly Enterprises............................ 7,700 83,738 * 2,000 23,250 *
Biomet, Inc. .................................. 8,900 144,625 * 2,500 46,094 *
Black & Decker Corp. .......................... 6,800 282,200 2,000 74,750
Block (H.&R.), Inc. ........................... 7,900 235,025 2,400 106,800
Boatmen's Bancshares, Inc. .................... 12,300 686,494 2,800 108,150
Boeing Co. .................................... 27,200 2,570,400 7,400 539,275
Boise Cascade Corp. ........................... 3,900 132,600 1,200 44,700
Boston Scientific Corp. ....................... 13,600 782,000 * 3,300 133,650 *
Briggs & Stratton Corp. ....................... 2,300 102,063 800 33,300
Bristol Myers Squibb Co. ...................... 38,900 3,748,988 11,000 882,750
Brown Group, Inc. ............................. - - 400 5,600
Brown-Forman Corp. Class B. ................... 5,300 207,363 900 34,312
Browning-Ferris Industries, Inc. .............. 16,500 412,500 4,700 141,587
Brunswick Corp. ............................... 7,500 180,000 2,200 47,025
Burlington Northern Santa Fe Corp. ............ 11,637 981,872 3,089 249,051
</TABLE>
C-4
<PAGE>
THE DFA INVESTMENT TRUST COMPANY
THE U.S. LARGE COMPANY SERIES
(Continued)
<TABLE>
<CAPTION>
September 30, 1996 November 30, 1995
-------------------- -------------------
(Unaudited)
Shares Value+ Shares Value+
------ ------ ------ ------
<S> <C> <C> <C> <C>
Burlington Resources, Inc. .................... 9,900 $ 439,313 2,800 $ 107,800
CIGNA Corp. ................................... 5,800 695,275 1,700 187,000
CPC International, Inc. ....................... 11,100 831,113 3,100 213,125
CSX Corp. ..................................... 16,400 828,200 2,200 192,775
CUC International, Inc. ....................... 19,100 761,613 * 3,800 144,400 *
Cabletron Systems, Inc. ....................... 5,800 395,850 * 1,500 124,500 *
Caliber Systems, Inc. ......................... 2,900 46,763 - -
Campbell Soup Co. ............................. 19,300 1,505,400 5,500 307,312
Capital Cities ABC, Inc. ...................... - - 3,300 407,962
Carolina Power & Light Co. .................... 11,600 400,200 3,400 111,775
Case Corp. .................................... 5,700 277,875 - -
Caterpillar, Inc. ............................. 15,100 1,138,163 4,400 270,050
Centex Corp. .................................. 2,300 75,038 800 26,300
Central & South West Corp. .................... 16,200 421,200 4,100 110,187
Ceridian Corp. ................................ 5,200 260,000 * 800 33,600
Champion International Corp. .................. 7,300 334,888 2,100 98,962
Charming Shoppes, Inc. ........................ 8,000 47,750 * 2,200 5,156
Chase Manhattan Corp. ......................... 33,996 2,723,930 3,700 225,238
Chemical Banking Corp. ........................ - - 5,298 317,880
Chevron Corp. ................................. 50,800 3,181,350 14,100 696,187
Chrysler Corp. ................................ 57,600 1,648,800 8,400 435,750
Chubb Corp. ................................... 13,700 630,200 2,000 194,500
Cincinnati Milacron, Inc. ..................... 3,100 58,513 600 15,675
Cinergy Corp. ................................. 12,293 379,546 3,418 100,831
Circuit City Stores, Inc. ..................... 7,400 267,325 2,200 63,800
Cisco Sytems, Inc. ............................ 50,000 3,103,125 * 5,900 496,706 *
Citicorp....................................... 37,400 3,389,375 9,000 636,750
Clorox Co. .................................... 4,100 393,088 1,100 83,325
Coastal Corp. ................................. 8,050 332,063 2,200 73,150
Coca-Cola Co. ................................. 193,300 9,834,138 27,300 2,067,975 #
Colgate-Palmolive Co. ......................... 11,200 973,000 3,000 219,750
Columbia Gas System, Inc. ..................... 4,200 235,200 1,000 43,250 *
Columbia/HCA Healthcare Corp. ................. 34,455 1,959,628 # 9,455 488,114
Comcast Corp. Class A Special.................. 18,550 286,366 4,200 82,687
Comerica, Inc. ................................ 8,900 458,350 - -
Community Psychiatric Centers.................. 3,538 33,169 * 900 10,012
Compaq Computer Corp. ......................... 20,700 1,327,388 * 5,700 282,150 *
Computer Associates International, Inc. ....... 27,975 1,671,506 5,250 343,875
Computer Sciences Corp. ....................... 5,700 438,188 * 1,300 94,575 *
Conagra, Inc. ................................. 18,850 928,363 5,350 213,331
Conrail, Inc. ................................. 6,000 434,250 1,700 118,787
Consolidated Edison Co. of New York, Inc. .... 18,200 505,050 5,100 147,262
Consolidated Freightways, Inc. ................ 3,500 85,750 800 21,000
Consolidated Natural Gas Co. .................. 7,100 380,738 2,000 88,750
Cooper Industries, Inc. ....................... 8,200 354,650 2,300 83,950
</TABLE>
C-5
<PAGE>
THE DFA INVESTMENT TRUST COMPANY
THE U.S. LARGE COMPANY SERIES
(Continued)
<TABLE>
<CAPTION>
September 30, 1996 November 30, 1995
-------------------- -------------------
(Unaudited)
Shares Value+ Shares Value+
------ ------ ------ ------
<S> <C> <C> <C> <C>
Cooper Tire & Rubber Co. ...................... 6,600 $ 142,725 1,800 $ 44,325
Coors (Adolph) Co. Class B. ................... 3,100 68,006 1,000 20,375
Corestates Financial Corp. .................... 17,200 743,900 3,000 116,250
Corning, Inc. ................................. 17,900 698,100 4,900 147,612
Crane Co. ..................................... 2,400 106,500 500 17,062
Cray Research, Inc. ........................... - - 500 12,000 *
Crown Cork & Seal Co., Inc. ................... 9,800 452,025 1,900 79,562 *
Cummins Engine Co., Inc. ...................... 3,300 129,938 700 27,475 #
Cyprus Amax Minerals Co., Inc. ................ 7,250 155,875 2,100 57,750
DSC Communications Corp. ...................... 9,000 226,688 * 2,500 98,906 *
DTE Energy Co. ................................ 11,200 313,600 - -
Dana Corp. .................................... 8,000 242,000 2,100 61,425
Darden Restaurants, Inc. ...................... 12,300 106,088 * 3,400 39,525
Data General Corp. ............................ 3,100 43,400 * 1,000 12,125 *
Dayton-Hudson Corp. ........................... 16,800 555,400 1,700 123,462
Dean Witter, Discover & Co. ................... 12,977 713,735 3,566 181,866
Deere & Co. ................................... 20,300 852,600 5,700 187,387
Dell Computer Corp. ........................... 7,000 544,250 * - -
Delta Air Lines, Inc. ......................... 6,100 439,200 1,000 77,625
Deluxe Corp. .................................. 6,300 237,825 1,600 44,200
Detroit Edison Co. ............................ - - 3,200 104,400 #
Dial Corp. .................................... - - 2,100 56,700
Digital Equipment Corp. ....................... 11,700 418,275 * 3,200 188,400 *
Dillard Department Stores, Inc. Class A. ...... 8,900 287,025 2,300 66,412
Disney (Walt) Co. ............................. 52,800 3,346,200 11,200 673,400 #
Dominion Resources, Inc. VA. .................. 13,800 520,950 3,850 152,556
Donnelley (R.R.) & Sons Co. ................... 11,800 380,550 3,300 126,637
Dover Corp. ................................... 8,700 415,425 2,400 93,300
Dow Chemical Co. .............................. 19,400 1,556,850 5,800 411,075
Dow Jones & Co., Inc. ......................... 7,400 273,800 1,900 72,913
Dresser Industries, Inc. ...................... 13,900 413,525 3,900 92,137
DuPont (E.I.) de Nemours & Co. ................ 43,300 3,821,225 12,000 798,000
Duke Power Co. ................................ 15,900 741,338 4,500 201,937
Dun & Bradstreet Corp. ........................ 13,000 775,125 3,800 237,025
E G & G, Inc. ................................. 3,700 66,138 1,300 25,025
EMC Corp. MA. ................................. 17,900 404,988 * - -
Eastern Enterprises ........................... 1,700 64,175 300 9,750
Eastman Chemical Co. .......................... 6,050 353,169 1,625 106,641
Eastman Kodak Co. ............................. 26,700 2,095,950 7,400 503,200
Eaton Corp. ................................... 5,900 356,213 1,800 98,100
Echlin, Inc. .................................. 4,700 147,463 1,400 51,100
Echo Bay Mines, Ltd. .......................... 10,900 96,056 2,500 25,937
Ecolab, Inc. .................................. 5,100 172,125 1,300 37,375
Edison International .......................... 34,200 611,325 - -
Emerson Electric Co. .......................... 17,400 1,568,175 4,900 382,200
Engelhard Corp. ............................... 11,074 254,702 3,037 70,990
</TABLE>
C-6
<PAGE>
THE DFA INVESTMENT TRUST COMPANY
THE U.S. LARGE COMPANY SERIES
(Continued)
<TABLE>
<CAPTION>
September 30, 1996 November 30, 1995
-------------------- --------------------
(Unaudited)
Shares Value+ Shares Value+
------ ------ ------ ------
<S> <C> <C> <C> <C>
Enron Corp. ................................... 19,400 $ 790,550 5,500 $ 206,250
Enserch Corp. ................................. 5,200 108,550 1,500 23,250
Entergy Corp. ................................. 17,700 477,900 4,800 133,800
Exxon Corp. ................................... 96,100 8,000,325 26,900 2,081,387
FMC Corp. ..................................... 2,800 190,050 * 600 44,325 *
FPL Group, Inc. ............................... 14,300 618,475 4,000 173,500
Federal Express Corp. ......................... 4,400 348,700 * 1,100 82,225 *
Federal Home Loan Mortgage Corp................ 13,900 1,360,463 3,800 292,600
Federal National Mortgage Association.......... 84,600 2,950,425 6,000 657,000
Federal Paper Board Co., Inc. ................. - - 1,000 52,000
Federated Department Stores, Inc. ............. 16,100 539,350 * 3,900 113,587 *#
Fifth Third Bancorp............................ 7,800 453,375 - -
First Bank System, Inc. ....................... 10,800 722,250 2,900 149,712
First Chicago NBD Corp. ....................... 24,393 1,103,783 # 1,800 125,100
First Data Corp. .............................. 17,300 1,412,113 2,500 177,500 #
First Fidelity Bancorp......................... - - 1,600 117,400
First Interstate Bancorp....................... - - 1,500 201,000
First Union Corp. ............................. 22,040 1,471,170 3,600 196,650
Fleet Financial Group, Inc. ................... 20,364 906,198 3,200 133,600
Fleetwood Enterprises, Inc. ................... 2,600 79,950 800 19,200
Fleming Companies, Inc. ....................... 2,800 48,650 900 20,812
Fluor Corp. ................................... 6,400 393,600 1,800 117,000
Ford Motor Co. ................................ 91,800 2,868,750 23,300 658,225
Foster Wheeler Corp. .......................... 3,250 142,188 600 23,700
Freeport McMoran Copper & Gold, Inc. Class B. . 14,900 465,625 3,000 81,375 *
Fruit of The Loom, Inc. Class A. .............. 5,800 179,800 * 1,300 25,187 *
GPU, Inc. ..................................... 9,200 282,900 - -
GTE Corp. ..................................... 75,200 2,895,200 21,000 895,125
Gannett Co., Inc. ............................. 11,000 774,125 2,900 176,900
Gap, Inc. ..................................... 22,300 643,913 3,000 135,750
General Dynamics Corp. ........................ 4,800 330,600 1,200 71,550
General Electric Co. .......................... 128,200 11,666,128 36,400 2,447,900
General Instrument Corp. ...................... 9,880 244,530 * - -
General Mills, Inc. ........................... 12,200 736,575 3,400 187,425
General Motors Corp. .......................... 58,700 2,817,600 16,100 780,850
General Public Utilities Corp. ............... - - 2,400 75,900
General RE Corp. .............................. 6,200 878,850 1,900 284,287
General Signal Corp. .......................... 3,800 167,200 1,200 38,700
Genuine Parts Co. ............................. 9,550 417,813 2,550 102,956
Georgia-Pacific Corp. ......................... 7,000 553,875 2,000 155,500
Giant Food, Inc. Class A. ..................... 4,600 156,400 1,400 45,150
Giddings & Lewis, Inc. ........................ 2,750 32,313 900 14,119
Gillette Co. .................................. 34,700 2,502,738 9,700 503,187
Golden West Financial Corp. ................... 4,700 274,363 1,200 61,350
Goodrich (B.F.) Co. ........................... 4,100 185,013 500 35,062
Goodyear Tire & Rubber Co. .................... 12,100 558,113 3,400 144,075
Grace (W.R.) & Co. ............................ 7,500 562,500 2,200 133,650
</TABLE>
C-7
<PAGE>
<TABLE>
<CAPTION>
THE DFA INVESTMENT TRUST COMPANY
THE U.S. LARGE COMPANY SERIES
(Continued)
September 30, 1996 November 30, 1995
------------------ -----------------
(Unaudited)
Shares Value+ Shares Value+
------ ------ ------ ------
<S> <C> <C> <C> <C>
Grainger (W.W.), Inc....................... 4,100 $ 288,025 1,000 $ 66,875
Great Atlantic & Pacific Tea Co., Inc...... 3,000 77,625 700 15,312
Great Lakes Chemical Corp.................. 4,900 279,300 1,500 106,687
Great Western Financial Corp............... 10,600 280,900 3,000 76,500
Green Tree Financial Corp.................. 10,500 412,125 - -
HFS, Inc................................... 9,200 615,250 * - -
Halliburton Co............................. 9,000 464,625 2,400 104,100
Handleman Co............................... - - 600 3,750
Harcourt General, Inc...................... 5,623 310,671 1,423 57,276
Harland (John H.) Co....................... 2,450 73,500 500 10,312
Harnischfeger Industries, Inc.............. 3,676 138,769 900 30,488
Harrahs Entertainment, Inc................. 8,000 149,000 2,200 54,725 *
Harris Corp................................ 3,000 195,375 700 40,337
Hasbro, Inc................................ 6,650 246,881 1,750 53,375
Heinz (H.J.) Co............................ 28,450 960,188 8,100 258,188
Helmerich & Payne, Inc..................... 2,000 87,250 400 10,900
Hercules, Inc.............................. 8,300 454,425 2,300 126,212
Hershey Foods Corp......................... 11,800 592,950 1,700 104,975
Hewlett-Packard Co......................... 79,100 3,856,125 11,000 911,625
Hilton Hotels Corp......................... 15,200 431,300 1,000 64,625
Home Depot, Inc............................ 37,248 2,118,480 10,366 459,991
Homestake Mining Co........................ 11,300 165,263 2,900 47,850
Honeywell, Inc............................. 9,700 612,313 2,900 138,112
Household International, Inc............... 7,400 608,650 2,200 137,500
Houston Industries, Inc.................... 20,300 449,138 2,900 132,675
Humana, Inc................................ 12,400 251,100 * - -
ITT Corp................................... 9,200 401,350 * 2,500 306,563
ITT Hartford Group, Inc.................... 9,200 542,800 - -
ITT Industries, Inc........................ 9,000 217,125 - -
Illinois Tool Works, Inc................... 9,100 656,338 2,400 152,100
Inco, Ltd.................................. 13,100 402,825 2,600 92,625
Ingersoll-Rand Co.......................... 8,300 394,250 2,400 92,100
Inland Steel Industries, Inc............... 3,900 69,713 1,100 28,737
Intel Corp................................. 63,700 6,079,369 17,800 1,082,463
Intergraph Corp............................ 3,700 40,238 * 800 13,800 *
International Business Machines Corp....... 42,000 5,229,000 12,400 1,198,150
International Flavors & Fragrances, Inc.... 8,500 370,813 2,500 127,812
International Paper Co..................... 23,000 977,500 5,400 205,875
Interpublic Group of Companies, Inc........ 6,000 283,500 1,800 69,075
James River Corp. of Virginia.............. 6,700 185,088 # 1,600 50,400 #
Jefferson-Pilot Corp....................... 5,450 282,038 850 60,350
Johnson & Johnson.......................... 103,300 5,294,125 14,000 1,212,750
Johnson Controls, Inc...................... 3,100 232,500 700 48,475
Jostens, Inc............................... 3,200 66,800 800 19,800
</TABLE>
C-8
<PAGE>
<TABLE>
<CAPTION>
THE DFA INVESTMENT TRUST COMPANY
THE U.S. LARGE COMPANY SERIES
(Continued)
September 30, 1996 November 30, 1995
------------------ -----------------
(Unaudited)
Shares Value+ Shares Value+
------ ------ ------ ------
<S> <C> <C> <C> <C>
K Mart Corp.................... 37,200 $ 381,300 9,900 $ 76,725 #
Kaufman & Broad Home Corp...... 3,100 40,300 600 7,800
Kellogg Co..................... 16,500 1,136,438 4,600 351,325
Kerr-McGee Corp................ 3,800 231,325 1,300 75,238
Keycorp........................ 18,000 792,000 4,900 180,688
Kimberly Clark Corp............ 21,742 1,916,014 3,400 261,375
King World Productions, Inc.... 3,000 110,625 * 600 23,775 *
Knight Ridder, Inc............. 7,600 281,200 1,100 70,950
Kroger Co...................... 9,500 425,125 * 2,600 87,100 *
LSI Logic Corp................. 9,800 227,850 * - -
Laidlaw, Inc. Class B
Non-Voting.................... 24,200 266,200 5,000 46,250
Lilly (Eli) & Co............... 42,600 2,747,700 6,000 597,000
Limited, Inc................... 20,900 399,713 7,600 135,850
Lincoln National Corp.......... 8,200 359,775 2,200 102,850
Liz Claiborne, Inc............. 5,600 208,600 1,500 44,063
Lockheed Martin Corp........... 15,457 1,393,062 4,404 323,144
Loews Corp..................... 9,100 704,113 1,200 184,200
Longs Drug Stores Corp......... 1,700 73,950 300 11,925
Loral Corp..................... - - 3,700 125,338
Louisiana Land & Exploration
Co............................ 2,500 131,563 600 23,400
Louisiana-Pacific Corp......... 8,300 188,825 2,400 64,800 #
Lowe's Companies, Inc.......... 13,400 547,725 3,600 113,400
Luby's Cafeterias, Inc......... 1,950 46,800 500 11,000
Lucas Varity P.L.C. Sponsored
ADR........................... 4,126 162,461 * - -
Lucent Technologies, Inc....... 5,000 229,375 - -
MBNA Corp...................... 17,325 602,044 3,200 129,200
MCI Communications Corp........ 53,300 1,362,481 14,700 392,306
MGIC Investment Corp........... 4,500 303,188 - -
Mallinckrodt Group, Inc........ 5,700 237,263 1,500 51,188
Manor Care, Inc................ 4,800 184,200 1,450 47,306
Marriott International, Inc.... 10,000 551,250 2,600 96,850
Marsh & McLennan Companies,
Inc........................... 5,500 534,188 1,500 130,125
Masco Corp..................... 12,300 369,000 3,500 103,250
Mattel, Inc.................... 21,452 555,071 4,800 134,400
May Department Stores Co....... 19,300 938,463 5,400 235,575
Maytag Corp.................... 8,000 156,000 2,400 48,900
McDermott International, Inc... 4,200 91,350 1,300 23,563
McDonalds Corp................. 54,000 2,558,250 # 15,000 669,375
McDonnell Douglas Corp......... 17,200 903,000 2,300 204,988
McGraw-Hill Companies, Inc..... 7,700 328,213 1,200 100,500
Mead Corp...................... 4,000 234,500 1,300 74,263
Medtronic, Inc................. 18,100 1,160,663 5,000 274,375
Mellon Bank Corp............... 10,450 619,163 3,100 165,850
Melville Corp.................. 8,000 353,000 2,400 74,700
</TABLE>
C-9
<PAGE>
<TABLE>
<CAPTION>
THE DFA INVESTMENT TRUST COMPANY
THE U.S. LARGE COMPANY SERIES
(Continued)
September 30, 1996 November 30, 1995
------------------ -----------------
(Unaudited)
Shares Value+ Shares Value+
------ ------ ------ ------
<S> <C> <C> <C> <C>
Mercantile Stores Co., Inc............ 2,900 $ 156,600 600 $ 27,900
Merck & Co., Inc...................... 94,500 6,650,438 26,800 1,658,250
Meredith Corp......................... 2,300 113,563 700 27,563
Merrill Lynch & Co., Inc.............. 13,100 859,688 3,700 205,813
Micron Technology, Inc................ 16,100 491,050 4,600 251,850
Microsoft Corp........................ 46,400 6,116,100 * 12,700 1,105,694 *
Millipore Corp........................ 3,500 138,250 800 29,800
Minnesota Mining & Manufacturing Co... 32,700 2,284,913 9,000 589,500
Mobil Corp............................ 30,400 3,518,800 8,700 908,063
Monsanto Co........................... 45,500 1,660,750 2,600 297,700
Moore Corp., Ltd...................... 7,800 143,325 2,300 41,113
Morgan (J.P.) & Co., Inc.............. 14,600 1,297,575 4,100 321,850
Morgan Stanley Group, Inc............. 11,700 582,075 1,800 155,250
Morrison Knudsen Corp................. - - 600 3,600 #
Morton International, Inc............. 11,300 449,175 3,200 110,800
Motorola, Inc......................... 46,200 2,385,075 12,800 784,000
NBD Bancorp, Inc...................... - - 3,450 132,394
Nacco Industries, Inc. Class A........ 600 28,650 100 5,700
Nalco Chemical Co..................... 5,300 192,125 1,500 45,938
National City Corp.................... 17,100 720,338 3,200 103,600
National Semiconductor Corp........... 10,600 213,325 * 2,600 55,575 *
National Service Industries, Inc...... 3,900 136,500 1,000 32,500
NationsBank Corp...................... 23,171 2,012,981 5,824 415,688
Navistar International Corp........... 5,970 50,745 * 1,450 15,769 *
New York Times Class A................ 7,700 259,875 2,100 61,950
Newell Co............................. 12,400 372,000 3,400 89,675
Newmont Mining Corp................... 7,615 359,809 1,723 74,304
Niagra Mohawk Power Corp.............. 11,100 88,800 3,000 29,625
Nicor, Inc............................ 3,900 131,625 900 22,838
Nike, Inc. Class B.................... 11,200 1,360,800 2,200 127,600
Noram Energy Corp..................... 10,300 153,213 2,700 21,263
Nordstrom, Inc........................ 6,200 235,988 1,900 74,813
Norfolk Southern Corp................. 9,700 886,338 2,900 228,375
Northern States Power Co. MN.......... 5,200 242,450 1,300 61,100
Northern Telecom, Ltd................. 19,900 1,149,225 5,500 222,063
Northrop Grumman Corp................. 4,400 353,100 1,000 61,500
Norwest Corp.......................... 28,200 1,152,675 6,900 227,700
Novell, Inc........................... 28,200 311,963 * 8,100 136,181 *
Nucor Corp............................ 6,800 345,100 2,000 99,750
Nynex Corp............................ 33,600 1,461,600 9,200 456,550
Occidental Petroleum Corp............. 24,600 575,025 7,000 154,875 #
Ogden Corp............................ - - 1,200 25,500
Ohio Edison Co........................ 11,700 226,688 3,300 75,075 #
Oneok, Inc............................ 2,200 60,500 400 9,400
Oracle Systems Corp................... 50,975 2,169,623 * 9,450 428,203 *
Oryx Energy Co........................ 8,100 143,775 * 2,100 27,563 *
</TABLE>
C-10
<PAGE>
<TABLE>
<CAPTION>
THE DFA INVESTMENT TRUST COMPANY
THE U.S. LARGE COMPANY SERIES
(Continued)
September 30, 1996 November 30, 1995
------------------ -----------------
(Unaudited)
Shares Value+ Shares Value+
------ ------ ------ ------
<S> <C> <C> <C> <C>
Outboard Marine Corp........... - - 300 $ 6,150
Owens-Corning Fiberglas Corp... 4,000 $ 147,500 * 900 39,938 *
PECO Energy Co................. 17,200 408,500 4,800 139,200
PNC Bank Corp.................. 26,250 876,094 5,100 149,175 #
PP &L Resources, Inc........... 12,200 266,875 - -
PPG Industries, Inc............ 14,700 799,313 4,500 204,188
Paccar, Inc.................... 3,060 167,918 760 33,440
PacifiCorp..................... 22,700 468,188 6,200 121,675 #
Pacific Enterprises............ 6,300 190,575 2,000 53,500
Pacific Gas & Electric Co...... 32,100 698,175 9,100 250,250
Pacific Telesis Group.......... 33,000 1,109,625 9,300 279,000
Pall Corp...................... 8,766 247,640 2,600 70,525
Panenergy Corp................. 11,500 398,188 - -
Panhandle Eastern Corp......... - - 3,100 87,963 #
Parker-Hannifin Corp........... 5,650 237,300 1,500 55,125
Penney (J.C.) Co., Inc......... 17,400 941,775 4,800 225,000
Pennzoil Co.................... 3,500 185,063 1,000 39,625
Peoples Energy Corp............ 2,600 88,400 700 21,350
Pep Boys -- Manny, Moe & Jack.. 4,800 171,000 1,400 37,100
Pepsico, Inc................... 121,700 3,438,025 17,100 944,775 #
Perkin Elmer Corp.............. 3,500 202,563 1,100 39,600
Pfizer, Inc.................... 49,700 3,932,513 13,600 788,800
Pharmacia & Upjohn, Inc........ 39,380 1,624,425 5,365 192,469
Phelps Dodge Corp.............. 5,100 327,038 1,600 108,600
Philip Morris Companies, Inc... 64,100 5,752,975 18,200 1,597,050
Phillips Petroleum Co.......... 20,300 867,825 5,700 189,525
Pioneer Hi-Bred International,
Inc........................... 6,300 381,150 1,800 103,050
Pitney Bowes, Inc.............. 11,500 606,625 3,200 143,200
Pittston Co. Services Group.... - - 700 21,350
Placer Dome, Inc............... 18,500 437,063 5,300 131,175
Polaroid Corp.................. 3,700 162,800 800 36,900
Potlatch Corp.................. 2,300 89,125 600 24,225
Praxair, Inc................... 11,800 507,400 3,000 87,375
Premark International, Inc..... - - 1,300 66,300
Price/Costco, Inc.............. 15,203 312,612 * 4,165 69,503 *
Procter & Gamble Co............ 53,416 5,208,060 14,900 1,286,988
Providian Corp................. 7,200 309,600 2,200 88,275
Public Service Enterprise
Group, Inc.................... 18,900 505,575 5,200 154,050
Pulte Corp..................... 1,900 48,688 700 21,525
Quaker Oats Co................. 10,400 380,900 3,000 104,250
Ralston Purina Group........... 8,100 554,850 2,300 147,200
Raychem Corp................... 3,400 255,000 900 46,800
Raytheon Co.................... 18,500 1,029,063 5,600 249,200
Reebok International, Ltd...... 4,800 166,800 1,600 41,600
Republic New York Corp......... 4,300 297,238 1,200 75,600
Reynolds Metals Co............. 4,900 250,513 1,500 86,625
Rite Aid Corp.................. 6,400 232,000 1,900 59,375
</TABLE>
C-11
<PAGE>
<TABLE>
<CAPTION>
THE DFA INVESTMENT TRUST COMPANY
THE U.S. LARGE COMPANY SERIES
(Continued)
September 30, 1996 November 30, 1995
------------------ -----------------
(Unaudited)
Shares Value+ Shares Value+
------ ------ ------ ------
<S> <C> <C> <C> <C>
Roadway Services, Inc.......... - - 700 $ 35,175
Rockwell International Corp.... 16,900 $ 952,738 4,800 235,200
Rohm & Haas Co................. 5,000 327,500 1,600 96,400
Rowan Companies, Inc........... 6,700 124,788 2,000 15,000 *
Royal Dutch Petroleum Co....... 41,700 6,510,413 11,500 1,476,313
Rubbermaid, Inc................ 11,600 284,200 3,500 96,250
Russell Corp................... 3,100 99,975 700 18,638
Ryans Family Steak Houses, Inc. 4,200 31,631 * 1,300 9,669 *
Ryder System, Inc.............. 6,000 177,750 1,700 40,588 #
SBC Communications, Inc........ 47,500 2,285,938 13,100 707,400
SCE Corp....................... - - 9,800 153,125
Safeco Corp.................... 9,700 338,288 1,400 99,663
Safety Kleen Corp.............. 4,500 74,250 1,300 18,525
Saint Jude Medical, Inc........ 6,050 244,647 * 1,800 71,213 *
Saint Paul Companies, Inc...... 6,500 360,750 1,700 95,200
Salomon, Inc................... 8,000 365,000 2,400 87,300 #
Santa Fe Energy Resources, Inc. 7,080 100,890 * 2,100 19,425 *
Santa Fe Pacific Corp.......... 10,054 125,675 2,803 33,636
Sara Lee Corp.................. 37,200 1,329,900 10,300 332,175
Schering-Plough Corp........... 28,400 1,746,600 8,200 470,475
Schlumberger, Ltd.............. 18,800 1,588,600 5,100 323,850
Scientific-Atlanta, Inc........ 5,800 92,075 1,500 23,813
Scott Paper Co................. - - 3,400 194,225
Seagate Technology, Inc........ 8,000 447,000 * - -
Seagram Co., Ltd............... 28,800 1,076,400 8,200 299,300
Sears, Roebuck & Co............ 30,200 1,351,450 8,400 330,750
Service Corp. International.... 18,200 550,550 1,950 79,219
Shared Medical Systems Corp.... 1,900 107,944 700 30,231
Shawmut National Corp.......... - - 2,600 97,500
Sherwin-Williams Co............ 6,500 301,438 1,800 71,325
Shoney's, Inc.................. 3,900 35,588 * 700 7,525 *#
Sigma-Aldrich Corp............. 3,900 223,031 1,200 59,250
Silicon Graphics, Inc.......... 12,700 280,988 * 3,500 127,750 *
Snap-On, Inc................... 6,300 202,388 1,000 44,250
Sonat, Inc..................... 6,700 296,475 1,700 54,825
Southern Co.................... 51,700 1,169,713 14,400 329,400 #
Southwest Airlines Co.......... 11,100 253,913 3,200 80,000
Springs Industries, Inc. Class
A............................. 1,450 64,525 600 25,200
Sprint Corp.................... 33,600 1,306,200 7,400 296,000
Stanley Works.................. 6,700 188,438 800 40,500
Stone Container Corp........... 7,700 120,313 2,114 33,031
Stride Rite Corp............... 3,900 35,100 1,000 8,750
Sun Company, Inc............... 5,800 133,400 1,600 44,400 #
Sun Microsystems............... 14,020 870,116 * 2,200 185,350 *
Suntrust Banks, Inc............ 17,600 721,600 2,600 177,450
Supervalu, Inc................. 5,200 143,000 1,600 51,600
Sysco Corp..................... 13,900 467,388 3,800 116,375
</TABLE>
C-12
<PAGE>
<TABLE>
<CAPTION>
THE DFA INVESTMENT TRUST COMPANY
THE U.S. LARGE COMPANY SERIES
(Continued)
September 30, 1996 November 30, 1995
------------------ -----------------
(Unaudited)
Shares Value+ Shares Value+
------ ------ ------ ------
<S> <C> <C> <C> <C>
TJX Companies, Inc. .......... 5,500 $ 197,313 1,600 $ 26,600
TRW, Inc. .................... 5,000 465,000 1,300 97,338
Tandem Computers, Inc. ....... 9,000 96,750 * 2,400 30,000 *
Tandy Corp. .................. 4,615 186,331 1,515 72,152
Tektronix, Inc. .............. 2,600 106,275 900 48,488
Tele-Communications, Inc.
Class A...................... 50,400 752,850 * 12,300 228,319 *
Teledyne, Inc. ............... - - 1,300 31,525
Tellabs, Inc. ................ 6,800 480,250 * 2,000 79,000 *
Temple-Inland, Inc. .......... 4,200 221,550 1,300 58,988
Tenet Healthcare Corp. ....... 16,500 367,125 * 4,400 78,650 *
Tenneco, Inc. ................ 13,500 676,688 3,900 187,200
Texaco, Inc. ................. 20,400 1,876,800 5,700 421,800
Texas Instruments, Inc. ...... 14,700 810,338 4,000 231,500
Texas Utilities Co. .......... 17,500 693,438 4,900 188,650
Textron, Inc. ................ 6,400 544,000 2,000 153,250
Thomas & Betts Corp. ......... 3,300 135,300 400 29,350
Three COM Corp. .............. 13,000 780,813 * - -
Time Warner, Inc. ............ 30,260 1,168,793 8,360 334,400
Times Mirror Co. Class A...... 8,100 360,450 2,400 78,000
Timken Co. ................... 2,500 98,125 500 20,188
Torchmark Corp. .............. 5,450 250,019 1,550 65,875
Toys 'R' Us, Inc. ............ 21,100 614,538 * 6,000 139,500 *
Transamerica Corp. ........... 5,200 363,350 1,400 107,275
Travelers Group, Inc. ........ 36,448 1,790,508 6,852 407,694
Tribune Co. .................. 4,700 366,600 1,300 83,850
Trinova Corp. ................ 2,300 72,450 800 24,600
Tupperware Corp. ............. 4,700 230,300 * - -
Tyco International, Ltd. ..... 11,900 513,188 3,600 112,950
UNUM Corp. ................... 5,700 365,513 1,700 92,013
US Bancorp.................... 12,400 489,800 2,150 72,966
US Healthcare, Inc. .......... - - 3,600 164,025
US West, Inc. ................ 36,700 1,091,825 10,100 315,625
US West, Inc. Media Group
Class........................ 36,300 612,563 * 20,200 363,600 *
USAir Group, Inc. ............ 4,800 79,200 * 1,400 18,725 *
USF&G Corp. .................. 9,100 168,350 2,300 39,675
USLIFE Corp. ................. 2,725 81,750 750 21,656
UST, Inc. .................... 15,200 450,300 4,300 140,288
USX-Marathon Group, Inc. ..... 22,200 480,075 6,300 115,763
USX-US Steel Group............ 6,320 180,120 1,620 52,853
Unicom Corp., Inc. ........... 16,700 419,588 4,500 144,000
Unilever NV................... 12,500 1,970,313 3,500 465,063
Union Camp Corp. ............. 5,400 263,925 1,400 68,775
Union Carbide Corp. .......... 10,200 465,375 3,100 122,838
Union Electric Co. ........... 7,800 287,625 2,300 92,288
Union Pacific Corp. .......... 19,000 1,391,750 # 4,300 291,325
</TABLE>
C-13
<PAGE>
<TABLE>
<CAPTION>
THE DFA INVESTMENT TRUST COMPANY
THE U.S. LARGE COMPANY SERIES
(Continued)
September 30, 1996 November 30, 1995
------------------ -----------------
(Unaudited)
Shares Value+ Shares Value+
------ ------ ------ ------
<S> <C> <C> <C> <C>
Unisys Corp............................... 13,200 $ 80,850 * 3,800 $ 24,700 *
United Healthcare Corp.................... 14,200 591,075 3,700 232,638
United States Surgical Corp............... 4,900 208,250 1,100 27,638
United Technologies Corp.................. 9,300 1,117,163 2,600 243,750
Unocal Corp............................... 19,100 687,600 5,500 147,813
VF Corp................................... 4,900 294,613 1,300 67,600
Varity Corp............................... - - 1,000 38,750 *
Viacom, Inc. Class B...................... 28,534 1,012,957 * 6,221 300,163 *
WMX Technologies, Inc..................... 38,000 1,249,250 10,400 306,800
Wachovia Corp............................. 12,900 638,550 3,800 171,000
Wal-Mart Stores, Inc...................... 177,900 4,692,113 49,600 1,190,400
Walgreen Co............................... 19,100 706,700 5,500 160,188
Warner-Lambert Co......................... 21,000 1,386,000 2,900 258,825
Wells Fargo & Co.......................... 7,399 1,923,740 900 189,225
Wendy's International, Inc................ 9,700 208,550 2,300 47,438
Western Atlas, Inc........................ 4,100 255,225 * 1,300 62,238 *
Westinghouse Electric Corp................ 32,100 597,863 7,900 133,313
Westvaco Corp............................. 7,750 229,594 2,150 58,856
Weyerhaeuser Co........................... 15,400 710,325 4,500 203,625
Whirlpool Corp............................ 5,700 288,563 1,500 83,250
Whitman Corp.............................. 8,300 191,938 2,400 52,800
Williamette Industries, Inc............... 4,300 280,575 1,200 72,900
Williams Companies, Inc................... 7,957 405,807 2,300 96,600 #
Winn-Dixie Stores, Inc.................... 11,700 408,038 1,600 102,600
Woolworth Corp............................ 10,300 212,438 * 2,800 42,000 #
Worldcom, Inc............................. 29,920 643,280 * - -
Worthington Industries, Inc............... 6,875 138,789 2,075 40,981
Wrigley (Wm.) Jr. Co...................... 8,900 536,225 2,600 122,525
Xerox Corp................................ 25,000 1,340,625 * 2,300 315,388
Yellow Corp............................... 2,300 30,188 800 9,550
Zurn Industries, Inc...................... - - 200 4,900
---------------- ---------
TOTAL COMMON STOCKS (Cost $299,439,341 and
$68,158,757, respectively)................ $404,182,897 $96,600,848
------------ -----------
</TABLE>
C-14
<PAGE>
THE DFA INVESTMENT TRUST COMPANY
THE U.S. LARGE COMPANY SERIES
(Continued)
<TABLE>
<CAPTION>
September 30, 1996 November 30, 1995
------------------ -----------------
(Unaudited)
Face Face
Amount Value+ Amount Value+
------ ------ ------ ------
(000) (000)
<S> <C> <C> <C> <C>
TEMPORARY CASH INVESTMENTS -- (0.2% and 0.1%,
respectively)
Repurchase Agreement, PNC Securities Corp.
5.40%, 10/01/96 (Collateralized by U.S.
Treasury Notes, 6.000%, 08/31/97)
(Cost $690,000).............................. $ 690 $690,000
---------
Repurchase Agreement, PNC Securities Corp.
5.65%, 12/01/95 (Collateralized by U.S.
Treasury Notes, 6.125%, 05/31/97)
(Cost $140,000).............................. $ 140 $140,000
---------
TOTAL INVESTMENTS -- (99.9% and 99.6%,
respectively)
(Cost $300,129,341 and $68,298,757,
respectively)............................... 404,872,897 96,740,848
----------- -----------
OTHER ASSETS AND LIABILITIES -- (0.1% and
0.4%, respectively)
Other Assets................................. 848,757 407,035
Payable for Investment Securities Purchased.. (224,475) -
Payable for Fund Shares Redeemed............. (273,232) -
Other Liabilities............................ (19,417) (29,506)
------------ -----------
(331,633) 377,529
--------- --------
NET ASSETS -- (100.0%)**...................... $405,204,530 $97,118,377
============ ===========
NET ASSET VALUE, OFFERING
AND REDEMPTION PRICE PER SHARE $13.48
=====
</TABLE>
- -----------------------------------------
+ See Note B to Financial Statements.
* Non-Income Producing Securities
# Securities on Loan
** Applicable to 7,203,088 Outstanding $.01 Par Value Shares (Unlimited Number
of Shares Authorized) at November 30, 1995
See accompanying Notes to Financial Statements
C-15
<PAGE>
THE DFA INVESTMENT TRUST COMPANY
THE U.S. LARGE COMPANY SERIES
STATEMENTS OF OPERATIONS
(Amounts in thousands)
<TABLE>
<CAPTION>
Ten Months Year
Ended Ended
Sept. 30, Nov. 30,
1996 1995
----------- ---------
(Unaudited)
<S> <C> <C>
Investment Income
Dividends.............................................. $ 3,964 $ 1,944
Interest.............................................. 78 40
Income From Securities Lending......................... 6 -
------- -------
Total Investment Income........................... 4,048 1,984
------- -------
Expenses
Investment Advisory Services........................... 44 19
Accounting & Transfer Agent Fees....................... 56 75
Custodian's Fee........................................ 48 29
Legal Fees............................................. 58 2
Audit Fees............................................. 6 2
Shareholders' Reports.................................. 3 3
Trustees' Fees and Expenses............................ 1 1
Other.................................................. 10 7
------- -------
Total Expenses.................................... 226 138
Less: Expenses Reimbursed............................. - (119)
------- -------
Net Expenses........................................... 226 19
------- -------
Net Investment Income............................. 3,822 1,965
------- -------
Net Realized and Unrealized Gain (Loss) on Investments
Net Realized Gain on Investment Securities.............. 709 172
Change in Unrealized Appreciation (Depreciation)
of Investment Securities.............................. 21,479 21,274
------- -------
Net Gain on Investment Securities..................... 22,188 21,446
------- -------
Net Increase in Net Assets Resulting from Operations.... $26,010 $23,411
======= =======
</TABLE>
See accompanying Notes to Financial Statements
C-16
<PAGE>
THE DFA INVESTMENT TRUST COMPANY
THE U.S. LARGE COMPANY SERIES
STATEMENTS OF CHANGES IN NET ASSETS
(Amounts in thousands)
<TABLE>
<CAPTION>
Ten Months Year Year
Ended Ended Ended
Sept. 30, Nov. 30, Nov. 30,
1996 1995 1994
----------- --------- ---------
(Unaudited)
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income...................... $ 3,822 $ 1,965 $ 1,224
Net Realized Gain (Loss) on Investment
Securities................................ 709 172 (43)
Change in Unrealized Appreciation
(Depreciation) of Investment Securities... 21,479 21,274 (687)
-------- ------- -------
Net Increase in Net Assets Resulting
from Operations...................... 26,010 23,411 494
-------- ------- -------
Distributions From:
Net Investment Income...................... (1,215) (1,886) (1,252)
Net Realized Gains......................... (685) - (33)
-------- ------- -------
Total Distributions................... (1,900) (1,886) (1,285)
-------- ------- -------
Capital Share Transactions (1):
Shares Issued.............................. 32,324 31,424 16,588
Shares Issued in Lieu of Cash
Distributions............................. 1,744 1,585 1,173
Shares Redeemed............................ (10,535) (6,073) (6,166)
-------- ------- -------
Net Increase from Capital Share
Transactions......................... 23,533 26,936 11,595
-------- ------- -------
Transactions in Interest (1):
Contributions.............................. 283,520 - -
Withdrawals................................ (23,076) - -
-------- ------- -------
Net Increase from Transactions in
Interest............................. 260,444 - -
-------- ------- -------
Total Increase........................ 308,087 48,461 10,804
Net Assets
Beginning of Period........................ 97,118 48,657 37,853
-------- ------- -------
End of Period.............................. $405,205 $97,118 $48,657
======== ======= =======
(1) Shares Issued and Redeemed:
Shares Issued.............................. 2,257 2,738 1,612
Shares Issued in Lieu of Cash
Distributions............................. 121 135 114
Shares Redeemed............................ (754) (484) (597)
-------- ------- -------
1,624 2,389 1,129
======== ======= =======
- ----------------------
</TABLE>
(1) Capital Share Transaction and Shares Issued and Redeemed are reported
through May 31, 1996. Effective June 1, 1996, the Series was reorganized as
a partnership.
See accompanying Notes to Financial Statements
C-17
<PAGE>
THE DFA INVESTMENT TRUST COMPANY
THE U.S. LARGE COMPANY SERIES
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Ten Months Year Year Feb. 8
Ended Ended Ended to
Sept. 30, Nov. 30, Nov. 30, Nov. 30,
1996 1995 1994 1993
----------- ------------ ------------ -----------
(Unaudited)
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period (2)... $ 13.48 $ 10.11 $ 10.27 $ 10.00
-------- ------- ------- --------
Income from Investment Operations (2)
- ---------------------------------
Net Investment Income ................... 0.15 0.30 0.28 0.24
Net Gains (Losses) on Securities
(Realized and Unrealized)............... 1.41 3.36 (0.14) 0.26
-------- ------- ------- --------
Total from Investment Operations......... 1.56 3.66 0.14 0.50
-------- ------- ------- --------
Less Distributions (2)
- ------------------
Net Investment Income.................... (0.16) (0.29) (0.29) (0.23)
Net Realized Gains....................... (0.08) - (0.01) -
-------- ------- ------- --------
Total Distributions...................... (0.24) (0.29) (0.30) (0.23)
-------- ------- ------- --------
Net Asset Value, End of Period (2)......... $ 14.80 $ 13.48 $ 10.11 $ 10.27
======== ======= ======= ========
Total Return (2)........................... 11.60%# 36.77% 1.30% 5.05%#
Net Assets, End of Period (thousands)...... $405,205 $97,118 $48,657 $ 37,853
Ratio of Expenses to Average Net Assets.... 0.13%* 0.02%(a) 0.02%(a) 0.02%*(a)
Ratio of Net Investment Income to Average
Net Assets................................ 2.15%* 2.61%(a) 2.83%(a) 2.87%*(a)
Portfolio Turnover Rate.................... 11.64%* 2.38% 8.52% 34.36%*
Average Commission Rate (1)................ $ 0.0216 N/A N/A N/A
</TABLE>
- -----------------------------
*Annualized
#Non-Annualized
(1) Computed by dividing the total amount of brokerage commissions paid by the
total shares of investment securities purchased and sold during the period
for which commissions were charged, as required by the SEC for fiscal years
beginning after September 1, 1995.
(2) Items calculated through May 31, 1996. Effective June 1, 1996, the Series
was reorganized as a partnership, and these items are no longer applicable.
(a) Had certain reimbursements not been in effect the ratios of expenses to
average net assets for the periods ended November 30, 1995, 1994 and 1993
would have been 0.18%, 0.33% and 0.48%, respectively, and the ratios of net
investment income to average net assets for the periods ended November 30,
1995, 1994 and 1993, would have been 2.45%, 2.52% and 2.41%, respectively.
See accompanying Notes to Financial Statements
C-18
<PAGE>
THE DFA INVESTMENT TRUST COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
A. Organization:
The DFA Investment Trust Company (the "Trust") is an open-end management
investment company registered under the Investment Company Act of 1940. At
September 30, 1996, The Trust consisted of fifteen investment portfolios: The
U.S. 6-10 Small Company Series, The U.S. Large Company Series, The Enhanced U.S.
Large Company Series, The U.S. Small Cap Value Series, The U.S. Large Cap Value
Series, The DFA One-Year Fixed Income Series, The DFA Two-Year Corporate Fixed
Income Series, The DFA Two-Year Government Series, The Japanese Small Company
Series, The Pacific Rim Small Company Series, The United Kingdom Small Company
Series, The Continental Small Company Series, The DFA International Value
Series, The Emerging Markets Series and The DFA Two-Year Global Fixed Income
Series. At November 30, 1995, The DFA Two-Year Corporate Fixed Income Series,
The DFA Two-Year Government Series, The Japanese Small Company Series, The
Pacific Rim Small Company Series, The United Kingdom Small Company Series, The
Continental Small Company Series and The DFA Two-Year Global Fixed Income Series
had not yet commenced operations. These financial statements relate solely to
The U.S. Large Company Series (the "Series").
On June 1, 1996, the Series was reorganized from an entity taxed as a
corporation to an entity taxed as a partnership for income tax purposes. This
reorganization was accomplished by an amendment to the organization document of
the Series which for income tax purposes was treated as a liquidation of the
Series, immediate distribution of its assets to its sole shareholder at May 31,
1996, which was The U.S. Large Company Portfolio (the "Portfolio") and
subsequent contribution of those assets from the Portfolio, along with a nominal
contribution from the Advisor to this Series to create the partnership.
On June 2, 1996, an unrelated investment company contributed assets valued
at $225,957,696 to the Series in exchange for a 63.4% interest in the Series.
The total net assets of the Series increased to $356,632,854 immediately
following this transaction.
These transactions are expected to be tax-free events to all parties
involved based on rulings obtained from the Internal Revenue Service.
For financial reporting purposes, the Series continues to exist and as such,
will maintain all of its previous operating history throughout the financial
statements.
B. Significant Accounting Policies:
The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such policies
are consistently followed by the Trust in preparation of its financial
statements. The preparation of financial statements in accordance with generally
accepted accounting principles may require management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
1. Security Valuation: Securities held by the Series which are listed on a
securities exchange and for which market quotations are readily available are
valued at the last quoted sale price of the day, or if there is no such reported
sale, at the mean between the most recent bid and asked prices. Price
information on listed securities is taken from the exchange where the security
is primarily traded. Unlisted securities for which market quotations are
readily available are valued at the mean between the most recent bid and asked
prices. The value of securities for which no quotations are readily available
are determined in good faith at fair value using methods determined by the Board
of Directors.
2. Federal Income Taxes: Prior to June 1, 1996, the Series qualified as a
regulated investment company and distributed all of its taxable income.
Accordingly, no provision for federal taxes was required in the financial
statements prior to that time. Effective June 1, 1996, the Series is treated as
a partnership for federal income tax purposes. Any interest, dividends and
gains or losses of the Series will be deemed to have been "passed through" to
its Feeder Funds.
C-19
<PAGE>
3. Repurchase Agreements: The Series may purchase money market instruments
subject to the seller's agreement to repurchase them at an agreed upon date and
price. The seller will be required on a daily basis to maintain the value of
the collateral subject to the agreement at not less than the repurchase price
(including accrued interest). The agreements are conditioned upon the
collateral being deposited under the Federal Reserve book-entry system or with
the Fund's custodian or a third party sub-custodian. All repurchase agreements
were entered into on September 30, 1996 or November 30, 1995.
4. Other: Security transactions are accounted for on the date the securities
are purchased or sold. Costs used in determining realized gains and losses on
the sale of investment securities are those of specific securities sold.
Dividend income and distributions to shareholders are recorded on the ex-
dividend date. Interest income is recorded on the accrual basis. Expenses
directly attributable to a Series are directly charged. Common expenses are
allocated using methods determined by the Board of Directors.
C. Investment Advisor:
Dimensional Fund Advisors Inc. (the "Advisor") provides investment advisory
services to the Series. For the ten months ended September 30, 1996 and the
year ended November 30, 1995, the Series' advisory fees were computed daily and
paid monthly to the Advisor based on an effective annual rate of 0.025 of 1%.
Through November 30, 1995, the Advisor had agreed to bear all of the
ordinary operating expenses of the Series except for the advisory fee. Effective
December 1, 1995, the Series is obligated to bear all of its expenses including
its advisory fee.
Certain officers of the Series are also officers, directors and shareholders
of the Advisor.
D. Purchases and Sales of Securities:
The Series made the following purchases and sales of investment securities
(amounts in thousands):
<TABLE>
<CAPTION>
Ten Months Year
Ended Ended
Sept. 30, Nov. 30,
1996 1995
----------- --------
(Unaudited)
<S> <C> <C>
Purchases.................................. $250,332 $26,675
Sales...................................... 20,037 1,770
</TABLE>
C-20
<PAGE>
E. Investment Transactions:
The gross unrealized appreciation and depreciation for financial reporting
and federal income tax purposes of investment securities was as follows (amounts
in thousands):
<TABLE>
<CAPTION>
Ten Months Year
Ended Ended
Sept. 30, Nov. 30,
1996 1995
----------- ---------
(Unaudited)
<S> <C> <C>
Gross Unrealized Appreciation........... $109,728 $28,997
Gross Unrealized Depreciation........... (4,984) (555)
-------- -------
Net..................................... $104,744 $28,442
======== =======
</TABLE>
At November 30, 1995, the Series had a capital loss carryover of
approximately $172,000 for federal income tax purposes expiring on November 30,
2001.
F. Components of Net Assets:
At November 30, 1995, net assets consisted of (amounts in thousands):
<TABLE>
<CAPTION>
<S> <C>
Paid-In Capital........................... $69,255
Undistributed Net Investment Income....... 97
Undistributed Net Realized Gain........... (676)
Unrealized Appreciation of Investment
Securities............................... 28,442
-------
$97,118
=======
</TABLE>
G. Securities Lending
Loans of domestic securities are required at all times to be secured by
collateral at least equal to 102% of the market value of the securities on loan.
However, in the event of default or bankruptcy by the other party to the
agreement, realization and/or retention of the collateral may be subject to
legal proceedings. In the event that the borrower fails to return loaned
securities, and cash collateral being maintained by the borrower is insufficient
to cover the value of loaned securities, and provided such collateral
insufficiency is not the result of investment losses, the lending agent has
agreed to pay the amount of the shortfall to the Series or, at the option of the
lending agent, replace the loaned securities. The market value of securities on
loan to brokers from the Series and the related collateral cash, and
indemnification received as follows:
<TABLE>
<CAPTION>
Ten Months Year
Ended Ended
Sept. 30, Nov. 30,
1996 1995
------------ ----------
(Unaudited)
<S> <C> <C>
Value of Securities on Loan.............. $3,808,137 $6,064,020
Value of Collateral and Indemnification.. 3,884,300 6,262,200
</TABLE>
C-21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
The DFA Investment Trust Company:
We have audited the accompanying statement of net assets of The U.S. Large
Company Series of The DFA Investment Trust Company as of November 30, 1995, and
the related statement of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the periods presented. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion of these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatements. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosure in the financial
statements. Our procedures included confirmation of investments owned as of
November 30, 1995, by correspondence with the custodians and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all materials respects, the financial position of The
U.S. Large Company Series of The DFA Investment Trust Company as of November 30,
1995, and the results of its operations for the year then ended, the changes in
its net assets for each of the two years in the period then ended, and its
financial highlights for each of the periods presented, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
January 19, 1996
C-22
