PCS CASH FUND, INC.
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PROSPECTUS
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PCS Money Market Portfolio
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PCS Tax-Free
Money Market Portfolio
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PCS Government Obligations
Money Market Portfolio
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November 1, 1995
<PAGE>
No person has been authorized to give any information or to make any
representations not contained in this Prospectus or in the Fund's Statement of
Additional Information incorporated herein by reference, in connection with the
offering made by this Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the Fund or
its Distributor. This Prospectus does not constitute an offering by the Fund or
by the Distributor in any jurisdiction in which such offering may not lawfully
be made.
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CONTENTS
Page
------
Introduction ....................................................... 2
Financial Highlights ............................................... 4
Investment Objectives and Policies ................................. 6
Purchase and Redemption of Shares .................................. 15
Management ......................................................... 19
Distribution of Shares ............................................. 20
Dividends and Distributions ........................................ 21
Taxes .............................................................. 21
Performance Information ............................................ 22
Description of Shares .............................................. 23
Other Information .................................................. 23
INVESTMENT ADVISOR
Morgan Stanley Asset Management Inc.
New York, New York
DISTRIBUTOR
Morgan Stanley & Co. Incorporated
New York, New York
CUSTODIAN
PNC Bank
Philadelphia, Pennsylvania
ADMINISTRATOR/TRANSFER AGENT
PFPC, Inc.
Wilmington, Delaware
COUNSEL
Morgan, Lewis & Bockius LLP
Philadelphia, Pennsylvania
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
Philadelphia, Pennsylvania
<PAGE>
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PROSPECTUS
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PCS CASH FUND, INC.
PCS Cash Fund, Inc. (the "Fund") is a diversified open-end management
investment company authorized to offer shares in three Portfolios: a taxable
money market portfolio, a tax-free money market portfolio and a U.S. Government
obligations money market portfolio. The Fund is currently offering shares of the
PCS Money Market Portfolio and the PCS Government Obligations Money Market
Portfolio. Shares of the PCS Tax-Free Money Market Portfolio are not currently
available. The investment objectives of each investment portfolio described in
this Prospectus are as follows:
PCS MONEY MARKET PORTFOLIO -- to provide as high a level of current
interest income as is consistent with maintaining liquidity and stability
of principal. It seeks to achieve such objective by investing in high
quality, U.S. dollar-denominated money market instruments.
PCS TAX-FREE MONEY MARKET PORTFOLIO -- to provide as high a level of
current interest income exempt from federal income taxes as is consistent
with maintaining liquidity and stability of principal. It seeks to achieve
such objective by investing substantially all of its assets in a
diversified portfolio of high quality, short-term Municipal Obligations.
"Municipal Obligations" are obligations issued by or on behalf of states,
territories and possessions of the United States, the District of Columbia
and their political subdivisions, agencies, instrumentalities and
authorities. During periods of normal market conditions, at least 80% of
the net assets of the Portfolio will be invested in Municipal Obligations,
the interest on which is exempt from the regular federal income tax and is
not an item of tax preference for noncorporate shareholders for purposes of
the federal alternative minimum tax ("Tax-Exempt Interest").
PCS GOVERNMENT OBLIGATIONS MONEY MARKET PORTFOLIO -- to provide as
high a level of current interest income as is consistent with maintaining
liquidity and stability of principal. It seeks to achieve such objective by
investing in short-term U.S. Treasury bills, notes and other obligations
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, and repurchase agreements relating to such obligations.
Morgan Stanley & Co. Incorporated acts as sponsor and distributor for the
Fund and Morgan Stanley Asset Management Inc. serves as investment advisor for
the Fund. PNC Bank, National Association ("PNC Bank") serves as custodian for
the Fund and PFPC, Inc. ("PFPC") serves as administrator and transfer and
dividend disbursing agent for the Fund.
This Prospectus contains concise information that a prospective investor
needs to know before investing. Please keep it for future reference. A Statement
of Additional Information, dated November 1, 1995, has been filed with the
Securities and Exchange Commission and is incorporated by reference in this
Prospectus. It may be obtained upon request free of charge from the Fund's
transfer agent, PFPC, P.O. Box 8950, Wilmington, DE 19899.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR
GUARANTEED BY THE UNITED STATES GOVERNMENT. THERE
CAN BE NO ASSURANCE THAT ANY PORTFOLIO WILL BE
ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF
$1.00 PER SHARE.
THE DATE OF THIS PROSPECTUS IS NOVEMBER 1, 1995
<PAGE>
INTRODUCTION
PCS Cash Fund, Inc. (the "Fund") is a diversified, open-end management
investment company authorized to offer shares in three separate investment
portfolios. The Fund's shares (collectively, the "Shares") described in this
Prospectus represent interests in one of the following of such investment
portfolios: the PCS Money Market Portfolio, the PCS Tax-Free Money Market
Portfolio and the PCS Government Obligations Money Market Portfolio.
The PCS Money Market Portfolio's investment objective is to provide as high
a level of current interest income as is consistent with maintaining liquidity
and stability of principal. It seeks to achieve such objective by investing in a
portfolio of high quality, U.S. dollar-denominated money market instruments. In
pursuing its investment objective, the PCS Money Market Portfolio invests in a
broad range of government, foreign and domestic bank obligations and commercial
obligations that may be available in the money markets.
The PCS Tax-Free Money Market Portfolio's investment objective is to
provide as high a level of current interest income exempt from federal income
taxes as is consistent with maintaining liquidity and stability of principal. To
achieve this objective, the PCS Tax-Free Money Market Portfolio invests
substantially all of its assets in a diversified portfolio of high quality,
short-term Municipal Obligations. During periods of normal market conditions, at
least 80% of the net assets of the Portfolio will be invested in Municipal
Obligations, the interest on which is Tax-Exempt Interest.
The PCS Government Obligations Money Market Portfolio's investment
objective is to provide as high a level of current interest income as is
consistent with maintaining liquidity and stability of principal. To achieve its
objective, the Portfolio invests exclusively in short-term U.S. Treasury bills,
notes and other obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities, and enters into repurchase agreements relating to
such obligations.
Morgan Stanley & Co. Incorporated (the "Distributor") acts as distributor
of the Fund's Shares. The Fund's investment advisor is Morgan Stanley Asset
Management Inc. (the "Advisor"). PNC Bank serves as custodian to the Fund and
PFPC serves as administrator and transfer and dividend disbursing agent to the
Fund.
An investor may purchase and redeem Shares of any of the Portfolios through
an account maintained with his broker or by direct purchases or redemptions. See
"Purchase and Redemption of Shares."
An investment in any of the Portfolios is subject to certain risks, as set
forth in detail under "Investment Objectives and Policies." The Fund was created
in 1989 and is currently operating two Portfolios: The PCS Money Market
Portfolio and the PCS Government Obligations Money Market Portfolio. The PCS
Tax-Free Money Market Portfolio is not currently offering shares. Any or all of
the Portfolios, to the extent set forth under "Investment Objectives and
Policies," may engage in the following investment practices: the use of
repurchase agreements and reverse repurchase agreements, the purchase of
mortgage-related securities, the purchase of securities on a "when-issued" basis
and the purchase of securities on a "forward commitment" basis. All of these
transactions involve certain special risks, as set forth under "Investment
Objectives and Policies."
For more detailed information of how to purchase or redeem Shares, please
refer to the section of this Prospectus entitled "Purchase and Redemption of
Shares."
2
<PAGE>
<TABLE>
<CAPTION>
EXPENSE TABLE
Annual Fund Operating Expenses
(as a percentage of average net assets)
PCS GOVERNMENT
PCS MONEY PCS TAX-FREE OBLIGATIONS
MARKET MONEY MARKET MONEY MARKET
PORTFOLIO PORTFOLIO PORTFOLIO
---------- ------------ --------------
<S> <C> <C> <C>
Management fees (after fee waivers) ....................... .40% .14% .43%
12b-1 fees (after fee waivers)............................. .35 .35 .25
Other Expenses*............................................ .23 .46 .27
--- --- ---
Net Expenses (after fee waivers)........................... .98% .95% .95%
<FN>
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* The caption "Other Expenses" does not include extraordinary expenses as
determined by use of generally accepted accounting principles.
</FN>
</TABLE>
The Expense Table is designed to assist an investor in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. (For more complete descriptions of the various costs and expenses,
see "Management--Investment Advisor," and "Distribution of Shares" below.) The
Advisor and the Distributor are voluntarily waiving a portion of their
respective fees until such time as they determine that the Fund's performance is
competitive with other comparable funds without such waivers. However, such fee
waivers are voluntary and may be terminated at any time. There can be no
assurance that any future waivers will not vary from the figures reflected in
the Expense Table. Absent fee waivers, Management fees would be .45% and 12b-1
fees would be .50% for each Portfolio and Total Operating Expenses would be
1.18% for the PCS Money Market Portfolio, 1.41% for the PCS Tax-Free Money
Market Portfolio and 1.22% for the PCS Government Obligations Money Market
Portfolio. The percentages shown above representing Annual Fund Operating
Expenses are based on net operating expenses for the PCS Money Market Portfolio
(.98%) for the fiscal year ended June 30, 1995 and have been restated to reflect
current fees for the PCS Government Obligations Money Market Portfolio (.95%),
net of fee waivers. The expenses for the PCS Tax-Free Money Market Portfolio,
which is not in operation, are estimates.
EXAMPLE
An investor would pay the following expenses on a $1,000 investment
assuming (1) 5% annual return and (2) redemption at the end of each time period.
The following example is based on total operating expenses of each Portfolio
after fee waivers.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
PCS Money Market Portfolio................................. $10 $31 $54 $120
PCS Tax-Free Money Market Portfolio........................ $10 $30 -- --
PCS Government Obligations Money
Market Portfolio...................................... $10 $30 $53 $117
</TABLE>
The Example assumes that all dividends and distributions are reinvested.
Long-term shareholders of the Fund may pay more than the equivalent of the
maximum front-end sales charges otherwise permitted by the Rules of Fair
Practice of the National Association of Securities Dealers, Inc. (the "NASD").
The foregoing table has not been audited by Coopers & Lybrand L.L.P., the Fund's
independent accountants. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The Fund is a diversified, open-end management investment company
authorized to offer shares in three separate investment portfolios: the PCS
Money Market Portfolio, the PCS Tax-Free Money Market Portfolio or the PCS
Government Obligations Money Market Portfolio (collectively, the "Portfolios").
The PCS Money Market Portfolio and the PCS Government Obligations Money Market
Portfolio are currently in operation. The Fund was incorporated in Maryland on
January 5, 1989 and commenced operations of the PCS Money Market Portfolio on
August 4, 1989 and of the PCS Government Obligations Money Market Portfolio on
March 12, 1992. The financial highlights included in this table have been
derived from the Fund's financial statements for the PCS Money Market Portfolio
and the PCS Government Obligations Money Market Portfolio for the indicated
fiscal periods since operations commenced. These financial statements have been
audited by Coopers & Lybrand L.L.P., independent accountants, whose report
thereon accompanies the financial statements which appear in the Statement of
Additional Information. The financial highlights should be read in conjunction
with the financial statements and related notes included in the Statement of
Additional Information which can be obtained at no charge by calling the Fund at
(800) 533-7719.
PCS MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE PERIOD
AUGUST 4, 1989
FOR THE YEAR ENDED JUNE 30, (COMMENCEMENT
---------------------------------------------------------- OF OPERATIONS)
1995 1994 1993 1992 1991 TO JUNE 30, 1990
------- ------- -------- -------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD . $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- -------- -------- -------- ---------
Income from investment
operations:
Net investment income .0446 .0246 .0243 .0402 .0652 .0690
Net realized gains on
investments ...... .0001 -- .0001 -- -- --
Less dividends to
shareholders from:
Net investment income (.0446) (.0246) (.0243) (.0402) (.0652) (.0690)
Net realized gains .. (.0001) -- (.0001) -- -- --
------- ------- -------- -------- -------- ---------
NET ASSET VALUE,
END OF PERIOD ....... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======== ======== ======== =========
Total return ........... 4.55% 2.49% 2.47% 4.11% 6.72% 7.12%(c)
Ratio of expenses to
average net assets .. .98%(b) .98%(b) .98%(b) .98%(b) .98%(b) .98%(a)(b)
Ratio of net investment
income to average
net assets .......... 4.45%(b) 2.45%(b) 2.44%(b) 3.97%(b) 6.40%(b) 7.53%(a)(b)
Net assets at end of
period (000) ........ $171,515 $176,599 $156,310 $190,034 $140,594 $76,463
<FN>
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(a) Annualized.
(b) Without the voluntary waiver of advisory and distribution fees, the ratio
of expenses to average net assets would have been 1.18%, 1.19%, 1.20%,
1.27%, 1.27% and 1.48% (annualized), respectively. The ratio of net
investment income to average net assets would have been 4.25%, 2.24%,
2.22%, 3.68%, 6.11% and 7.03% (annualized), respectively.
(c) Not annualized. Total return, if on annualized basis, would have been
7.90%.
</FN>
</TABLE>
4
<PAGE>
PCS GOVERNMENT OBLIGATIONS MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE PERIOD
MARCH 12, 1992
FOR THE YEAR ENDED JUNE 30, (COMMENCEMENT
---------------------------------- OF OPERATIONS)
1995 1994 1993 TO JUNE 30, 1992
-------- -------- -------- -----------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD .. $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- --------
Income from investment operations:
Net investment income .............. .0448 .0243 .0246 .0094
Net realized gains on investments .. -- .0011 .0002 --
Less dividends to shareholders from:
Net investment income .............. (.0448) (.0243) (.0246) (.0094)
Net realized gains ................. -- (.0011) (.0002) --
-------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD ........ $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ========
Total return .......................... 4.58% 2.45% 2.51% 0.94%(c)
Ratio of expenses to average net assets .95%(b) .95%(b) .95%(b) .95%(a)(b)
Ratio of net investment income to
average net assets .................... 4.61%(b) 2.40%(b) 2.50%(b) 3.07%(a)(b)
Net assets at end of period (000) ..... $ 67,505 $102,551 $101,736 $269,627
<FN>
- --------
(a) Annualized.
(b) Without the voluntary waiver of advisory and distribution fees, the ratio
of expenses to average net assets would have been 1.12%, 1.22%, 1.19% and
1.29% annualized, and the ratio of net investment income to average net
assets would have been 4.44%, 2.13%, 2.26% and 2.73% annualized.
(c) Not annualized. Total return, if on annualized basis, would have been
3.16%.
</FN>
</TABLE>
5
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
PCS MONEY MARKET PORTFOLIO
The PCS Money Market Portfolio's investment objective is to provide as high
a level of current interest income as is consistent with maintaining liquidity
and stability of principal. Portfolio obligations held by the PCS Money Market
Portfolio have remaining maturities of 397 days or less (except that portfolio
securities which are subject to repurchase agreements may bear maturities
exceeding 397 days). In pursuing its investment objective, the PCS Money Market
Portfolio invests in a broad range of U.S. dollar-denominated instruments, such
as government, bank and commercial obligations, that may be available in the
money markets and that satisfy strict credit quality standards imposed by the
Portfolio in accordance with applicable law ("Money Market Instruments"). The
following descriptions illustrate the types of Money Market Instruments in which
the PCS Money Market Portfolio invests.
BANK OBLIGATIONS. The Portfolio may purchase bank obligations, such as
certificates of deposit, bankers' acceptances and time deposits, including U.S.
dollar-denominated instruments issued or supported by the credit of U.S. or
foreign banks or savings institutions having total assets at the time of
purchase in excess of $1 billion. The Portfolio may invest substantially in U.S.
dollar-denominated obligations of foreign banks or foreign branches of U.S.
banks where the Advisor deems the instrument to present minimal credit risks and
to otherwise satisfy applicable quality standards. Such investments may
nevertheless entail risks that are different from those of investments in
domestic obligations of U.S. banks due to differences in political, regulatory
and economic systems and conditions. These risks may include future unfavorable
political and economic developments, possible withholding taxes on interest
income, seizure or nationalization of foreign deposits, currency controls,
interest limitations, or other governmental restrictions which might affect the
payment of principal or interest on the securities held in a Portfolio.
Additionally, these institutions may be subject to less stringent reserve
requirements and to different accounting, auditing, reporting and recordkeeping
requirements than those applicable to domestic branches of U.S. banks. The
Portfolio may also make interest-bearing savings deposits in commercial and
savings banks in amounts not in excess of 5% of its total assets.
COMMERCIAL PAPER. The Portfolio may purchase commercial paper rated (at the
time of purchase) "A-1" by Standard & Poor's Ratings Group ("S&P") or "Prime-1"
by Moody's Investors Service, Inc. ("Moody's") or, when deemed advisable by the
Advisor and to the extent permitted under applicable regulations, limited
amounts of "high quality" issues rated "A-2" or "Prime-2" by S&P or Moody's,
respectively. The Portfolio may also purchase unrated commercial paper provided
that such paper is determined by the Advisor to be of comparable quality
pursuant to guidelines approved by the Fund's Board of Directors.
VARIABLE RATE DEMAND NOTES. The Portfolio may purchase variable rate demand
notes, which are unsecured instruments that permit the indebtedness thereunder
to vary and provide for periodic adjustment in the interest rate. Although the
notes are not normally traded and there may be no active secondary market in the
notes, the Portfolio will be able (at any time or during the specified periods
not exceeding 397 days, depending upon the note involved) to demand payment of
the principal of a note. The notes are not typically rated by credit rating
agencies, but issuers of variable rate demand notes must satisfy the same
criteria as set forth above for issuers of commercial paper. If an issuer of a
variable rate demand note defaulted on its payment obligation, the Portfolio
might be unable to dispose of the note because of the absence of an active
secondary market. For this or other reasons, the Portfolio might suffer a loss
to the extent of the default. The Portfolio invests in variable rate demand
notes only when the Advisor deems the investment to involve minimal credit risk
and to otherwise satisfy applicable quality standards. The Advisor also monitors
the continuing creditworthiness of issuers of such notes to determine whether
the Portfolio should continue to hold such notes.
6
<PAGE>
REPURCHASE AGREEMENTS. The Portfolio may agree to purchase Money Market
Instruments from financial institutions subject to the seller's agreement to
repurchase them at an agreed upon time and price ("repurchase agreements"). The
securities held subject to a repurchase agreement may have stated maturities
exceeding 397 days, provided the repurchase agreement itself matures in less
than 397 days. The financial institutions with whom the Portfolio may enter into
repurchase agreements will be banks that are the issuers of securities
acceptable for purchase by the Portfolio 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. The Portfolio will enter into repurchase agreements with
sellers that the Advisor considers creditworthy under criteria approved by the
Board of Directors. The seller under a repurchase agreement will be required to
maintain the value of the securities subject to the agreement at not less than
the repurchase price. The Advisor will mark to market daily the value of the
securities, and will, if necessary, require the seller to maintain additional
securities, to ensure that the value is not less than the repurchase price.
Default by the seller would, however, expose the Portfolio to possible loss
because of adverse market action or delays in connection with the disposition of
the underlying obligations.
U.S. GOVERNMENT OBLIGATIONS. The Portfolio may purchase obligations issued
or guaranteed by the U.S. Government or its agencies and instrumentalities.
Obligations of certain agencies and instrumentalities of the U.S. Government are
backed by the full faith and credit of the United States. These securities
include U.S. Treasury Securities, obligations of the Government National
Mortgage Association ("GNMA"), the Farmers Home Administration, and the
Export-Import Bank. Others are backed by the right of the issuer to borrow from
the U.S. Treasury or are backed only by the credit of the agency or
instrumentality issuing the obligations; some examples of agencies or
instrumentalities issuing these obligations are the Federal Farm Credit System
and the Federal Home Loan Banks.
MORTGAGE-BACKED SECURITIES. Mortgage loans made by banks, savings and loan
institutions, and other lenders are often assembled into pools, the interests in
which are issued and guaranteed by an agency or instrumentality of the U.S.
Government, though not necessarily by the U.S. Government itself. Interests in
such pools are what this Prospectus calls "mortgage-backed securities."
One such type of mortgage-backed security in which the Portfolio may invest
is a Government National Mortgage Association ("GNMA") Certificate. GNMA
Certificates are backed as to the timely payment of principal and interest by
the full faith and credit of the U.S. Government. Another type is a Federal
National Mortgage Association ("FNMA") Certificate. Principal and interest
payments on FNMA Certificates are guaranteed only by FNMA itself, not by the
full faith and credit of the U.S. Government. A third type of mortgage-backed
security in which the Portfolio may invest is a Federal Home Loan Mortgage
Association ("FHLMC") Participation Certificate. This type of security is
guaranteed by FHLMC as to timely payment of principal and interest but, like a
FNMA security, it is not guaranteed by the full faith and credit of the U.S.
Government. For a further discussion of GNMA, FNMA and FHLMC, see
"Mortgage-Related Debt Securities" in the Statement of Additional Information.
Each of the mortgage-backed securities described above is characterized by
monthly payments to the security holder, reflecting the monthly payments made by
the mortgagors of the underlying mortgage loans. The payments to the security
holders (such as the Portfolio), like the payments on the underlying loans,
represent both principal and interest. Although the underlying mortgage loans
are for specified periods of time, such as twenty or thirty years, the borrowers
can, and typically do, repay them sooner. Thus, the security holders frequently
receive prepayments of principal, in addition to the principal which is part of
the regular monthly payments. A borrower is more likely to prepay a mortgage
which bears a relatively high rate of interest. This means that, in times of
declining interest rates, some of the Portfolio's higher yielding securities
might be repaid and thereby converted to cash and the Portfolio will be forced
to accept lower interest rates when that cash is used
7
<PAGE>
to purchase additional securities. The Portfolio normally will not distribute
principal payments (whether regular or prepaid) to its shareholders. Interest
received by the Portfolio will, however, be distributed to shareholders in the
form of dividends.
REVERSE REPURCHASE AGREEMENTS. The Portfolio may enter into reverse
repurchase agreements with respect to portfolio securities. At the time the
Portfolio enters into a reverse repurchase agreement, it will place in a
segregated custodial account liquid assets such as U.S. Government securities or
other liquid high grade debt securities having a value equal to or greater than
the repurchase price (including accrued interest) and will subsequently monitor
the account to ensure that such value is maintained. Reverse repurchase
agreements involve the risk that the market value of the securities sold by the
Portfolio may decline below the price of the securities the Portfolio is
obligated to repurchase. The Portfolio's investment of the proceeds of a reverse
repurchase agreement is the speculative factor known as leverage. The Portfolio
may enter into a reverse repurchase agreement only if the interest income from
the investment of the proceeds is greater than the interest expense of the
transaction and the proceeds are invested for a period no longer than the term
of the agreement. The Portfolio will enter into reverse repurchase agreements
with banks and broker dealers that the Advisor considers creditworthy under
criteria approved by the Board of Directors. Reverse repurchase agreements are
considered to be borrowings by the Portfolio under the Investment Company Act of
1940, as amended (the "1940 Act").
MUNICIPAL OBLIGATIONS. In addition, the Portfolio may, when deemed
appropriate by the Advisor in light of the Portfolio's investment objective,
invest without limitation in high quality, short-term Municipal Obligations
issued by state and local governmental issuers, the interest on which may be
taxable or tax-exempt for federal income tax purposes, provided that such
obligations carry yields that are competitive with those of other types of Money
Market Instruments of comparable quality. For a more complete discussion of
Municipal Obligations, see "Investment Objectives and Policies." In addition,
the Portfolio may acquire "stand-by commitments" with respect to Municipal
Obligations held in its portfolio. Under a stand-by commitment, a dealer would
agree to purchase at the Portfolio's option specified Municipal Obligations at a
specified price. The acquisition of a stand-by commitment may increase the cost,
and thereby reduce the yield, of the Municipal Obligation to which such
commitment relates. The Portfolio will acquire stand-by commitments solely to
facilitate portfolio liquidity and does not intend to exercise its rights
thereunder for trading purposes.
WHEN-ISSUED SECURITIES. The Portfolio may purchase portfolio securities on
a "when-issued" basis. When-issued securities are securities purchased for
delivery beyond the normal settlement date at a stated price and yield. The
Portfolio will generally not pay for such securities or start earning interest
on them until they are received. Securities purchased on a when-issued basis are
recorded as an asset at the time the commitment is entered into and are subject
to changes in value prior to delivery based upon changes in the general level of
interest rates. The Portfolio expects that commitments to purchase when-issued
securities will not exceed 25% of the value of its total assets absent unusual
market conditions. The Portfolio does not intend to purchase when-issued
securities for speculative purposes but only in furtherance of its investment
objective.
LENDING OF SECURITIES. The Portfolio may also lend its portfolio securities
to financial institutions in accordance with the investment restrictions
described below. Such loans would involve risks of delay in receiving additional
collateral in the event the value of the collateral decreased below the value of
the securities loaned or of delay in recovering the securities loaned or even
loss of rights in the collateral should the borrower of the securities fail
financially. However, loans will be made only to borrowers deemed by the Advisor
to be of good standing and only when, in the Advisor's judgment, the income to
be earned from the loans justifies the attendant risks.
The Portfolio will limit its purchase of illiquid obligations to 10% of the
value of the Portfolio's total assets. Illiquid obligations include any time
deposits with maturities longer than seven days, securities with restrictions
8
<PAGE>
on dispositions, repurchase agreements with maturities greater than seven days,
variable rate demand notes that cannot be disposed of promptly within seven
business days and in the usual course of business without taking a reduced price
and other securities the Advisor determines are illiquid.
The PCS Money Market Portfolio's investment objective and policies
described above are not fundamental and may be changed by the Fund's Board of
Directors without the affirmative vote of the holders of a majority of all
outstanding Shares representing interests in the Portfolio. Such changes may
result in investment objectives which differ from those described above. There
is no assurance that the investment objective of the PCS Money Market Portfolio
will be achieved. The Portfolio may not, however, change the investment
limitations summarized below without such a vote of shareholders. (A more
detailed description of the following investment limitations, together with
other investment limitations that cannot be changed without a vote of
shareholders, is contained in the Statement of Additional Information under
"Investment Objectives and Policies.")
The PCS Money Market Portfolio may not:
1. Purchase any securities other than Money Market Instruments but the
Portfolio may make interest-bearing savings deposits in amounts not in
excess of 5% of the value of the Portfolio's assets and may make time
deposits.
2. Borrow money, except that the Fund may (a) borrow from banks
for temporary purposes and in amounts not in excess of 10% of the value of
the Portfolio's assets at the time of such borrowing, and (b) invest in
reverse repurchase agreements, provided that no borrowing pursuant to (a)
and (b) is permitted unless, after such borrowing, there is asset coverage
of at least 300% for all borrowings of the Portfolio; or mortgage, pledge
or hypothecate any of its assets except in connection with any such
borrowing and in amounts not in excess of 10% of the value of the
Portfolio's assets at the time of such borrowing; or purchase portfolio
securities while borrowings in excess of 5% of the Portfolio's net assets
are outstanding. (With the exception of investments in reverse repurchase
agreements in certain instances, this borrowing provision is not for
investment leverage, but solely to facilitate management of the Portfolio's
securities by enabling the Portfolio to meet redemption requests where the
liquidation of portfolio securities is deemed to be disadvantageous or
inconvenient.)
3. Make loans except that the Portfolio may purchase or hold
debt obligations in accordance with its investment objective, policies and
limitations, may enter into repurchase agreements for securities, and may
lend portfolio securities against collateral, consisting of cash or
securities which are consistent with the Portfolio's permitted investments,
which is equal at all times to at least 100% of the value of the securities
loaned. There is no investment restriction on the amount of securities that
may be loaned.
4. Purchase any securities which would cause 25% or more of
the value of its total assets at the time of such purchase to be invested
in the securities of one or more issuers conducting their principal
business activities in the same industry, provided that there is no
limitation with respect to investments in securities issued or guaranteed
by the U.S. Government or its agencies and instrumentalities or in
obligations of U.S. banks or their domestic branches.
5. Purchase securities of any one issuer, other than securities
issued or guaranteed by the U.S. Government or its agencies and
instrumentalities, if immediately after and as a result of such purchase
more than 5% of the value of its total assets would be invested in the
securities of such issuer, or more than 10% of the outstanding voting
securities of such issuer would be owned by the Portfolio, except that up
to 25% of the value of the Portfolio's total assets may be invested without
regard to such 5% limitation. Under applicable regulations, however,
the Portfolio may invest more than 5% of its assets in any one issuer for
no more than three days.
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PCS TAX-FREE MONEY MARKET PORTFOLIO
The PCS Tax-Free Money Market Portfolio's investment objective is to
provide as high a level of current interest income exempt from federal income
taxes as is consistent with maintaining liquidity and relative stability of
principal. The PCS Tax-Free Money Market Portfolio invests substantially all of
its assets in a diversified portfolio of high quality, short-term Municipal
Obligations, the interest on which, in the opinion of bond counsel or counsel to
the issuer, as the case may be, is exempt from the regular federal income tax.
During periods of normal market conditions, at least 80% of the net assets of
the PCS Tax-Free Money Market Portfolio will be invested in short-term Municipal
Obligations, the interest on which is Tax-Exempt Interest. All portfolio
investments must satisfy strict credit quality standards imposed by the
Portfolio in accordance with applicable law.
MUNICIPAL OBLIGATIONS. The Portfolio invests in short-term Municipal
Obligations which are determined by the Advisor to present minimal credit risks
and to otherwise satisfy applicable quality standards pursuant to guidelines
established by the Fund's Board of Directors and which at the time of purchase
are considered to be of "high quality" -- e.g., rated "AA" or higher by S&P or
"Aa" or higher by Moody's in the case of bonds; rated "SP-1" by S&P or "MIG-1"
by Moody's in the case of notes; rated "VMIG-1" by Moody's in the case of
variable rate demand notes; or rated "A-1" by S&P or "Prime-1" by Moody's in the
case of tax-exempt commercial paper. In addition, the Portfolio may invest in
limited amounts of "high quality" notes and tax-exempt commercial paper rated
"MIG-2," "VMIG-2," or "Prime-2" by Moody's or "A-2" by S&P if deemed advisable
by the Advisor. The Portfolio may also purchase securities that are unrated at
the time of purchase provided that the securities are determined to be of
comparable quality by the Advisor pursuant to guidelines approved by the Fund's
Board of Directors. The applicable Municipal Obligations ratings are described
in the Appendix to the Statement of Additional Information.
The Portfolio may hold uninvested cash reserves pending investment during
temporary defensive periods or if, in the opinion of the Advisor, suitable
obligations bearing Tax-Exempt Interest are unavailable. There is no percentage
limitation on the amount of assets which may be held uninvested during temporary
defensive periods. Uninvested cash reserves will not earn income.
The two principal classifications of Municipal Obligations are "general
obligation" securities and "revenue" securities. General obligation securities
are secured by the issuer's pledge of its full faith, credit and taxing power
for the payment of principal and interest. Revenue securities are payable only
from the revenues derived from a particular facility or class of facilities or,
in some cases, from the proceeds of a special excise tax or other specific
excise tax or other specific revenue source such as the user of the facility
being financed. Revenue securities include private activity bonds which are not
payable from the unrestricted revenues of the issuer. Consequently, the credit
quality of private activity bonds is usually directly related to the credit
standing of the corporate user of the facility involved. Municipal Obligations
may also include "moral obligation" bonds, which are normally issued by special
purpose public authorities. If the issuer of moral obligation bonds is unable to
meet its debt service obligations from current revenues, it may draw on a
reserve fund, the restoration of which is a moral commitment but not a legal
obligation of the state or municipality which created the issuer.
Municipal Obligations may include variable rate demand notes. Such notes
are frequently not rated by credit rating agencies, but unrated notes purchased
by the Portfolio will have been determined by the Advisor to be of comparable
quality at the time of the purchase to rated instruments purchasable by the
Portfolio. Where necessary to ensure that a note is of "high quality," the
Portfolio will require that the issuer's obligation to pay the principal of the
note be backed by an unconditional bank letter or line of credit, guarantee or
commitment to lend. While there may be no active secondary market with respect
to a particular variable rate demand note purchased by a Portfolio, the
Portfolio may, upon the notice specified in the note, demand payment
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<PAGE>
of the principal of the note at any time or during specified periods not
exceeding 397 days, depending upon the instrument involved. The absence of such
an active secondary market, however, could make it difficult for the Portfolio
to dispose of a variable rate demand note if the issuer defaulted on its payment
obligation or during the periods that the Portfolio is not entitled to exercise
its demand rights. The Portfolio could, for this or other reasons, suffer a loss
to the extent of the default. The Portfolio invests in variable rate demand
notes only when the Portfolio's Advisor deems the investment to involve minimal
credit risk and to otherwise satisfy applicable quality standards. The Advisor
also monitors the continuing creditworthiness of issuers of such notes to
determine whether the Portfolio should continue to hold such notes.
Current federal tax law limits the types and volume of bonds qualifying for
the federal income tax exemption of interest. Such limitations may have an
effect on the ability of the Portfolio to purchase sufficient amounts of
tax-exempt securities. In addition, interest on certain bonds, although exempt
from the regular federal income tax, may be subject to alternative minimum tax.
See the discussion below under "Taxes" and the Statement of Additional
Information.
Although the PCS Tax-Free Money Market Portfolio may invest more than 25%
of its net assets in (i) Municipal Obligations whose issuers are in the same
state, (ii) Municipal Obligations the interest on which is paid solely from
revenues of similar projects, and (iii) private activity bonds bearing
Tax-Exempt Interest, it does not currently intend to do so on a regular basis.
To the extent the PCS Tax-Free Money Market Portfolio's assets are concentrated
in Municipal Obligations that are payable from the revenues of similar projects
or are issued by issuers located in the same state, the Portfolio will be
subject to the peculiar risks presented by the laws and economic conditions
relating to such states or projects to a greater extent than it would be if its
assets were not so concentrated.
WHEN-ISSUED SECURITIES. The Portfolio may also purchase portfolio
securities on a "when-issued" basis. When-issued securities are securities
purchased for delivery beyond the normal settlement date at a stated price and
yield. The Portfolio will generally not pay for such securities or start earning
interest on them until they are received. Securities purchased on a when-issued
basis are recorded as an asset at the time the commitment is entered into and
are subject to changes in value prior to delivery based upon changes in the
general level of interest rates. The Portfolio expects that commitments to
purchase when-issued securities will not exceed 25% of the value of its total
assets absent unusual market conditions. The Portfolio does not intend to
purchase when-issued securities for speculative purposes but only in furtherance
of its investment objective.
STAND-BY COMMITMENTS. The Portfolio may acquire "stand-by commitments" with
respect to Municipal Obligations held in its portfolio. Under a stand-by
commitment, a dealer would agree to purchase at the Portfolio's option specified
Municipal Obligations at a specified price. The acquisition of a stand-by
commitment may increase the cost, and thereby reduce the yield, of the Municipal
Obligation to which such commitment relates. The Portfolio will acquire stand-by
commitments solely to facilitate portfolio liquidity and does not intend to
exercise its rights thereunder for trading purposes.
The Portfolio will not purchase securities with restrictions on disposition
or other securities which in the opinion of the Advisor are illiquid if, as a
result, more than 10% of the value of the Portfolio's total assets will be
illiquid. For this purpose, variable rate demand notes that can not be disposed
of promptly within seven business days and in the usual course of business
without taking a reduced price are considered illiquid.
The PCS Tax-Free Money Market Portfolio's investment objective and the
policies described above are not fundamental and may be changed by the Fund's
Board of Directors without the affirmative vote of the holders of a majority of
the PCS Tax-Free Money Market Portfolio's outstanding shares. Such changes may
result in investment objectives which differ from those described above. There
is no assurance that the investment objective of the PCS Tax-Free Money Market
Portfolio will be achieved. The PCS Tax-Free Money
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Market Portfolio may not, however, change the following investment limitations
without such a vote of shareholders. (A more detailed description of the
following investment limitations, together with other investment limitations
that cannot be changed without a vote of shareholders, is contained in the
Statement of Additional Information under "Investment Objectives and Policies.")
The PCS Tax-Free Money Market Portfolio may not:
1. Purchase the securities of any issuer, other than securities issued
or guaranteed by the U.S. Government or its agencies and instrumentalities,
if immediately after and as a result of such purchase more than 5% of the
value of the Portfolio's assets would be invested in the securities of such
issuer or more than 10% of the outstanding voting securities of such issuer
would be owned by the Portfolio, except that up to 25% of the value of the
Portfolio's assets may be invested without regard to this 5% limitation.
Under applicable regulations, however, the Portfolio may invest more than
5% of its assets in any one issuer for no more than three days.
2. Borrow money, except from banks for temporary purposes and then in
amounts not in excess of 10% of the value of the Portfolio's assets at the
time of such borrowing, and only if after such borrowing there is asset
coverage of at least 300% for all borrowings of the Portfolio; or mortgage,
pledge or hypothecate any of its assets except in connection with any such
borrowing and in amounts not in excess of 10% of the value of the
Portfolio's assets at the time of such borrowing; or purchase portfolio
securities while borrowings in excess of 5% of the Portfolio's net assets
are outstanding. (With the exception of reverse repurchase agreements in
certain instances, this borrowing provision is not for investment leverage,
but solely to facilitate management of the Portfolio's securities by
enabling the Portfolio to meet redemption requests where the liquidation of
portfolio securities is deemed to be disadvantageous or inconvenient.)
3. Purchase any securities which would cause, at the time of purchase,
more than 25% of the value of the total assets of the Portfolio to be
invested in the obligations of issuers in the same industry.
In addition, without the affirmative vote of the holders of a majority of
the Portfolio's outstanding shares, the Portfolio may not change its policy of
investing during normal market conditions at least 80% of its net assets in
obligations the interest on which is Tax-Exempt Interest.
PCS GOVERNMENT OBLIGATIONS MONEY MARKET PORTFOLIO
The PCS Government Obligations Money Market Portfolio's investment
objective is to provide as high a level of current interest income as is
consistent with maintaining liquidity and stability of principal. It seeks to
achieve such objective by investing in short-term U.S. Treasury bills, notes and
other obligations issued or guaranteed by the U.S. Government or it agencies or
instrumentalities, and entering into repurchase agreements relating to such
obligations. Purchases of portfolio securities must satisfy strict credit
quality standards imposed by the Portfolio in accordance with applicable law.
The types of U.S. Government obligations in which the Portfolio may invest
include a variety of U.S. Treasury obligations, which differ only in their
interest rates, maturities, and time of issuance, and obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities,
including mortgage-related securities. Obligations of certain agencies and
instrumentalities of the U.S. Government, such as the Government National
Mortgage Association and the Export-Import Bank of the United States, are
supported by the full faith and credit of the U.S. Treasury; others, such as
those of the Federal National Mortgage Association, are supported by the right
of the issuer to borrow from the Treasury; others, such as those of the Student
Loan Marketing Association, are supported by the discretionary authority of the
U.S. Government to purchase the agency's obligations; still others, such as
those of the Federal Farm Credit
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Banks or the Federal Home Loan Mortgage Corporation, are supported only by
the credit of the instrumentality. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government-sponsored agencies
or instrumentalities if it is not obligated to do so under law. The Portfolio
will invest in the obligations of such agencies or instrumentalities only when
the Advisor believes that the credit risk with respect thereto is minimal and
that applicable quality standards have been satisfied.
Securities issued or guaranteed by the U.S. Government, its agencies and
instrumentalities have historically involved little risk of loss of principal if
held to maturity. However, due to fluctuations in interest rates, the market
value of such securities may vary during the period a shareholder owns Shares
representing an interest in the Portfolio. Certain government securities held by
the Portfolio may have remaining maturities exceeding 397 days if such
securities provide for adjustments in their interest rates not less frequently
than annually and the adjustments are sufficient to cause the securities to have
market values, after adjustment, which approximate their par values.
REPURCHASE AGREEMENTS. The Portfolio may agree to purchase government
securities from financial institutions subject to the seller's agreement to
repurchase them at an agreed upon time and price ("repurchase agreements"). The
securities held subject to a repurchase agreement may have stated maturities
exceeding 397 days, provided the repurchase agreement itself matures in less
than 397 days. The financial institutions with whom the Portfolio may enter into
repurchase agreements will be banks that are the issuers of securities
acceptable for purchase by the Portfolio 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. The Advisor will consider the creditworthiness of a seller in
determining whether to have the Portfolio enter into a repurchase agreement. The
seller under a repurchase agreement will be required to maintain the value of
the securities subject to the agreement at not less than the repurchase price.
The Advisor will mark to market daily the value of the securities, and will, if
necessary, require the seller to maintain additional securities, to ensure that
the value is not less than the repurchase price. Default by or bankruptcy of the
seller would, however, expose the Portfolio to possible loss because of adverse
market action or delay in connection with the disposition of the underlying
obligations.
REVERSE REPURCHASE AGREEMENTS. The Portfolio may enter into reverse
repurchase agreements with respect to portfolio securities. At the time the
Portfolio enters into a reverse repurchase agreement, it will place in a
segregated custodial account liquid assets such as U.S. Government securities or
other liquid high grade debt securities having a value equal to or greater than
the repurchase price (including accrued interest) and will subsequently monitor
the account to ensure that such value is maintained. Reverse repurchase
agreements involve the risk that the market value of the securities sold by the
Portfolio may decline below the price of the securities the Portfolio is
obligated to repurchase. The Portfolio's investment of the proceeds of a reverse
repurchase agreement is the speculative factor known as leverage. The Portfolio
may enter into a reverse repurchase agreement only if the interest income from
the investment of the proceeds is greater than the interest expense of the
transaction and the proceeds are invested for a period no longer than the term
of the agreement. The Portfolios will enter into reverse repurchase agreements
with banks and broker dealers that the Advisor considers creditworthy under
criteria approved by the Board of Directors. Reverse repurchase agreements are
considered to be borrowings by the Portfolio under the 1940 Act.
MORTGAGE-BACKED SECURITIES. Mortgage loans made by banks, savings and
loan institutions, and other lenders are often assembled into pools,
the interests in which are issued and guaranteed by an agency or
instrumentality of the U.S. Government, though not necessarily by the
U.S. Government itself. Interests in such pools are what this
Prospectus calls "mortgage-backed securities."
One such type of mortgage-backed security in which the Portfolio may invest
is a Government National Mortgage Association ("GNMA") Certificate. GNMA
Certificates are backed as to the timely payment of principal and interest by
the full faith and credit of the U.S. Government. Another type is a Federal
National
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<PAGE>
Mortgage Association ("FNMA") Certificate. Principal and interest payments
on FNMA Certificates are guaranteed only by FNMA itself, not by the full faith
and credit of the U.S. Government. A third type of mortgage-backed security in
which the Portfolio may invest is a Federal Home Loan Mortgage Association
("FHLMC") Participation Certificate. This type of security is guaranteed by
FHLMC as to timely payment of principal and interest but, like FNMA security, it
is not guaranteed by the full faith and credit of the U.S. Government. For a
further discussion of GNMA, FNMA and FHLMC, see "Mortgage-Related Debt
Securities" in the Statement of Additional Information.
Each of the mortgage-backed securities described above is characterized by
monthly payments to the security holder, reflecting the monthly payments made by
the mortgagors of the underlying mortgage loans. The payments to the security
holders (such as the Portfolio), like the payments on the underlying loans,
represent both principal and interest. Although the underlying mortgage loans
are for specified periods of time, such as twenty or thirty years, the borrowers
can, and typically do, repay them sooner. Thus, the security holders frequently
receive prepayments of principal, in addition to the principal which is part of
the regular monthly payments. A borrower is more likely to prepay a mortgage
which bears a relatively high rate of interest. This means that, in times of
declining interest rates, some of the Portfolio's higher yielding securities
might be repaid and thereby converted to cash and the Portfolio will be forced
to accept lower interest rates when that cash is used to purchase additional
securities. The Portfolio normally will not distribute principal payments
(whether regular or prepaid) to its shareholders. Interest received by the
Portfolio will, however, be distributed to shareholders in the form of
dividends.
LENDING OF SECURITIES. The Portfolio may also lend its portfolio securities
to financial institutions in accordance with the investment restrictions
described below. Such loans would involve risks of delay in receiving additional
collateral in the event the value of the collateral decreased below the value of
the securities loaned or of delay in recovering the securities loaned or even
loss of rights in the collateral should the borrower of the securities fail
financially. However, loans will be made only to borrowers deemed by the Advisor
to be of good standing and only when, in the Advisor's judgment, the income to
be earned from the loans justifies the attendant risks.
The Portfolio will limit its purchase of illiquid securities, including
repurchase agreements with maturities in excess of seven days, securities with
restrictions on disposition and other instruments in the Portfolio which are
considered illiquid, to 10% of the Portfolio's total assets.
The PCS Government Obligations Money Market Portfolio's investment
objective and policies described above are not fundamental and may be changed by
the Fund's Board of Directors without the affirmative vote of the holders of a
majority of the Portfolio's outstanding shares. Such changes may result in
investment objectives which differ from those described above. There is no
assurance that the investment objective of the PCS Government Obligations Money
Market Portfolio will be achieved. The investment limitations summarized below
may not be changed, however, without such a vote of shareholders. (A more
detailed description of the following investment limitations is contained in the
Statement of Additional Information under "Investment Objectives and Policies.")
The PCS Government Obligations Money Market Portfolio may not:
1. Purchase securities other than U.S. Treasury bills, notes and other
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, and repurchase agreements relating to such obligations.
2. Borrow money, except from banks for temporary purposes, and except
for reverse repurchase agreements, and then in an amount not exceeding 10%
of the value of the Portfolio's total assets, and only if after such
borrowing there is asset coverage of at least 300% for all borrowings of
the Portfolio; or
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mortgage, pledge or hypothecate its assets except in connection with any
such borrowing and in amounts not in excess of 10% of the value of the
Portfolio's assets at the time of such borrowing; or purchase portfolio
securities while borrowings in excess of 5% of the Portfolio's net assets
are outstanding. (With the exception of investments in reverse repurchase
agreements in certain instances, this borrowing provision is not for
investment leverage, but solely to facilitate management of the Portfolio
by enabling the Portfolio to meet redemption requests where liquidation of
Portfolio securities is deemed to be inconvenient or disadvantageous.)
3. Make loans except that the Portfolio may purchase or hold debt
obligations in accordance with its investment objective, policies and
limitations, may enter into repurchase agreements for securities, and may
lend portfolio securities against collateral, consisting of cash or
securities which are consistent with the Portfolio's permitted investments,
which is equal at all times to at least 100% of the value of the securities
loaned. There is no investment restriction on the amount of securities that
may be loaned, except that payments received on such loans, including
amounts received during the loan on account of interest on the securities
loaned, may not (together with all non-qualifying income) exceed 10% of the
Portfolio's annual gross income (without offset for realized capital gains)
unless, in the opinion of counsel to the Fund, such amounts are qualifying
income under federal income tax provisions applicable to regulated
investment companies.
PURCHASE AND REDEMPTION OF SHARES
PURCHASE PROCEDURES
GENERAL. Shares are sold without a sales load on a continuous basis by the
Distributor. Investors may purchase Shares through an account maintained by the
investor with his brokerage firm (the "Account"). The minimum initial investment
is $5,000, and the minimum subsequent investment is $500. The Fund in its sole
discretion may accept or reject any order for purchases of Shares.
All payments for initial and subsequent investments should be in U.S.
dollars. Purchases will be effected at the net asset value next determined after
PFPC, the Fund's transfer agent, has received a purchase order in proper form
and the Fund's custodian has Federal Funds immediately available to it. In those
cases where payment is made by check, Federal Funds will generally become
available two Business Days after the check is received. Orders which are
accompanied by Federal Funds, or are converted into Federal Funds, by 12:00 noon
Eastern Time, will be executed as of 12:00 noon that Business Day. Orders which
are accompanied by Federal Funds, or are converted into Federal Funds, after
12:00 noon Eastern Time but prior to 4:00 p.m. Eastern Time on any Business Day
of the Fund, will be executed as of the close of the New York Stock Exchange
(the "NYSE") on that Business Day. Orders which are accompanied by Federal Funds
or are converted to Federal Funds after 4:00 p.m. Eastern Time on a Business Day
will be processed as of 12:00 noon Eastern Time on the following Business Day. A
"Business Day" is any day that both the NYSE and the Federal Reserve Bank of
Philadelphia (the "FRB") are open.
PURCHASES THROUGH AN ACCOUNT. Share purchases may be effected through an
investor's Account with his broker through procedures established in connection
with the requirements of Accounts at such broker. In such event, beneficial
ownership of Shares will be recorded by the broker and will be reflected in the
Account statements provided by the broker to such investors. A broker may impose
minimum investor Account requirements. Although a broker does not impose a sales
charge for purchases of Shares, depending on the terms of an investor's Account
with his broker, the broker may charge an investor's Account fees for automatic
investment and other services provided to the Account. Information concerning
Account requirements, services and charges should be obtained from an investor's
broker. This Prospectus should be read in conjunction with any information
received from a broker.
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<PAGE>
A broker may offer investors maintaining Accounts the ability to purchase
Shares under an automatic purchase program (a "Purchase Program") established by
a participating broker. An investor who participates in a Purchase Program will
have his "free-credit" cash balances in his Account automatically invested in
Shares of the Portfolio which he has designated (the "Designated Portfolio")
under the Purchase Program. The frequency of investments and the minimum
investment requirement will be established by the broker and the Fund. In
addition, the broker may require a minimum amount of cash and/or securities to
be deposited in an Account for participants in its Purchase Program. The
description of the particular broker's Purchase Program should be read for
details, and any inquiries concerning an Account under a Purchase Program should
be directed to the broker. A participant in a Purchase Program may change the
designation of the Designated Portfolio at any time by so instructing his
broker.
If a broker makes special arrangements under which orders for Shares are
received by PFPC prior to 12:00 noon Eastern Time, and the broker guarantees
that payment for such Shares will be made in Federal Funds to the Fund's
custodian prior to 4:00 p.m. Eastern Time, on the same day, such purchase orders
will be effective and Shares will be purchased at the offering price in effect
as of 12:00 noon Eastern Time on the date the purchase order is received by
PFPC.
DIRECT PURCHASES. An investor may also make direct investments at any time
in any Portfolio he selects through any broker that has entered into a dealer
agreement with the Distributor (a "Dealer"). An investor may make an initial
investment in any of the Portfolios by mail by fully completing and signing an
application obtained from a Dealer (the "Application"), specifying the Portfolio
in which he wishes to invest, and mailing it, together with a check payable to
"PCS Cash Fund" c/o PFPC, P.O. Box 8950, Wilmington, Delaware 19899. The check
must specify the name of the Portfolio for which shares are being purchased. An
Application will be returned to the investor unless it contains the name of the
Dealer from whom it was obtained. Subsequent purchases may be made through a
Dealer or by forwarding payment to the Fund's transfer agent at the foregoing
address.
Provided that the investment is at least $2,500, an investor may also
purchase Shares in any of the Portfolios by having his bank or Dealer wire
Federal Funds to the Fund's custodian, PNC Bank. An investor's bank or Dealer
may impose a charge for this service. In order to ensure prompt receipt of an
investor's Federal Funds wire, for an initial investment, it is important that
an investor follow these steps:
A. Telephone the Fund's transfer agent, PFPC, toll-free (800) 533-7719
(in Delaware call collect (302) 791-1032), and provide it with your name,
address, telephone number, Social Security or Tax Identification Number,
the Portfolio selected, the amount being wired, and by which bank. PFPC
will then provide an investor with a Fund account number. (Investors with
existing accounts should also notify the Fund's transfer agent prior to
wiring funds.)
B. Instruct your bank or Dealer to wire the specified amount, together
with your assigned account number, to the custodian.
PNC Bank, Philadelphia, Pa.
ABA-0310-0005-3
FROM: (name of investor)
ACCOUNT NUMBER: (investor's account number with the Portfolio)
FOR PURCHASE OF: (name of the Portfolio)
AMOUNT: (amount to be invested)
C. Fully complete and sign the Application and mail it to the address
shown thereon. PFPC will not process redemptions until it receives a fully
completed and signed Application. For subsequent investments, an investor
should follow steps A and B above.
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RETIREMENT PLANS. Shares may be purchased in conjunction with individual
retirement accounts ("IRAs") and rollover IRAs where PNC Bank acts as custodian.
For further information as to applications and annual fees, contact the
Distributor or your broker. To determine whether the benefits of an IRA are
available and/or appropriate, a shareholder should consult with a tax advisor.
REDEMPTION PROCEDURES
Redemption orders are effected at the net asset value per share next
determined after receipt of the order in proper form by the Fund's transfer
agent, PFPC. Investors may redeem all or some of their Shares in accordance with
one of the procedures described below.
REDEMPTION OF SHARES IN AN ACCOUNT. An investor who beneficially owns
Shares may redeem such Shares in his Account in accordance with instructions and
limitations pertaining to his Account by contacting his broker. If such notice
is received by PFPC by 12:00 noon Eastern Time on any Business Day, the
redemption will be effective as of 12:00 noon Eastern Time on that day. Payment
of the redemption proceeds will be made after 12:00 noon Eastern Time on the day
the redemption is effected, provided that the Fund's custodian is open for
business. If the custodian is not open, payment will be made on the next bank
business day. If the redemption request is received after 12:00 noon but before
4:00 p.m. Eastern Time, the redemption will be effected as of 4:00 p.m. Eastern
Time on that day and payment will be made on the next bank business day
following receipt of the redemption request. Redemption requests received after
4:00 p.m. Eastern Time will be effected as of 12:00 noon Eastern Time on the
next Business Day and payment of the redemption proceeds will be made after
12:00 noon Eastern Time on the day the redemption is effected, provided that the
Fund's custodian is open for business. If the custodian is not open, payment
will be made on the next bank business day. If all Shares are redeemed, all
accrued but unpaid dividends on those Shares will be paid with the redemption
proceeds.
An investor's brokerage firm will also redeem each day a sufficient number
of Shares of the Designated Portfolio to cover debit balances created by
transactions in the Account or instructions for cash disbursements. Fund Shares
will be redeemed on the same day that a transaction occurs that results in such
a debit balance or charge.
Each brokerage firm reserves the right to waive or modify criteria for
participation in an Account or to terminate participation in an Account for any
reason.
REDEMPTION OF SHARES OWNED DIRECTLY. A direct investor may redeem any
number of Shares by sending a written request to "PCS Cash Fund" c/o PFPC, P.O.
Box 8950, Wilmington, Delaware 19899. Redemption requests must be signed by each
shareholder in the same manner as the Shares are registered. Redemption requests
for joint accounts require the signature of each joint owner. On redemption
requests of $5,000 or more, each signature must be guaranteed by a commercial
bank or trust company or by a member firm of a national securities exchange.
Guarantees must be signed by an authorized signatory of the bank, trust company
or member firm and "Signature Guaranteed" must appear with the signature.
Direct investors may redeem Shares without charge by telephone if they have
checked the appropriate box and supplied the necessary information on the
Application, or have filed a Telephone Authorization with the Fund's transfer
agent. An investor may obtain a Telephone Authorization from PFPC or by calling
Account Services at (800) 533-7719 (in Delaware call collect (302) 791-1032).
The proceeds will be mailed by check to an investor's registered address unless
he has designated in his Application or Telephone Authorization that such
proceeds are to be sent by wire transfer to a specified checking or savings
account. If proceeds are to be sent by wire transfer, a telephone redemption
request received prior to 4:00 p.m. will result in redemption proceeds being
wired to the investor's bank account on the next day that a wire transfer can be
effected. The minimum redemption for proceeds sent by wire transfer is $2,500.
There is no maximum for proceeds sent by wire transfer. There is no minimum
redemption for proceeds mailed by check; however, the maximum redemption for
proceeds mailed by check is $25,000. The Fund may modify this redemption service
at any time or charge a
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service fee upon prior notice to shareholders. No fee is currently contemplated.
The Fund and the Fund's transfer agent will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine. These
procedures include requiring the investor to provide certain personal
identification information at the time an account is opened and prior to
effecting each transaction requested by telephone. In addition, all telephone
transaction requests will be recorded and investors may be required to provide
additional telecopied written instructions of transaction requests. The Fund or
the transfer agent may be liable for any losses due to unauthorized or
fraudulent telephone instructions if either of them does not employ these
procedures. Neither the Fund nor the transfer agent will be responsible for any
loss, liability, cost or expense for following instructions received by
telephone that either of them reasonably believes to be genuine. During periods
of extreme economic or market changes, shareholders may experience difficulty in
effecting telephone transactions. In such event, requests should be made by
regular or express mail.
REDEMPTION BY CHECK. Upon request, the Fund will provide any investor with
forms of drafts ("checks") payable through PNC Bank (the "Bank"). These checks
may be made payable to the order of anyone. The minimum amount of a check is
$500. An investor wishing to use this check writing redemption procedure should
complete specimen signature cards, and then forward such signature cards to his
broker or in accordance with the broker's instructions. Upon receipt, PFPC will
then arrange for the checks to be honored by the Bank. Investors who own Shares
through an Account should contact their brokers for signature cards. Investors
of joint accounts may elect to have checks honored with a single signature.
Check redemptions will be subject to the Bank's rules governing checks. An
investor will be able to stop payment on a check redemption. The Fund or
Provident may terminate this redemption service at any time, and neither shall
incur any liability for honoring checks, for effecting redemptions to pay
checks, or for returning checks which have not been accepted.
When a check is presented to the Bank for clearance, the Bank, as the
investor's agent, will cause the Fund to redeem a sufficient number of full and
fractional Shares owned by the investor to cover the amount of the check. This
procedure enables the investor to continue to receive dividends on those Shares
equalling the amount being redeemed by check until such time as the check is
presented to the Bank. Checks may not be presented for cash payment at the
offices of the Bank because, under 1940 Act rules, redemptions may be effected
only at the redemption price next determined after the redemption request is
presented to PFPC. This limitation does not affect checks used for the payment
of bills or to obtain cash at other banks.
ADDITIONAL REDEMPTION INFORMATION. The Fund ordinarily will make payment
for all Shares redeemed within seven days after receipt of a redemption request
in proper form. Shares purchased by check will not be redeemed, for a period of
up to ten days after their purchase, pending a determination that the check has
cleared. This procedure does not apply to shares purchased by wire payment.
During the period prior to the time shares are redeemed, dividends on such
shares will accrue and be payable.
The Fund imposes no charge when Shares are redeemed. The Fund reserves the
right to redeem any account in a Portfolio involuntarily, on thirty days'
notice, if such account has been reduced by the shareholder to less than $500
and during such 30-day period the amount invested in such account is not
increased to at least $500. Payment for Shares redeemed may be postponed or the
right of redemption suspended as provided by the rules of the Securities and
Exchange Commission.
NET ASSET VALUE
The net asset value per share of each of the 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 the close of trading on the NYSE on each
weekday with the exception of those holidays on which either the NYSE or the FRB
is closed. Currently, the NYSE or the FRB, or both, are closed on the customary
national business holidays of New Year's Day, Martin Luther King, Jr.'s
Birthday, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Columbus Day, Veterans' Day, Thanksgiving Day and Christmas
Day. Each Portfolio's net asset value per share is calculated by adding the
value of all securities and other assets of the Portfolio, subtracting its
liabilities and dividing the result by the number of its outstanding shares. The
net asset value per share of each Portfolio is determined independently of
any of the Fund's other investment portfolios.
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The Fund seeks to maintain for each of the Portfolios a net asset value of
$1.00 per share for purposes of purchases and redemptions and values its
portfolio securities on the basis of the amortized cost method of valuation
described in the Statement of Additional Information under the heading
"Valuation of Shares." There can be no assurance that any Portfolio will be able
to maintain a stable net asset value of $1.00 per share.
With the approval of the Board of Directors, a Portfolio may use a pricing
service, bank or broker-dealer experienced in such matters to value the
Portfolio's securities. A more detailed discussion of net asset value and
security valuation is contained in the Statement of Additional Information.
MANAGEMENT
BOARD OF DIRECTORS
The business and affairs of the Fund and each Portfolio are managed under
the direction of the Fund's Board of Directors.
INVESTMENT ADVISOR
Morgan Stanley Asset Management Inc.(the "Advisor") with principal offices
at 1221 Avenue of the Americas, New York, New York 10020, a wholly-owned
subsidiary of Morgan Stanley Group Inc., acts as investment advisor to the Fund
and each of its Portfolios. At June 30, 1995, the Advisor, together with its
affiliated asset management companies, had approximately $52 billion in assets
under management as an investment manager or as a fiduciary advisor.
As investment advisor to the Portfolios, the Advisor manages such
Portfolios and is responsible for all purchases and sales of portfolio
securities. The Advisor also assists generally in supervising the operations of
the Portfolios. In entering into Portfolio transactions for a Portfolio with a
broker, the Advisor may take into account the sale by such broker of shares of
the Fund, subject to the requirements of best execution.
For the services provided to and expenses assumed by it for the benefit of
each Portfolio, the Advisor is entitled to receive from each Portfolio a fee,
computed daily and payable monthly, at an annual rate of .45% of the first $250
million of such Portfolio's average daily net assets, .40% of the next $250
million of such Portfolio's average daily net assets and .35% of the average
daily net assets of such Portfolio in excess of $500 million. The Advisor may in
its discretion from time to time agree to waive voluntarily all or any portion
of its advisory fee for any Portfolio. For the fiscal year ended June 30, 1995,
the Advisor received fees from the Fund which represented .40% (net of fee
waivers) of the PCS Money Market Portfolio's average net assets and .44% of the
PCS Government Obligations Money Market Portfolio's average net assets.
ADMINISTRATOR AND TRANSFER AND DIVIDEND DISBURSING AGENT
PFPC, an indirect wholly-owned subsidiary of PNC Financial Corp., a
multi-bank holding company, serves as the Fund's administrator and transfer and
dividend disbursing agent. PFPC's address is 400 Bellevue Parkway, Wilmington,
Delaware 19809.
The administrative services to be provided by PFPC include maintenance of
the Fund's books and records, preparation of regulatory filings and
stockholders' reports, and computation of net asset values and daily dividends.
For its services to the Fund as administrator, PFPC receives from each Portfolio
a fee, computed daily and payable monthly, at an annual rate of .10% of the
first $200 million of the Fund's average daily net assets, .075% on the next
$200 million of average daily net assets, .05% on the next $200 million of
average daily net assets, and .03% on average daily net assets over $600
million. For administrative services for the fiscal year ended June 30, 1995,
PFPC received fees from the Fund which represented .10% of the PCS Money Market
Portfolio's average net assets and .09% of the PCS Government Obligations Money
Market Portfolio's average net assets.
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CUSTODIAN
PNC Bank, 17th and Chestnut Streets, Philadelphia, Pennsylvania 19103
serves as the Fund's custodian. PNC Bank is a wholly-owned subsidiary of PNC
Financial Corp.
EXPENSES
The expenses of each Portfolio are deducted from the total income of such
Portfolio before dividends are paid. These expenses include, but are not limited
to, organizational costs, fees paid to the Advisor, fees and expenses of the
Fund's chairman and the officers and directors who are not affiliated with the
Portfolio's Advisor or Distributor, taxes, interest, legal fees, custodian fees,
auditing fees, brokerage fees and commissions, certain of the fees and expenses
of registering and qualifying the Portfolio and its shares for distribution
under federal and state securities laws, expenses of preparing prospectuses and
statements of additional information and of printing and distributing
prospectuses and statements of additional information annually to existing
shareholders, the expense of reports to shareholders, shareholders' meetings and
proxy solicitations, fidelity bond and directors and officers liability
insurance premiums, the expense of using independent pricing services and other
expenses which are not expressly assumed by the Advisor under its advisory
agreement with the Portfolio. For the fiscal year ended June 30, 1995, the PCS
Money Market Portfolio's total expenses (net of fee waivers) were .98% of its
average net assets and the PCS Government Obligations Money Market Portfolio's
total expenses (net of fee waivers) were .95% of its average net assets. Absent
fee waivers, the total operating expenses of such Portfolios would have been
1.18% and 1.12% of their respective average net assets.
The Advisor has agreed to reimburse each Portfolio for the amount, if any,
by which the total operating and management expenses of such Portfolio for any
fiscal year exceed the most restrictive state blue sky expense limitation in
effect from time to time, to the extent required by such limitation.
The Advisor may assume additional expenses of the Portfolios from time to
time, in its discretion, while retaining the ability to be reimbursed by the
Portfolios for such amounts prior to the end of a fiscal year. Assumption of
additional expenses will have the effect of lowering a Portfolio's overall
expense ratio and of increasing yield to investors or the converse at the time
such amounts are reimbursed.
DISTRIBUTION OF SHARES
The Distributor, with an address at 1251 Avenue of the Americas, New York,
NY 10020 acts as distributor of the Shares of each of the Portfolios of the Fund
pursuant to separate distribution contracts (collectively, the "Distribution
Contracts") with the Fund on behalf of each of the Portfolios. The Distributor
may make ongoing annual payments to broker/dealers based upon the aggregate
investment amounts maintained by customers of such broker/dealers in shareholder
accounts in each of the Portfolios of the Fund. The Distributor also pays for
the cost of printing and mailing to prospective investors prospectuses and other
materials relating to the Portfolios of the Fund as well as for related direct
mail and advertising expenses.
The Board of Directors of the Fund approved and adopted the Distribution
Contracts and separate Plans of Distribution for each of the Portfolios
(collectively, the "Plans") pursuant to Rule 12b-1 under the 1940 Act. Under
each of the Plans, the Distributor is entitled to receive from the relevant
Portfolio a distribution fee, which is accrued daily and paid monthly, of up to
.50% on an annualized basis of the average daily net assets of the relevant
Portfolio. The actual amount of such compensation is agreed upon by the Fund's
Board of Directors and by the Distributor. Under each of the Distribution
Contracts, the Distributor has agreed to accept compensation for its services
thereunder and under the relevant Plan in the amount of .50% on an annualized
basis in any year. In addition, the Distributor may, in its discretion,
voluntarily waive from time to time all or any portion of its distribution fee.
For the fiscal year ended June 30, 1995, the Distributor received fees (net of
fee waivers) from the PCS Money Market Portfolio and the PCS Government
Obligations Money Market Portfolio which represented .35% and .33% of their
respective average net assets.
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Each of the Plans obligates the relevant Portfolio, during the period it is
in effect, to accrue and pay to the Distributor the fee agreed to under the
relevant Distribution Contract. None of the Plans obligates a Portfolio to
reimburse the Distributor for the actual expenses the Distributor may incur in
fulfilling its obligations under a Plan. Thus, under each of the Plans, even if
the Distributor's actual expenses exceed the fee payable to the Distributor
thereunder at any given time, the relevant Portfolio will not be obligated to
pay more than that fee. If the Distributor's actual expenses are less than the
fee it receives, the Distributor will retain the full amount of the fee.
Under the terms of Rule 12b-1, each Plan will remain in effect only if
approved at least annually by the Fund's Board of Directors, including those
directors who are not "interested persons" of the Fund as that term is defined
in the 1940 Act and who have no direct or indirect financial interest in the
operation of the Plan or in any agreements related thereto ("12b-1 Directors").
Each of the Plans may be terminated at any time by vote of a majority of the
12b-1 Directors or by vote of a majority of the Fund's outstanding voting
securities of the relevant Portfolio. The fee set forth above will be paid by a
Portfolio to the Distributor unless and until the relevant Plan is terminated or
not renewed. The Fund intends to operate each of the Plans in accordance with
its terms and with the NASD Rules concerning sales charges.
DIVIDENDS AND DISTRIBUTIONS
Each Portfolio will distribute substantially all of its net investment
income and net capital gains, if any, to shareholders. All distributions are
reinvested in the form of additional full and fractional Shares unless a
shareholder elects otherwise. The net investment income (not including, for this
purpose, any net short-term capital gains) earned by each Portfolio will be
declared as a dividend on a daily basis and paid monthly. Dividends are payable
to shareholders of record immediately prior to the determination of net asset
value made as of the close of trading on the NYSE on days on which there is a
determination of net asset value, and as of 4:00 p.m. Eastern Time on days on
which there is no determination of net asset value. Net capital gains, if any,
will be distributed at least annually.
TAXES
The following summary of federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of a Portfolio or its shareholders.
Accordingly, shareholders are urged to consult their tax advisors regarding
specific questions as to federal, state and local income taxes. The Statement of
Additional Information sets forth further information regarding taxes.
Each Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Fund's other Portfolios. Each Portfolio
will elect to be taxed as a regulated investment company under Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"). So long as a
Portfolio satisfies the requirements of the Code for this tax treatment, such
Portfolio will be relieved of federal income tax on amounts distributed to
shareholders, but shareholders, unless otherwise exempt, will pay income or
capital gains taxes on amounts so distributed (except distributions that
constitute "exempt interest dividends" or that are treated as a return of
capital) regardless of whether such distributions are paid in cash or reinvested
in additional Shares. None of the Portfolios intends to make distributions that
will be eligible for the corporate dividends received deduction.
Distributions out of the "net capital gain" (the excess of net long-term
capital gain over net short-term capital loss), if any, of any Portfolio will be
taxed to shareholders as long-term capital gain regardless of the length of time
a shareholder has held Shares of the Portfolio, whether such gain was reflected
in the price paid for the
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Shares, or whether such gain was attributable to securities bearing tax-exempt
interest. All other distributions, to the extent they are taxable, are taxed to
shareholders as ordinary income.
The PCS Tax-Free Money Market Portfolio intends to qualify to pay "exempt
interest dividends" by satisfying the Code's requirement that at the close of
each quarter of its taxable year at least 50% of the value of its total assets
consists of securities the interest on which is exempt from federal income tax.
So long as this and certain other requirements are satisfied, the Portfolio's
"exempt interest dividends" will be exempt from regular federal income tax.
Investors in this Portfolio should note, however, that in certain circumstances
such amounts, while exempt from regular federal income tax, are subject to
alternative minimum tax. In addition, this Portfolio may not be an appropriate
investment for persons who are "substantial users" of facilities financed by
industrial development or private activity bonds. See the Statement of
Additional Information for a description of the application of the alternative
minimum tax and certain other collateral tax consequences.
Current federal income tax law limits the types and volume of bonds
qualifying for the federal income tax exemption of interest, which may affect
the ability of the PCS Tax-Free Money Market Portfolio to purchase sufficient
amounts of tax-exempt securities to qualify to pay "exempt interest dividends."
Investors should note that interest on indebtedness incurred or continued by
shareholders to purchase or carry Shares of the PCS Tax-Free Money Market
Portfolio will not be deductible for federal income tax purposes.
The PCS Tax-Free Money Market Portfolio will determine annually the
percentages of its net investment income which are exempt from the regular
federal income tax and will apply such percentages uniformly to all
distributions declared from net investment income during that year. These
percentages may differ significantly from the actual percentages for any
particular day.
The Fund will send written notices to shareholders annually regarding the
tax status of distributions made by each Portfolio. Dividends declared in
October, November or December of any year payable to shareholders of record on a
specified date in such month will be deemed to have been received by the
shareholders on December 31 of such year, provided such dividends are paid at
any time during January of the following year. Each Portfolio intends to make
sufficient distributions prior to the end of each calendar year to avoid
liability for federal excise tax.
Shareholders who are nonresident alien individuals, foreign trusts or
estates, foreign corporations or foreign partnerships may be subject to
different U.S. federal income tax treatment.
PERFORMANCE INFORMATION
From time to time a Portfolio advertises its "yield" and "effective yield."
Both yield figures are based on historical earnings and are not intended to
indicate future performance. The "yield" of a Portfolio refers to the income
generated by an investment in a Portfolio over a seven-day period (which period
will be stated in the advertisement). This income is then "annualized." That is,
the amount of income generated by the investment during that week is assumed to
be generated each week over a 52-week period and is shown as a percentage of the
investment. The "effective yield" is calculated similarly but, when annualized,
the income earned by an investment in a Portfolio is assumed to be reinvested.
The "effective yield" will be slightly higher than the "yield" because of the
compounding effect of this assumed reinvestment. The PCS Tax-Free Money Market
Portfolio's "tax-equivalent yield" may also be quoted from time to time, which
shows the level of taxable yield needed to produce an after-tax equivalent to
such Portfolio's tax-free yield. This is done by increasing such Portfolio's
yield (calculated as above) by the amount necessary to reflect the payment of
federal income tax at a stated tax rate.
The yield of any investment is generally a function of portfolio quality
and maturity, type of investment and operating expenses. The yield on Shares of
any of the Portfolios will fluctuate and is not necessarily representative of
future results. Any fees charged by broker/dealers directly to their customers
in connection with investments
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<PAGE>
in the Portfolios are not reflected in the yields of the Portfolios, and such
fees, if charged, will reduce the actual return received by shareholders on
their investments.
In addition, from time to time, in advertisements or in reports to
shareholders, the yield of a Portfolio may be quoted and compared to those of
other mutual funds with similar investment objectives and to stock or other
relevant indices. For example, the yield of the PCS Money Market Portfolio may
be compared to the Donoghue's Money Fund Average, which is an average compiled
by IBC/DONOGHUE'S MONEY FUND REPORT, a widely recognized independent publication
that monitors the performance of money market funds, or to the data prepared by
Lipper Analytical Services, Inc., a widely-recognized independent service that
monitors the performance of mutual funds.
DESCRIPTION OF SHARES
The Fund has authorized capital of ten billion shares of Common Stock,
$.001 par value per share, of which three billion shares are currently
classified as follows: 1 billion shares are classified as Class A Common Stock
(PCS Money Market Portfolio), 1 billion shares are classified as Class B Common
Stock (PCS Tax-Free Money Market Portfolio), 1 billion shares are classified as
Class C Common Stock (PCS Government Obligations Money Market Portfolio). Under
the Fund's charter, the Board of Directors has the power to classify or
reclassify any unissued Shares of Common Stock and to increase authorized Shares
from time to time.
Each Share is entitled to one vote for the election of Directors and any
other matter submitted to a shareholder vote. Shares of the Fund do not have
preemptive or conversion rights. When issued for payment as described in this
Prospectus, Shares of the Fund will be fully paid and non-assessable.
The Fund currently does not intend to hold annual meetings of shareholders
except as required by the 1940 Act or other applicable law. The 1940 Act
requires initial shareholder approval of the investment advisory agreement and
the Rule 12b-1 Plan, election of Directors (although vacancies on the Board of
Directors may be filled by the Board under certain circumstances); and if the
Fund holds an annual meeting, ratification of the Board's selection of the
Fund's independent accountants. The law under certain circumstances provides
shareholders with the right to call for a meeting of shareholders to consider
the removal of one or more directors. To the extent required by law, the Fund
will assist in shareholder communication in such matters.
Shareholders of the Fund are entitled to one vote for each full Share held
(irrespective of portfolio) and fractional votes for fractional Shares held.
Voting rights are not cumulative and, accordingly, the holders of more than 50%
of the aggregate Shares of Common Stock of the Fund may elect all of the
directors.
The Fund will not normally issue share certificates for any of the Shares
of the Portfolios.
OTHER INFORMATION
REPORTS AND INQUIRIES
Shareholders will receive unaudited semi-annual reports describing the
Fund's investment operations and annual financial statements audited by
independent accountants. Shareholder inquiries should be addressed to PFPC, the
Fund's transfer agent, P.O. Box 8950, Wilmington, DE 19899.
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PCS CASH FUND, INC.
PCS Money Market Portfolio
PCS Tax-Free Money Market Portfolio
PCS Government Obligations Money Market Portfolio
This Statement of Additional Information provides supplementary information
pertaining to shares of the PCS Money Market Portfolio, the PCS Tax-Free Money
Market Portfolio and the PCS Government Obligations Money Market Portfolio of
the PCS Cash Fund, Inc. (the "Fund"). This Statement of Additional
Information is not a prospectus, and should be read only in conjunction with
the Prospectus of the Fund, dated November 1, 1995 (the "Prospectus"). A copy
of the Prospectus may be obtained by calling toll-free (800) 533-7719.
CONTENTS
Page
General ............................................................. 2
Investment Objectives and Policies .................................. 2
Directors and Officers .............................................. 10
Investment Advisory, Distribution and Servicing
Arrangements ...................................................... 17
Portfolio Transactions .............................................. 19
Purchase and Redemption Information ................................. 21
Valuation of Shares ................................................. 21
Taxes ............................................................... 23
Additional Information Concerning Fund Shares ....................... 26
Miscellaneous ....................................................... 26
Financial Statements ................................................ 27
No person has been authorized to give any information or to make any
representations not contained in this Statement of Additional Information in
connection with the offering made by the Prospectus and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Fund or its distributor. The Prospectus does not constitute
an offering by the Fund or by the distributor in any jurisdiction in which
such offering may not lawfully be made.
This Statement of Additional Information is dated November 1, 1995.
<PAGE>
GENERAL
The PCS Cash Fund, Inc. (the "Fund") is a diversified, open-end management
investment company authorized to offer shares in three investment portfolios.
This Statement of Additional Information pertains to shares of the PCS Money
Market Portfolio, the PCS Tax-Free Money Market Portfolio and the PCS
Government Obligations Money Market Portfolio. The Fund was incorporated
under the laws of the State of Maryland on January 5, 1989 and commenced
operations of the PCS Money Market Portfolio on August 4, 1989, the PCS
Tax-Free Money Market Portfolio on January 9, 1990 and the PCS Government
Obligations Money Market Portfolio on March 12, 1992. Only the PCS Money
Market Portfolio and the PCS Government Obligations Money Market Portfolio are
currently in operation. The PCS Tax-Free Money Market Portfolio was liquidated
on January 3, 1991.
Capitalized terms used herein and not otherwise defined have the same
meanings as are given to them in the Prospectus.
INVESTMENT OBJECTIVES AND POLICIES
The following supplements the information contained in the Prospectus
concerning the investment objective and policies of the Portfolios. A
description of ratings of Municipal Obligations and commercial paper is set
forth in the Appendix hereto.
ADDITIONAL INFORMATION ON PORTFOLIO INVESTMENTS.
REVERSE REPURCHASE AGREEMENTS. Reverse repurchase agreements involve the
sale of securities held by the Portfolios pursuant to the Portfolios'
agreement to repurchase the securities at an agreed upon price, date and rate
of interest. Such agreements are considered to be borrowings under the
Investment Company Act of 1940, as amended (the "1940 Act"). While reverse
repurchase transactions are outstanding, the Portfolios will maintain in a
segregated account cash, U.S. Government securities or other liquid,
high-grade debt securities of an amount at least equal to the market value of
the securities, plus accrued interest, subject to the agreement.
VARIABLE RATE DEMAND INSTRUMENTS. Variable rate demand instruments held by
each Portfolio may have maturities of more than 397 days, provided: (i) the
Portfolio is entitled to the payment of principal at any time, or during
specified intervals not exceeding 397 days, upon giving the prescribed notice
(which may not exceed 30 days), and (ii) the rate of interest on such
instruments is adjusted at periodic intervals which may extend up to 397 days.
In determining the average weighted maturity of the Portfolio and whether a
variable rate demand instrument has a remaining maturity of 397 days or less,
each instrument will be deemed by the Portfolio to have a maturity equal to
the longer of the period remaining until its next interest rate adjustment or
the period remaining until the principal amount can be recovered through
demand. In determining whether an unrated variable rate demand instrument is
of comparable quality at the time of purchase to instruments rated "high
quality," the Advisor will follow guidelines adopted by the Fund's Board of
Directors.
FIRM COMMITMENTS. Firm commitments for securities include "when issued" and
delayed delivery securities purchased for delivery beyond the normal
settlement date at a stated price and yield. While a Portfolio has firm
commitments outstanding, the Portfolio will maintain in a segregated account
cash, U.S. government securities or other liquid, high grade debt securities
of an
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amount at least equal to the purchase price of the securities to be
purchased. Normally, the custodian for a Portfolio will set aside portfolio
securities to satisfy a purchase commitment and, in such a case, a 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 such Portfolio's commitment. It may be expected that 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, it is expected that commitments to purchase "when
issued" securities will not exceed 25% of the value of a Portfolio's total
assets absent unusual market conditions. When a Portfolio engages in
when-issued transactions, it relies on the seller to consummate the trade.
Failure of the seller to do so may result in a Portfolio's incurring a loss or
missing an opportunity to obtain a price considered to be advantageous.
STAND-BY COMMITMENTS. A Portfolio may enter into stand-by commitments with
respect to obligations issued by or on behalf of states, territories, and
possessions of the United States, the District of Columbia, and their
political subdivisions, agencies, instrumentalities and authorities
(collectively, "Municipal Obligations") held in its portfolio. Under a
stand-by commitment, a dealer would agree to purchase at a Portfolio's option
a specified Municipal Obligation at its amortized cost value to the Portfolio
plus accrued interest, if any. Stand-by commitments 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.
The Portfolios expect that 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 a stand-by commitment either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitment (thus reducing the yield to maturity
otherwise available for the same securities). The total amount paid in either
manner for outstanding stand-by commitments held by a Portfolio will not
exceed 1/2 of 1% of the value of that Portfolio's total assets calculated
immediately after each stand-by commitment is acquired.
The Portfolios intend to enter into stand-by commitments only with dealers,
banks and broker-dealers which, in the Advisor's opinion, present minimal
credit risks and otherwise satisfy applicable quality standards. The
Portfolios' reliance upon the credit of these dealers, banks and
broker-dealers will be secured by the value of the underlying Municipal
Obligations that are subject to the commitment.
The Portfolios will acquire stand-by commitments solely to facilitate
portfolio liquidity and do not intend to exercise their right thereunder for
trading purposes. The acquisition of a stand-by commitment will not affect
the valuation or assumed maturity of the underlying Municipal Obligation which
will continue to be valued in accordance with the amortized cost method. The
actual stand-by commitment 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 that Portfolio and will be
reflected in realized gain or loss when the commitment is exercised or
expires.
OBLIGATIONS OF DOMESTIC BANKS, FOREIGN BANKS AND FOREIGN BRANCHES OF U.S.
BANKS. For purposes of the Portfolios' investment policies with respect to
bank obligations, the assets of a bank or savings institution will be deemed
to include the assets of its domestic and foreign branches. Investments in
bank obligations will include obligations of domestic branches of foreign
banks and foreign branches of domestic banks. Such investments may involve
risks that are different from investments in securities of domestic branches
of U.S. banks. These risks may include future
3
<PAGE>
unfavorable political and economic developments, possible withholding taxes
on interest income, seizure or nationalization of foreign deposits, currency
controls, interest limitations, or other governmental restrictions which
might affect the payment of principal or interest on the securities held in a
Portfolio. Additionally, these institutions may be subject to less stringent
reserve requirements and to different accounting, auditing, reporting and
recordkeeping requirements than those applicable to domestic branches of U.S.
banks. The Portfolios will invest in U.S. dollar-denominated obligations of
domestic branches of foreign banks and foreign branches of domestic banks
only when the Advisor believes that the risks associated with such investment
are minimal and that all applicable quality standards have been satisfied.
U.S. GOVERNMENT OBLIGATIONS. Examples of types of U.S. Government
obligations include U.S. Treasury Bills, Treasury Notes and Treasury Bonds and
the obligations of Federal Home Loan Banks, Federal Farm Credit Banks, Federal
Land Banks, the Federal Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business Administration,
Federal National Mortgage Association, Government National Mortgage
Association, General Services Administration, Student Loan Marketing
Association, Central Bank for Cooperatives, Federal Home Loan Mortgage
Corporation, Federal Intermediate Credit Banks, Maritime Administration,
International Bank for Reconstruction and Development (the "World Bank"), the
Asian-American Development Bank and the Inter-American Development Bank.
REPURCHASE AGREEMENTS. The repurchase price under the repurchase agreements
described in the Prospectus generally equals the price paid by a Portfolio
plus interest negotiated on the basis of current short-term rates (which may
be more or less than the rate on the securities underlying the repurchase
agreement). Securities subject to repurchase agreements will be held by the
Fund's custodian in the Federal Reserve/Treasury book-entry system or by
another authorized securities depository. Repurchase agreements are considered
to be loans by a Portfolio under the 1940 Act.
MORTGAGE-RELATED DEBT SECURITIES. Mortgage-related debt securities
represent ownership interests in individual pools of residential mortgage
loans. These securities are designed to provide monthly payments of interest
and principal to the investor. Each mortgagor's monthly payment to his
lending institution on his residential mortgage is "passed-through" to
investors. Mortgage pools consist of whole mortgage loans or participations
in loans. The terms and characteristics of the mortgage instruments are
generally uniform within a pool but may vary among pools. Lending
institutions which originate mortgages for the pools are subject to certain
standards, including credit and underwriting criteria for individual mortgages
included in the pools.
4
<PAGE>
The coupon rate of interest on mortgage-related securities is lower than the
interest rates paid on the mortgages included in the underlying pool, but only
by the amount of the fees paid to the mortgage pooler, issuer, and/or
guarantor of payment of the securities for the guarantee of the services of
passing through monthly payments to investors. Actual yield may vary from the
coupon rate, however, if mortgage-related securities are purchased at a
premium or discount, traded in the secondary market at a premium or discount,
or to the extent that mortgages in the underlying pool are prepaid as noted
above. In addition, interest on mortgage-related securities is earned
monthly, rather than semi-annually as is the case for traditional bonds, and
monthly compounding may tend to raise the effective yield earned on such
securities.
LENDING OF SECURITIES. With respect to loans by the Portfolios of portfolio
securities as described in the Prospectus, the Portfolios would continue to
accrue interest on loaned securities and would also earn income on loans. Any
cash collateral received by the Portfolios in connection with such loans would
be invested in short-term U.S. Government obligations.
INVESTMENT LIMITATIONS.
PCS MONEY MARKET PORTFOLIO.
The Portfolio may not:
(1) issue senior securities or borrow money, except for borrowing money
from banks for temporary purposes or for reverse repurchase agreements and
then in amounts not in excess of 10% of the value of the Portfolio's total
assets at the time of such borrowing, and only if after such borrowing there
is asset coverage of at least 300 percent for all borrowings of the Portfolio;
or mortgage, pledge, hypothecate or in any manner transfer as security for
indebtedness any securities owned or held by the Portfolio, any assets except
as may be necessary in connection with permitted borrowings and then, in
amounts not in excess of 10% of the value of the Portfolio's total assets at
the time of the borrowing; or purchase portfolio securities while borrowings
in excess of 5% of the Portfolio's net assets are outstanding. (This
borrowing provision is not for investment leverage, but solely to facilitate
management of the Portfolio's securities by enabling the Portfolio to meet
redemption requests where the liquidation of portfolio securities is deemed to
be disadvantageous or inconvenient.);
(2) purchase the securities of any one issuer, other than securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, if immediately after and as a result at the time of such
purchase more than 5% of the Portfolio's total assets would be invested in the
securities of such issuer, or more than 10% of the outstanding voting
securities of such issuer would be owned by the Portfolio, except that 25% of
the Portfolio's total assets may be invested without regard to this
limitation;
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<PAGE>
(3) purchase securities on margin, except for short-term credit necessary
for clearance of portfolio transactions;
(4) underwrite securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the Portfolio may be
deemed an underwriter under federal securities laws and except to the extent
that the purchase of Municipal Obligations directly from the issuer thereof in
accordance with the Portfolio's investment objective, policies and limitations
may be deemed to be an underwriting;
(5) make short sales of securities or maintain a short position or write or
sell puts, calls, straddles, spreads or combinations thereof;
(6) purchase or sell real estate, provided that the Portfolio may invest
in securities secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein;
(7) purchase or sell commodities or commodity contracts;
(8) invest in oil, gas or mineral exploration or development programs;
(9) make loans except that the Portfolio may purchase or hold debt
obligations in accordance with its investment objective, policies and
limitations and may enter into repurchase agreements for securities, and may
lend portfolio securities against collateral, consisting of cash or securities
which are consistent with the Portfolio's permitted investments, which is
equal at all times to at least 100% of the value of the securities loaned.
There is no investment restriction on the amount of securities that may be
loaned;
(10) invest in other investment companies except to the extent permitted
by the 1940 Act, provided that the Fund may invest only in investment
companies that are unaffiliated with the Fund;
(11) make investments for the purpose of exercising control or management;
(12) purchase any securities other than Money-Market Instruments, some of
which may be subject to repurchase agreements, but the Portfolio may make
interest-bearing savings deposits in amounts not in excess of 5% of the value
of the Portfolio's assets and may make time deposits;
(13) purchase any securities which would cause 25% or more of the value of
its total assets at the time of such purchase to be invested in the securities
of one or more issuers conducting their principal business activities in the
same industry, provided that there is no limitation with respect to
investments in securities issued or guaranteed by the U.S. Government or its
agencies and instrumentalities or in obligations of U.S. banks or their
domestic branches;
(14) invest more than 5% of its total assets (taken at the time of
purchase) in securities of issuers (including their predecessors) with less
than three years of continuous operations.
The foregoing investment limitations cannot be changed without the
affirmative vote of the lesser of (a) more than 50% of the outstanding shares
of the Portfolio or (b) 67% or more of the shares of the Portfolio present at
a shareholders' meeting if more than 50% of the outstanding shares of the
Portfolio are represented at the meeting in person or by proxy.
With respect to limitation (13) above concerning industry concentration, the
Portfolio will consider wholly-owned finance companies to be in the industries
of their parents if their activities are
6
<PAGE>
primarily related to financing the activities of the parents, and will divide
utility companies according to their services. For example, gas, gas
transmission, electric and gas, electric and telephone will each be
considered a separate industry. The policy and practices stated in this
paragraph may be changed without the affirmative vote of the holders of a
majority of the Portfolio's outstanding shares, but any such change may
require the approval of the Securities and Exchange Commission (the "SEC")
and would be disclosed in the Prospectus prior to being made.
In order to permit the sale of its shares in certain states, the Fund may
make commitments more restrictive than the investment limitations described
above. Should the Fund determine that any such commitment is no longer in its
best interest, it will revoke the commitment and terminate sales of its shares
in the state involved.
In addition, the Board of Directors has adopted the following non-
fundamental investment restrictions. The Portfolio will not:
(1) invest in real estate limited partnerships; or
(2) invest in oil, gas and mineral leases.
PCS TAX-FREE MONEY MARKET PORTFOLIO.
The Portfolio may not:
(1) issue senior securities or borrow money, except from banks for
temporary purposes and then in amounts not in excess of 10% of the value of
the Portfolio's total assets at the time of such borrowing, and only if after
such borrowing there is asset coverage of at least 300 percent for all
borrowings of the Portfolio; or mortgage, pledge, hypothecate or in any manner
transfer as security for indebtedness any securities owned or held by the
Portfolio, any assets except as may be necessary in connection with permitted
borrowings and then in amounts not in excess of the lesser of the dollar
amounts borrowed or 10% of the value of the Portfolio's total assets at the
time of the borrowing; or purchase portfolio securities while borrowings in
excess of 5% of the Portfolio's net assets are outstanding. (This borrowing
provision is not for investment leverage, but solely to facilitate management
of the Portfolio's securities by enabling the Portfolio to meet redemption
requests where the liquidation of portfolio securities is deemed to be
disadvantageous or inconvenient.);
(2) purchase the securities of any one issuer, other than securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, if immediately after and as a result at the time of such
purchase more than 5% of the Portfolio's total assets would be invested in the
securities of such issuer, or more than 10% of the outstanding voting
securities of such issuer would be owned by the Portfolio, except that 25% of
the Portfolio's total assets may be invested without regard to this
limitation;
(3) purchase securities on margin, except for short-term credit necessary
for clearance of portfolio transactions;
(4) underwrite securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the Portfolio may be
deemed an underwriter under federal securities laws and except to the extent
that the purchase of Municipal Obligations directly from the issuer thereof in
accordance with the Portfolio's investment objective, policies and limitations
may be deemed to be an underwriting;
7
<PAGE>
(5) make short sales of securities or maintain a short position or write or
sell puts, calls, straddles, spreads or combinations thereof;
(6) purchase or sell real estate, provided that the Portfolio may invest
in securities secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein;
(7) purchase or sell commodities or commodity contracts;
(8) invest in oil, gas or mineral exploration or development programs;
(9) make loans except that the Portfolio may purchase or hold debt
obligations in accordance with its investment objective, policies and
limitations;
(10) invest more than 10% of the value of the Portfolio's assets in other
investment companies that are unaffiliated with the Fund and then no more than
5% of the Portfolio's assets may be invested in any one money market fund;
(11) make investments for the purpose of exercising control or management;
(12) under normal market conditions invest less than 80% of its net assets
in securities the interest on which is exempt from the regular federal income
tax and does not constitute an item of tax preference for purposes of the
federal alternative minimum tax ("Tax-Exempt Interest");
(13) invest in private activity bonds where the payment of principal and
interest are the responsibility of a company (including its predecessors) with
less than three years of continuous operations; or
(14) purchase any securities which would cause, at the time of purchase,
more than 25% of the value of the total assets of the Portfolio to be invested
in the obligations of the issuers in the same industry.
The foregoing investment limitations cannot be changed without the
affirmative vote of the lesser of (a) more than 50% of the outstanding shares
of the Portfolio or (b) 67% or more of the shares of the Portfolio present or
represented by proxy at a shareholders' meeting if more than 50% of the
outstanding shares of the Portfolio are represented at the meeting in person
or by proxy.
In order to permit the sale of its shares in certain states, the Fund may
make commitments more restrictive than the investment limitations described
above. Should the Fund determine that any such commitment is no longer in its
best interest, it will revoke the commitment and terminate sales of its shares
in the state involved.
PCS GOVERNMENT OBLIGATIONS MONEY MARKET PORTFOLIO
The Portfolio may not:
(1) purchase securities other than U.S. Treasury bills, notes and other
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, and repurchase
8
<PAGE>
agreements relating to such obligations. There is no limit on the amount of
the Portfolio's assets which may be invested in the securities of any one
issuer of obligations that the Portfolio is permitted to purchase;
(2) issue senior securities or borrow money, except from banks for
temporary purposes, and except for reverse repurchase agreements, and then in
an amount not exceeding 10% of the value of the Portfolio's total assets, and
only if after such borrowing there is asset coverage of at least 300 percent
for all borrowings of the Portfolio; or mortgage, pledge or hypothecate its
assets, except in connection with any such borrowing and in amounts not in
excess of 10% of the value of the Portfolio's assets at the time of such
borrowing; or purchase portfolio securities while borrowings in excess of 5%
of the Portfolio's net assets are outstanding. (This borrowing provision is
not for investment leverage, but solely to facilitate management of the
Portfolio by enabling the Portfolio to meet redemption requests where the
liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous);
(3) invest more than 10% of the value of the Portfolio's assets in other
investment companies that are unaffiliated with the Fund and then no more than
5% of the Portfolio's assets may be invested in any one investment company;
(4) act as an underwriter;
(5) make loans except that the Portfolio may purchase or hold debt
obligations in accordance with its investment objective, policies and
limitations, may enter into repurchase agreements for securities, and may lend
portfolio securities against collateral, consisting of cash or securities
which are consistent with the Portfolio's permitted investments, which is
equal at all times to at least 100% of the value of the securities loaned.
There is no investment restriction on the amount of securities that may be
loaned;
(6) purchase securities on margin, except for short-term credit necessary
for clearance of portfolio transactions;
(7) make short sales of securities or maintain a short position or write or
sell puts, calls, straddles, spreads or combinations thereof;
(8) purchase or sell commodities or commodity contracts;
(9) purchase or sell real estate, provided that the Portfolio may invest
in securities secured by real estate or interests therein which are issued and
guaranteed by an agency or instrumentality of the U.S. Government, though not
necessarily by the U.S. Government itself;
(10) invest in oil, gas or mineral exploration or development programs;
(11) make investments for the purpose of exercising control or management; or
(12) purchase any securities which would cause, at the time of purchase,
more than 25% of the value of the total assets of the Portfolio to be invested
in the obligations of the issuers in the same industry.
The foregoing investment limitations cannot be changed without the
affirmative vote of the lesser of (a) more than 50% of the outstanding shares
of the Portfolio or (b) 67% or more of the shares of the Portfolio present at
a shareholders' meeting if more than 50% of the outstanding shares of the
Portfolio are represented at the meeting in person or by proxy.
9
<PAGE>
In order to permit the sale of its shares in certain states, the Fund may
make commitments more restrictive than the investment limitations described
above. Should the Fund determine that any such commitment is no longer in its
best interest, it will revoke the commitment and terminate sales of its shares
in the state involved.
In addition, the Board of Directors has adopted the following non-
fundamental investment restrictions. The Portfolio will not:
(1) invest in real estate limited partnerships; or
(2) invest in oil, gas and mineral leases.
DIRECTORS AND OFFICERS
The Fund's officers, under the supervision of the Board of Directors, manage
the day to day operations of the Fund. Three Directors and all of the
officers of the Fund are directors, officers or employees of the Fund's
adviser, distributor or administrator. The other Directors have no
affiliation with the Fund's adviser, distributor or administrator. The
Directors are also directors of other open-end funds advised by Morgan Stanley
Asset Management Inc. (collectively with the Fund, the "Open-end Fund
Complex"). Officers of the Fund are also Officers of some or all of the other
investment companies managed, administered, advised or distributed by Morgan
Stanley Asset Management Inc. or its affiliates. The directors and executive
officers of the Fund, their business addresses and principal occupations
during the past five years are:
Name, Address Principal Occupation During
and Age Position with Fund Past Five Years
Barton M. Biggs* Chairman and Chairman and Director of Morgan
1221 Avenue of Director Stanley Asset Management Inc.and
the Americas Morgan Stanley Asset Management
New York, NY 10020 Limited; Managing Director of
(62) Morgan Stanley & Co., Inc.;
Director of Morgan Stanley Group
Inc.; Member of International
Advisory Counsel of the Thailand
Fund; Chairman and Director of
The Brazilian Investment Fund,
Inc., The Latin American
Discovery Fund, Inc., The
Malaysia Fund, Inc., Morgan
Stanley Africa Investment Fund,
Inc., Morgan Stanley Asia-
acific Fund, Inc., Morgan
Stanley Emerging Markets Debt
Fund, Inc., Morgan Stanley
Emerging Markets Fund, Inc.,
Morgan Stanley Fund Inc., Morgan
Stanley Global Opportunity Bond
Fund, Inc., Morgan Stanley High
Yield
10
<PAGE>
Fund, Inc., Morgan Stanley
India Investment Fund, Inc.,
Morgan Stanley Institutional
Fund, Inc., The Pakistan
Investment Fund, Inc., PCS
Cash Fund, Inc., The Thai Fund,
Inc. and The Turkish Investment
Fund, Inc.
Warren J. Olsen* Director and President Principal of Morgan Stanley &
1221 Avenue of the Co., Inc.; Principal of
Americas Morgan Stanley Asset Management
New York, NY 10020 Inc.; President and Director of
(39) The Brazilian Investment Fund,
Inc., The Latin American
Discovery Fund, Inc., The
Malaysia Fund, Inc., Morgan
Stanley Africa Investment Fund,
Inc., Morgan Stanley Asia-
Pacific Fund, Inc., Morgan
Stanley Emerging Markets Debt
Fund, Inc., Morgan Stanley
Emerging Markets Fund, Inc.,
Morgan Stanley Fund, Inc.,
Morgan Stanley Global
Opportunity Bond Fund, Inc.,
Morgan Stanley High Yield Fund,
Inc., Morgan Stanley India
Investment Fund, Inc., Morgan
Stanley Institutional Fund,
Inc., The Pakistan Investment
Fund, Inc., PCS Cash Fund,
Inc., The Thai Fund, Inc., and
The Turkish Investment Fund,
Inc.
John D. Barrett, II Director Chairman and Director of
521 Fifth Avenue Barrett Associates, Inc.
New York, NY 10135 (investment counseling);
(60) Director of the Ashforth
Company (real estate); Director
of the Morgan Stanley Fund,
Inc., Morgan Stanley
Institutional Fund, Inc. and
PCS Cash Fund, Inc.
Gerard E. Jones Director Partner in Richards & O'Neil
43 Arch Street L.L.P. (law firm); Director of
Greenwich, CT 06830 the Morgan Stanley Fund, Inc.,
(58) Morgan Stanley Institutional
Fund, Inc. and PCS Cash Fund,
Inc.
Andrew McNally IV Director Chairman and Chief Executive
8255 North Central Officer of Rand McNally
Park Avenue (publication); Director of
Skokie, IL 60076 Allendale Insurance Co.,
(54) Mercury Finance (consumer
finance); Zenith Electronics,
Hubbell, Inc. (industrial
electronics); Director of the
Morgan Stanley Fund, Inc.,
Morgan Stanley Institutional
Fund, Inc. and PCS Cash Fund,
Inc.; Director of the Morgan
Stanley Fund, Inc., Morgan
Stanley Institutional Fund,
Inc. and PCS Cash Fund, Inc.
11
<PAGE>
Samuel T. Reeves Director Chairman of the Board and CEO,
8211 North Pinacle L.L.C. (investment
Fresno Street firm); Director, Pacific Gas
Fresno, CA 93720 and Electric and PG&E
(61) Enterprises (utilities);
Director of the Morgan Stanley
Fund, Inc., Morgan Stanley
Institutional Fund, Inc. and
PCS Cash Fund, Inc.
Fergus Reid Director Chairman and Chief Executive
85 Charles Colman Blvd Officer of LumeLite Corporation
Pawling, NY 12564 (injection molding firm);
(63) Trustee and Director of Vista
Mutual Fund Group; Director of
the Morgan Stanley Fund, Inc.,
Morgan Stanley Institutional
Fund, Inc. and PCS Cash Fund,
Inc.
Frederick O. Robertshaw Director Chairman Of Counsel, Bryan,
2800 North Central Avenue Cave (law firm); Previously
Phoenix, AZ 85004 associated with Copple,
(61) Chamberlin & Boehm, P.C. and
Rake, Copple, Downey & Black,
P.C. (law firms); Director of
the Morgan Stanley Fund, Inc.,
Morgan Stanley Institutional
Fund,Inc. and PCS Cash Fund,
Inc.
Frederick B. Whittemore* Director Advisory Director of Morgan
1251 Avenue of the Stanley & Co., Inc.; Vice-
Americas, 30th Flr. Chairman and Director of The
New York, NY 10020 Brazilian Investment Fund,
(65) Inc., The Latin American
Discovery Fund, Inc., The
Malaysia Fund, Inc., Morgan
Stanley Africa Investment Fund,
Inc., Morgan Stanley Asia-
Pacific Fund, Inc., Morgan
Stanley Emerging Markets Debt
Fund, Inc., Morgan Stanley
Emerging Markets Fund, Inc.,
Morgan Stanley Fund, Inc.,
Morgan Stanley Global
Opportunity Bond Fund, Inc.,
Morgan Stanley High Yield
Fund, Inc., Morgan Stanley India
Investment Fund, Inc., Morgan
Stanley Institutional Fund,
Inc., The Pakistan Investment
Fund, Inc., PCS Cash Fund,
Inc., The Thai Fund, Inc. and
The Turkish Investment Fund,
Inc.
12
<PAGE>
James W. Grisham Vice President Principal of Morgan Stanley &
1221 Avenue of the Co., Inc.; Vice President of
Americas Morgan Stanley Asset Management
New York, NY 10020 Inc.; Vice President of The
(54) Brazilian Investment Fund,
Inc., The Latin American
Discovery Fund, Inc., The
Malaysia Fund, Inc., Morgan
Stanley Africa Investment Fund,
Inc., Morgan Stanley Asia-
Pacific Fund, Inc., Morgan
Stanley Emerging Markets Debt
Fund, Inc., Morgan Stanley
Emerging Markets Fund, Inc.,
Morgan Stanley Fund, Inc.,
Morgan Stanley Global
Opportunity Bond Fund, Inc.,
Morgan Stanley High Yield Fund,
Inc., Morgan Stanley India
Investment Fund, Inc., Morgan
Stanley Institutional Fund,
Inc., The Pakistan Investment
Fund, Inc., PCS Cash Fund,
Inc., The Thai Fund, Inc. and
The Turkish Investment Fund,
Inc.
Harold J. Schaaff, Jr. Vice President Principal of Morgan Stanley &
1221 Avenue of the Co.; Principal General Counsel
Americas and Secretary of Morgan Stanley
New York, NY 10020 Asset Management Inc.; Vice
(35) President of The Brazilian
Investment Fund, Inc., The
Latin American Discovery Fund,
Inc., The Malaysia Fund, Inc.,
Morgan Stanley Africa
Investment Fund, Inc., Morgan
Stanley Asia-Pacific Fund,
Inc., Morgan Stanley Emerging
Markets Debt Fund, Inc., Morgan
Stanley Emerging Markets Fund,
Inc., Morgan Stanley Fund,
Inc., Morgan Stanley Global
Opportunity Bond Fund, Inc.,
Morgan Stanley High Yield Fund,
Inc., Morgan Stanley India
Investment Fund, Inc., Morgan
Stanley Institutional Fund,
Inc., The Pakistan Investment
Fund, Inc., The PCS Cash Fund,
Inc., The Thai Fund, Inc. and
The Turkish Investment Fund,
Inc.
13
<PAGE>
Joseph P. Stadler Vice President Vice President of Morgan
1221 Avenue of the Stanley Asset Management Inc.;
Americas Previously with Price
New York, NY 10020 Waterhouse LLP (accounting); Vice
(41) President of The Brazilian
Investment Fund, Inc., The
Latin American Discovery Fund,
Inc., The Malaysia Fund, Inc.,
Morgan Stanley Africa
Investment Fund, Inc., Morgan
Stanley Asia-Pacific Fund,
Inc., Morgan Stanley Emerging
Markets Debt Fund, Inc., Morgan
Stanley Emerging Markets Fund,
Inc., Morgan Stanley Fund,
Inc., Morgan Stanley Global
Opportunity Bond Fund, Inc.,
Morgan Stanley High Yield Fund,
Inc., Morgan Stanley India
Investment Fund, Inc., Morgan
Stanley Institutional Fund,
Inc., The Pakistan Investment
Fund, Inc., PCS Cash Fund,
Inc., The Thai Fund, Inc. and
The Turkish Investment Fund,
Inc.
Valerie Y. Lewis Secretary Vice President of Morgan
1221 Avenue of the Stanley Asset Management Inc.;
Americas Previously with Citicorp
New York, NY 10020 (banking); Secretary of The
(39) Brazilian Investment Fund,
Inc., The Latin American
Discovery Fund, Inc., The
Malaysia Fund, Inc., Morgan
Stanley Africa Investment Fund,
Inc., Morgan Stanley Asia-
Pacific Fund, Inc., Morgan
Stanley Emerging Markets Debt
Fund, Inc., Morgan Stanley
Emerging Markets Fund, Inc.,
Morgan Stanley Fund, Inc.,
Morgan Stanley Global
Opportunity Bond Fund, Inc.,
Morgan Stanley High Yield Fund,
Inc., Morgan Stanley India
Investment Fund, Inc., Morgan
Stanley Institutional Fund,
Inc., The Pakistan Investment
Fund, Inc., PCS Cash Fund,
Inc., The Thai Fund, Inc. and
The Turkish Investment Fund,
Inc.
Karl O. Hartmann Assistant Secretary Senior Vice President,
73 Tremont Street Secretary and General Counsel
Boston, MA 02108-3913 of Chase Global Funds Services
(40) Company; Senior Vice President,
Secretary and General Counsel,
Leland, O'Brien, Rubinstein
Associates, Inc. (an investment
adviser) from November 1990 to
November 1991.
14
<PAGE>
Sharon A. Vandiver Assistant Secretary Assistant Vice President, PFPC
400 Bellevue Parkway Inc. and PNC Bank.
Wilmington, DE 19809
(36)
Stephen M. Wynne Treasurer Vice President, PFPC Inc. and
400 Bellevue Parkway PNC Institutional Management
Wilmington, DE 19809 Corporation.
(40)
Charles D. Curtis, Jr. Assistant Treasurer Vice President, PFPC Inc.
400 Bellevue Parkway Former Secretary and Treasurer,
Wilmington, DE 19809 Parkway Management Corporation.
(40)
___________________
* "Interested Person" within the meaning of the 1940 Act.
Effective June 28, 1995, the Open-end Fund Complex will pay each of the nine
Directors who is not an "interested person" an annual aggregate fee of
$55,000, plus out-of-pocket expenses. The Open-end Fund Complex will pay each
of the members of the Fund's Audit Committee, which consists of the Fund's
Directors who are not "interested persons," an additional annual aggregate fee
of $10,000 for serving on such a committee. The allocation of such fees will
be among the three funds in the Open-end Fund Complex in direct proportion to
their respective average net assets. For the fiscal year ended June 30, 1995
fees and expenses paid to the Directors of the Fund totalled $54,500. The
Fund currently has no employees, as substantially all of the services
necessary for the operation of the Fund are performed by Morgan Stanley Asset
Management Inc., the Fund's advisor, PNC Bank, National Association (successor
by merger to Provident National Bank) ("PNC Bank"), the Fund's custodian, PFPC
Inc. (formerly Provident Financial Processing Corporation) ("PFPC"), the
Fund's administrator and transfer and dividend disbursing agent, and Morgan
Stanley & Co., Incorporated (the "Distributor"), the Fund's distributor.
Except for fees paid to the Fund's Chairman, as discussed above, no officer,
director or employee of Morgan Stanley Asset Management, Inc., PNC Bank, PFPC
or the Distributor currently receives any compensation from the Fund.
The aggregate compensation paid by the Fund and other investment companies
registered under the 1940 Act that have the Advisor as an investment advisor
(the "Fund Complex") to each of the Fund's Directors serving during the fiscal
year ended June 30, 1995 is set forth in the compensation table below.
15
<PAGE>
<TABLE>
<CAPTION>
COMPENSATION TABLE
(1) (2) (3) (4) (5)
Name of Aggregate Pension or Estimated Total
Person, Compensation Retirement Annual Compensation
Position From Benefits Accrued Benefits From Registrant
Registrant as Part of Fund Upon and Fund Complex
Expenses Retirement Paid to Directors
<S> <C> <C> <C> <C>
Barton M. Biggs,*
Director and Chairman of
the Board N/A* N/A*
John D. Barret II,*
Director N/A* N/A*
John P. Britton,***
Director $10,100 - - $26,600
George R. Bunn, Jr.,***
Director $13,650 - - $32,00
A. Macdonald Caputo,***
Director N/A N/A
Peter E. deSvastich,***
Director $10,100 - - $29,958
Gerard E. Jones,**
Director $10,100 - - $80,057
Warren J. Olsen,**
Director and President N/A N/A
Andrew McNally IV,*
Director N/A* N/A*
Samuel T. Reeves,*
Director N/A* N/A*
Fergus Reid,*
Director N/A* N/A*
Frederick O. Robertshaw,*
Director N/A* N/A*
Frederick B. Whittemore,**
Director (Chairman of
the Board until
June 28, 1995) $10,400 - - $57,400
<FN>
* Elected (Director) as of June 28, 1995.
** Reelected as of June 28, 1995.
*** Resigned as of June 28, 1995.
</FN>
</TABLE>
16
<PAGE>
INVESTMENT ADVISORY, DISTRIBUTION AND SERVICING ARRANGEMENTS
ADVISORY AGREEMENTS. The advisory services provided by Morgan Stanley Asset
Management Inc. (the "Advisor") and the fees received for such services are
described in the Prospectus. The Advisor renders advisory services to the
Portfolios pursuant to three separate Investment Advisory Agreements, each
dated as of July 3, 1989 (collectively, the "Advisory Agreements). For the
fiscal years ended June 30, 1995, June 30, 1994, and June 30, 1993 the Advisor
received from the Fund, out of the assets of the PCS Money Market Portfolio,
fees in the amount of $611,754, $686,138 and $652,763, respectively (net of
voluntary fee waivers of $87,105, $109,879 and $123,416, respectively). For
the fiscal years ended June 30, 1995, June 30, 1994 and June 30, 1993, the
Advisor received from the Fund, out of the assets of the PCS Government
Obligations Money Market Portfolio, fees in the amount of $897,867, $412,757
and $741,203, respectively (net of voluntary fee waivers of $0, $25,448 and
$20,059, respectively). The Advisor and the Distributor are voluntarily
waiving a portion of their respective fees until such time as they determine
that the Fund's performance is competitive with other comparable funds without
such waivers.
As required by various state regulations, the Advisor will reimburse the
Fund or a Portfolio (as applicable) if and to the extent that the aggregate
operating expenses of the Fund or the applicable Portfolio exceed applicable
state limits for the fiscal year, to the extent required by such state
regulations. Currently, the most restrictive of such applicable limits is
2.5% of the first $30 million of average daily net assets, 2.0% of the next
$70 million of average daily net assets and 1.5% of the remaining average
daily net assets. Certain expenses, such as brokerage commissions, taxes,
interest and extraordinary items, are excluded from this limitation. Whether
such expense limitations apply to the Fund as a whole or to a Portfolio on an
individual basis depends upon the particular regulations of such states. No
such reimbursements were required in any fiscal period since the Fund
commenced operations.
A Portfolio bears all of its own expenses not specifically assumed by the
Advisor. General expenses of the Fund not readily identifiable as belonging to
a portfolio are allocated among the portfolios by or under the direction of
the Fund's Board of Directors in such manner as the Board determines to be
fair and equitable. Expenses borne by a portfolio include, but are not
limited to, the following (or a portfolio's share of the following): (a) the
cost (including brokerage commissions) of securities purchased or sold by a
portfolio and any losses incurred in connection therewith; (b) fees payable to
and expenses incurred on behalf of a portfolio by the Advisor; (c) expenses of
organizing the Fund; (d) certain of the filing fees and expenses relating to
the registration and qualification of the Fund and a portfolio's shares under
federal and/or state securities laws and maintaining such registrations and
qualifications; (e) fees and salaries payable to the Fund's directors and
officers; (f) taxes (including any income or franchise taxes) and governmental
fees; (g) costs of any liability and other insurance or fidelity bonds; (h)
any costs, expenses or losses arising out of a liability of or claim for
damages or other relief asserted against the Fund or a portfolio for violation
of any law; (i) legal, accounting and auditing expenses, including legal fees
of special counsel for the independent directors; (j) charges of custodians
and other agents; (k) expenses of setting in type and printing prospectuses,
statements of additional information and supplements thereto for existing
shareholders, reports, statements, and confirmations to shareholders and proxy
material that are not attributable to a class; (l) costs of mailing
prospectuses, statements of additional information and supplements thereto to
existing shareholders, as well as reports to shareholders and proxy material;
(m) any extraordinary expenses; (n) fees, voluntary assessments and other
expenses incurred in connection with membership in investment company
organizations; (o) costs of mailing and tabulating proxies and costs of
shareholders' and directors' meetings; (p) costs of the Advisor's use of
independent pricing services to value a portfolio's securities; (q) the cost
of investment company literature and other publications provided by the Fund
to its directors and officers; (r) distribution expenses; (s) transfer agency
expenses; (t) expenses of preparation, printing and mailing
17
<PAGE>
prospectuses, statements of additional information, proxy statements
and reports to shareholders; and (u) organizational expenses and
registration fees.
Under the Advisory Agreement, the Advisor 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 Advisory Agreement, except
a loss resulting from willful misfeasance, bad faith or gross negligence on
the part of the Advisor in the performance of its duties or from reckless
disregard of its duties and obligations thereunder.
Each Advisory Agreement was approved by the Fund's initial shareholder on
June 30, 1989 and was most recently approved on June 28, 1995 by a vote of the
Fund's Board of Directors, including a majority of those directors who are not
parties to the Advisory Agreement or "interested persons" of such parties.
Each Advisory Agreement is terminable by vote of the Fund's Board of Directors
or by the holders of a majority of the outstanding voting securities of the
Portfolios, at any time without penalty, on 90 days' written notice to the
Advisor. Each Advisory Agreement may also be terminated by the Advisor on 60
days' written notice to the Fund. Each Advisory Agreement terminates
automatically in the event of its assignment.
ADMINISTRATION AGREEMENT. PFPC serves as Administrator of the Fund pursuant
to an Administration Agreement dated as of July 3, 1989. The services
provided and fees received by PFPC are described in the Fund's prospectus.
PFPC, may, on 30 days' notice to the Fund, assign its duties as Administrator
to any other affiliate of PNC Financial Corp. For administrative services for
the Fund for the fiscal years ended June 30, 1995, June 30, 1994 and June 30,
1993 the Fund paid the Administrator aggregate fees of $346,829 ($155,302 for
services to the PCS Money Market Portfolio and $191,527 for services to the
PCS Government Obligations Money Market Portfolio), $283,085 ($175,775 for
services to the PCS Money Market Portfolio and $107,310 for services to the
PCS Government Obligations Money Market Portfolio) and $339,279 ($171,956 for
services to the PCS Money Market Portfolio and $167,323 for services to the
PCS Government Obligations Money Market Portfolio), respectively.
CUSTODIAN AND TRANSFER AGENCY AGREEMENTS. PNC Bank is custodian of the
Fund's assets pursuant to a custodian agreement dated as of July 3, 1989 (the
"Custodian Agreement"). Under the Custodian Agreement, PNC Bank (a) maintains
a separate account or accounts in the name of the Portfolios (b) holds and
transfers portfolio securities on account of the Portfolios, (c) accepts
receipts and makes disbursements of money on behalf of the Portfolios, (d)
collects and receives all income and other payments and distributions on
account of the Portfolios' portfolio securities and (e) makes periodic reports
to the Fund's Board of Directors concerning the Portfolios' 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 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.
PFPC serves as the transfer and dividend disbursing agent for the Fund
pursuant to a Transfer Agency Agreement dated as of July 3, 1989 (the
"Transfer Agency Agreement"), under which PFPC (a) issues and redeems shares
of the Portfolios, (b) addresses and mails all communications by the
Portfolios to record owners of shares, including reports to shareholders,
dividend and distribution notices and proxy materials for its meetings of
shareholders, (c) maintains shareholder accounts and, if requested,
sub-accounts and (d) makes periodic reports to the Fund's Board of Directors
concerning the operations of the Portfolios. PFPC may, on 30 days' notice to
the Fund, assign its duties as transfer and dividend disbursing agent to any
other affiliate of PNC Financial Corp.
DISTRIBUTION AGREEMENTS AND PLANS. Pursuant to the terms of separate
distribution contracts, dated as of July 3, 1989 (the "Distribution
Contracts") entered into by the Distributor and the
18
<PAGE>
Fund on behalf of the Portfolios, and a separate Plan of Distribution for each
Portfolio (the "Plans"), all of which were adopted by the Fund in the manner
prescribed by Rule 12b-1 under the 1940 Act, the Distributor will use its best
efforts to distribute shares of the Portfolios. As compensation for its
distribution services, the Distributor will receive, pursuant to the terms of
the Distribution Contracts, a distribution fee, to be calculated daily and
paid monthly, at the annual rate set forth in the Prospectus. The Distributor
currently proposes to re-allow up to all of its distribution payments to
broker/dealers for selling shares of the Portfolios based on a percentage of
the amounts invested by their customers. For the fiscal years ended June 30,
1995, June 30, 1994, and June 30, 1993 the Distributor received fees from the
Fund for distribution of the PCS Money Market Portfolio of $545,816, $619,125
and $603,695, respectively, (net of voluntary fee waivers of $230,695,
$265,339 and $258,726, respectively) and paid from the fees it received
$173,196, $161,796 and $219,161, respectively, to broker dealers as
compensation for selling shares of such Portfolio. For the fiscal years ended
June 30, 1995, June 30, 1994 and June 30, 1993, the Distributor received fees
from the Fund for distribution of the PCS Government Obligations Money Market
Portfolio of $661,194, $252,061 and $462,592, respectively (net of voluntary
fee waivers of $351,869, $234,833 and $390,097, respectively) and paid from
the fees it received $62,899, $122,228 and $163,790, respectively, to broker
dealers as compensation for selling shares of such Portfolio. The Advisor and
the Distributor are voluntarily waiving a portion of their respective fees
until such time as they determine that the Fund's performance is competitive
with other comparable funds without such waivers.
Each of the Distribution Contracts provides that it shall continue in effect
for a period of more than two years from the date of its execution only so
long as such continuance is specifically approved at least annually by the
Board of Directors or by the shareholders in the manner prescribed by the 1940
Act. Each Distribution Contract also provides, in substance, for its automatic
termination in the event of its assignment. The Distribution Contracts were
most recently approved by the Fund's Board of Directors on June 28, 1995.
The Plans with respect to the Portfolios were approved on June 7, 1989 and
most recently on June 28, 1995 by the Fund's Board of Directors, including the
directors who are not "interested persons" of the Fund and who have no direct
or indirect financial interest in the operation of the Plans or any agreements
related to the Plans ("12b-1 Directors"). The Plans with respect to the
Portfolios were also approved by the Fund's sole shareholder on June 30, 1989.
Among other things, the Plans provide that: (1) the Distributor shall be
required to submit quarterly reports to the directors of the Fund regarding
all amounts expended under the Plans and the purposes for which such
expenditures were made, including commissions, advertising, printing,
interest, carrying charges and any allocated overhead expenses; (2) the Plans
will continue in effect only so long as they are approved at least annually,
and any material amendment thereto is approved, by the Fund's directors,
including the 12b-1 Directors, acting in person at a meeting called for said
purpose; (3) the aggregate amount to be spent by the Fund on the distribution
of the Fund's shares of the Portfolios under the Plans shall not be materially
increased without the affirmative vote of the holders of a majority of the
Fund's shares in a Portfolio; and (4) while the Plans remain in effect, the
selection and nomination of the Fund's directors who are not "interested
persons" of the Fund (as defined in the 1940 Act) shall be committed to the
discretion of the directors who are not interested persons of the Fund.
PORTFOLIO TRANSACTIONS
The Portfolios intend to purchase securities with remaining maturities of
397 days or less, except for securities that are subject to repurchase
agreements (which in turn may have maturities of 397 days or less), and
variable rate securities with remaining maturities of 397 days or more so long
19
<PAGE>
as such securities comply with conditions established by the SEC under which
they may be considered to have remaining maturities of 397 days or less.
Because each Portfolio intends to purchase only securities with remaining
maturities of 397 days or less, its respective portfolio turnover rate will be
relatively high. However, because brokerage commissions will not normally be
paid with respect to investments made by a Portfolio, the turnover rate should
not adversely affect a Portfolio's net asset value or net income. The
Portfolios do not intend to seek profits through short term trading.
Purchases of portfolio securities by the Portfolios are made from dealers,
underwriters and issuers; sales are made to dealers 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. 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
directly from or sold directly to an issuer, no commissions or discounts are
paid. It is the policy of the Portfolios to give primary consideration to
obtaining the most favorable price and efficient execution of transactions.
In seeking to implement the policies of the Portfolios, the Advisor will
effect transactions with those dealers it believes provide the most favorable
prices and are capable of providing efficient executions. In no instance will
portfolio securities be purchased from or sold to the Distributor, the
Advisor, or any affiliated person (as defined in the 1940 Act) of the
foregoing entities except to the extent permitted by SEC exemptive order or by
applicable law.
The Advisor may seek to obtain an undertaking from issuers of commercial
paper or dealers selling commercial paper to consider the repurchase of such
securities from the Portfolios prior to their maturity at their original cost
plus interest (sometimes adjusted to reflect the actual maturity of the
securities), if it believes that the Portfolios' 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 (for which there is no established market),
especially if interest rates have risen since acquisition of the particular
commercial paper.
Investment decisions for the Portfolios and for other investment accounts
managed by the Advisor are made independently of each other in the light of
differing conditions. However, the same investment decision may occasionally
be made for two or more of such accounts. In such cases, simultaneous
transactions are inevitable. Purchases or sales are then averaged as to price
and allocated as to amount according to a formula deemed equitable to each
such account. While in some cases this practice could have a detrimental
effect upon the price or value of the security as far as a Portfolio is
concerned, in other cases it is believed to be beneficial to a Portfolio. The
Portfolios will not purchase securities during the existence of any
underwriting or selling group relating to such security of which the
Distributor or any affiliated person (as defined in the 1940 Act) thereof is a
member except pursuant to procedures adopted by the Fund's Board of Directors
pursuant to Rule 10f-3 under the 1940 Act. Among other things, these
procedures, which will be reviewed by the Fund's directors annually, require
that the commission paid in connection with such a purchase be reasonable and
fair, that the purchase be at not more than the public offering price prior to
the end of the first business day after the date of the public offer, and that
the Advisor not participate in or benefit from the sale to the Portfolio. The
Fund paid no brokerage commissions in the fiscal years ended June 30, 1995,
June 30, 1994 and June 30, 1993.
The Fund is required to identify any securities of its "regular brokers or
dealers" (as such term is defined in the 1940 Act) which the Fund has acquired
during its most recent fiscal year. As of June 30, 1995, the PCS Money Market
Portfolio held a 6.05% repurchase agreement issued by Goldman, Sachs & Co.
valued at $35,380,000 and the PCS Government Obligations Money Market
Portfolio held a
20
<PAGE>
6.05% repurchase agreement issued by Goldman Sachs & Co. valued at
$11,930,000 Goldman Sachs & Co. is a "regular broker or dealer" of
the Fund.
PURCHASE AND REDEMPTION INFORMATION
The Fund reserves the right, if conditions exist which make cash payments
undesirable, to honor any request for redemption or repurchase of the
Portfolio's shares by making payment in whole or in part in securities chosen
by the Fund and valued in the same way as they would be valued for purposes of
computing each Portfolio's net asset value. If payment is made in securities,
a shareholder may incur transaction costs in converting these securities into
cash. The Fund has elected, however, to be governed by Rule 18f-1 under the
1940 Act so that a Portfolio is obligated to redeem its shares solely in cash
up to the lesser of $250,000 or 1% of its net asset value during any 90-day
period for any one shareholder of a Portfolio.
Under the 1940 Act, a Portfolio may suspend the right of redemption or
postpone the date of payment upon redemption for any period during which the
New York Stock Exchange (the "NYSE") is closed (other than customary weekend
and holiday closings), or during which trading on said Exchange is restricted,
or during which (as determined by the SEC by rule or regulation) an emergency
exists as a result of which disposal or valuation of portfolio securities is
not reasonably practicable, or for such other periods as the SEC may permit.
(A Portfolio may also suspend or postpone the recordation of the transfer of
its shares upon the occurrence of any of the foregoing conditions.)
VALUATION OF SHARES
The Fund intends to use its best efforts to maintain the net asset value of
each Portfolio at $1.00 per share. However, there is no assurance that each
Portfolio will maintain a stable net asset value of $1.00 per share. Net
asset value per share, the value of an individual share in a Portfolio, is
computed by dividing a Portfolio's net assets by the number of outstanding
shares of that Portfolio. A Portfolio's "net assets" equal the value of that
Portfolio's investments and other securities less its liabilities. The Fund's
net asset value per share is computed twice each day, as of 12:00 noon
(Eastern Time) and as of the close of trading on the NYSE, on each Business
Day. "Business Day" means each day, Monday through Friday, when the NYSE and
the Federal Reserve Bank of Philadelphia (the "FRB") are open. Currently, the
NYSE or the FRB, or both, are closed on New Year's Day, Martin Luther King,
Jr.'s Birthday, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Columbus Day, Veteran's Day, Thanksgiving Day and Christmas Day.
The Fund calculates the value of the portfolio securities of the Portfolios
by using the amortized cost method of valuation. Under this method the market
value of an instrument is approximated by amortizing the difference between
the acquisition cost and value at maturity of the instrument on a
straight-line basis over the remaining life of the instrument. The effect of
changes in the market value of a security as a result of fluctuating interest
rates is not taken into account. The market value of debt securities usually
reflects yields generally available on securities of similar quality. When
such yields decline, market values can be expected to increase, and when
yields increase, market values can be expected to decline. In addition, if a
large number of redemptions take place at a time when interest rates have
increased, a Portfolio may have to sell portfolio securities prior to maturity
and at a price which might not be as desirable.
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 Portfolio would
receive if the security were sold prior to maturity. The Fund's Board of
Directors has established procedures for the purpose of maintaining a
21
<PAGE>
constant net asset value of $1.00 per share for the 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 Portfolio, the Board of Directors 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, and utilizing a net asset value
per share as determined by using available market quotations.
Each 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 ("Rule 2a-7") greater than 397 days and will limit
portfolio investments, including repurchase agreements (where permitted), to
those instruments contained on the Advisor's list of securities in which the
Portfolio may invest (the "Approved List"). All securities on the Approved
List must, as required by Rule 2a-7, be "Eligible Securities," present minimal
credit risks, be U.S. dollar denominated and have a remaining maturity of 397
days or less. (See the "Appendix" for the definition of "Eligible Security.")
The Board of Directors has adopted guidelines to be used by the Advisor in
making the foregoing determinations and the Advisor will comply with certain
reporting and recordkeeping procedures concerning such determinations. In the
event amortized cost ceases to represent fair value in the judgment of the
Fund's Board of Directors, the Board will take such actions as it deems
appropriate.
In determining the approximate market value of portfolio investments, the
Fund may employ outside organizations, which may use a matrix or formula
method that takes into consideration market indices, 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 by the Fund's
Board of Directors.
PERFORMANCE INFORMATION. For the seven day period ended June 30, 1995, the
current yield for the PCS Money Market Portfolio and the PCS Government
Obligations Money Market Portfolio was 5.01% and 5.08%, respectively and the
effective yield for each Portfolio was 5.14% and 5.21%, respectively. The PCS
Tax-Free Money Market Portfolio was not in operation during that period.
Each Portfolio's current and effective yield are computed using standardized
methods required by the SEC. The annualized yield for a Portfolio 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. The PCS
Tax-Free Money Market Portfolio's tax-equivalent yield is also computed using
a standardized method required by the SEC. Such yield is determined by
dividing the tax-exempt portion of the Portfolio's effective yield for a
stated seven day period by one minus the investor's income tax rate and adding
the product to the portion of the yield for the same seven day period that is
not tax-exempt. The resulting yield is what the investor would need to earn
from a taxable investment in order to realize an after-tax benefit equal to
the tax-free yield provided by the Portfolio.
22
<PAGE>
Yield may fluctuate daily and does not provide a basis for determining
future yields. Because the yields of the Portfolios will fluctuate, it cannot
be compared with yields on savings account or other investment alternatives
that provide an agreed to or guaranteed fixed yield for a stated period of
time. However, yield information may be useful to an investor considering
temporary investments in money market instruments. In comparing the yield of
one money market fund to another, consideration should be given to each fund's
investment policies, including the types of investments made, lengths of
maturities of the portfolio securities, the method used by each fund to
compute the yield (methods may differ) and whether there are any special
account charges which may reduce the effective yield.
The yields on certain obligations, including the money market instruments in
which the Portfolios invest (such as commercial paper and bank obligations),
are dependent on a variety of factors, including general money 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 Investors
Service and Standard & Poor's Corporation 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. In addition, subsequent to its purchase by a
Portfolio, an issue may cease to be rated or may have its rating reduced below
the minimum required for purchase. In such an event, the Advisor will consider
whether a Portfolio should continue to hold the obligation.
TAXES
The following discussion of federal income tax consequences is based on the
Internal Revenue Code of 1986, as amended (the "Code") and the regulations
issued thereunder as in effect on the date of this Statement of Additional
Information. New legislation, as well as administrative changes or court
decisions, may significantly change the conclusions expressed herein, and may
have a retroactive effect with respect to the transactions contemplated
herein.
The following is only a summary of certain additional tax considerations
generally affecting each Portfolio and its shareholders that are not described
in the Fund's Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of each Portfolio or its shareholders, and
the discussion here and in the Fund's Prospectus 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 situations.
Each Portfolio will elect to be taxed as a regulated investment company
("RIC") under Subchapter M of the Code. As a RIC, each Portfolio is exempt
from federal income tax on its net investment income and its net realized
short-term and long-term capital gains which it distributes to shareholders,
provided that it distributes each year an amount equal to at least the sum of
(a) 90% of its investment company taxable income (including, for this purpose,
its net realizes short-term capital gains), 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 to the extent that they relate to the investments contemplated
by the Portfolios. The Distribution Requirement for any year may be waived if
a RIC establishes to the satisfaction of the Internal Revenue Service that it
is unable to satisfy the Distribution Requirement by reason of distributions
previously made for the purpose of avoiding liability for federal excise tax
(discussed below).
In addition to satisfaction of the Distribution Requirement each Portfolio
generally must derive at least 90% of its gross income each taxable year from
dividends, interest, certain payments with
23
<PAGE>
respect to securities loans and gains from the sale or other disposition of
stock or securities, or from other income derived with respect to its
business of investing in such stock or securities (the "Income Requirement"),
and generally must derive less than 30% of its gross income each taxable
year from the sale or other disposition of stocks or securities held for
less than three months (the "Short-Short Gain Test").
In addition to the foregoing requirements, at the close of each quarter of
its taxable year, at least 50% of the market value of each Portfolio's assets
must consist of cash and cash items, U.S. Government securities, securities of
other RICs, and securities of other issuers (as to which such Portfolio has
not invested more than 5% of the value of its total assets in securities of
such issuer and as to which such Portfolio does not hold more than 10% of the
outstanding voting securities of such issuer), and no more than 25% of the
market value of each Portfolio's total assets may be invested in the
securities (other than U.S. Government securities and securities of other
RICs) of any one issuer, or of two or more issuers which a Portfolio controls
and which are engaged in the same, similar or related trades or businesses.
While the Portfolios do not expect to realize long-term capital gains, any
net long-term capital gain, in excess of net short-term capital loss ("net
capital gain"), such as gain from the sale of debt securities and Municipal
Obligations, will be distributed annually. A Portfolio will not have income
tax liability with respect to such gains, and the distributions will be
taxable to Portfolio shareholders as long-term capital gains, regardless of
how long a shareholder has held Portfolio shares.
If for any taxable year a Portfolio does not qualify as a RIC, all of its
taxable income will be subject to tax at regular corporate rates without any
deduction for distributions to shareholders, and all distributions will be
taxable to shareholders as ordinary dividends to the extent of that
Portfolio's current and accumulated earnings and profits. Such distributions
will be eligible for the dividends received deduction in the case of corporate
shareholders.
Shareholders will be advised annually as to the federal income tax status of
distributions made by the Portfolios during the year.
The Code imposes a non-deductible 4% federal excise tax on RICs that do not
distribute in each calendar year an amount equal to 98 percent of their
ordinary income for the calendar year plus 98 percent of their capital gain
net income (the excess of short and long-term capital gains over short and
long-term capital losses) for the 1-year period ending on October 31 of such
calendar year, plus certain other amounts. The balance of such income must be
distributed during the next calendar year. For the foregoing purposes, a
company is treated as having distributed any amount on which it is subject to
income tax for any taxable year ending in such calendar year. Because the
Portfolios intend to distribute all of their taxable income currently, the
Portfolios do not anticipate incurring any liability for this excise tax.
The Fund will be required in certain cases to withhold and remit to the
United States Treasury 31% of distributions paid to any shareholder (1) who
has provided either an incorrect tax identification number or no number at
all, (2) who is subject to backup withholding by the Internal Revenue Service
for failure to report the receipt of interest or dividend income properly, or
(3) who has failed to certify to the Fund that such taxpayer is not subject to
backup withholding.
Although each Portfolio expects to qualify as a RIC 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.
24
<PAGE>
ADDITIONAL CONSIDERATIONS FOR THE PCS TAX-FREE MONEY MARKET PORTFOLIO
In order for the PCS Tax-Free Money Market Portfolio to pay exempt interest
dividends during any taxable year, at the close of each quarter of its taxable
year at least 50% of the value of the Portfolio's assets must consist of
certain tax-exempt obligations. Exempt-interest dividends distributed to
shareholders are not included in the shareholder's gross income for regular
federal income tax purposes. Exempt-interest dividends may, however, be
subject to the alternative minimum tax (the "AMT") imposed by Section 55 and,
in the case of corporate taxpayers, the Code or the environmental tax (the
"Environmental Tax") imposed by Section 59A of the Code. The AMT and the
Environmental Tax may be imposed in two circumstances. First, exempt-interest
dividends derived from certain "private activity bonds" issued after August 7,
1986, will generally be an item of tax preference (and therefore potentially
subject to the AMT and the Environmental Tax) for both corporate and
non-corporate taxpayers. Second, in the case of exempt-interest dividends
received by corporate shareholders, all exempt-interest dividends, regardless
of when the bonds from which they are derived were issued or whether they are
derived from private activity bonds, will be included in the corporation's
"adjusted current earnings," as defined in Section 56(g) of the Code, in
calculating the corporation's alternative minimum taxable income for purposes
of determining the AMT and the Environmental Tax.
The deduction otherwise allowable to property and casualty insurance
companies for "losses incurred" will be reduced by an amount equal to a
portion of exempt-interest dividends received or accrued during any taxable
year. Foreign corporations engaged in a trade or business in the United
States will be subject to a "branch profits tax" on their "dividend equivalent
amount" for the taxable year, which will include exempt-interest dividends.
Certain Subchapter S corporations may also be subject to taxes on their
"passive investment income," which could include exempt-interest dividends.
Up to 85% (depending on the taxpayer's income) of the Social Security benefits
or railroad retirement benefits received by an individual during any taxable
year will be included in the gross income of such individual depending upon
the individual's "modified adjusted gross income" (which includes
exempt-interest dividends).
The PCS Tax-Free Money Market Portfolio may not be an appropriate investment
for persons (including corporations and other business entities) who are
"substantial users" (or persons related to such users) of facilities financed
by industrial development or private activity bonds. A "substantial user" is
defined generally to include certain persons who regularly use such a facility
in their trade or business. Such entities or persons should consult their tax
advisors before purchasing Shares of this Portfolio.
Issuers of bonds purchased by the PCS Tax-Free Money Market Portfolio (or
the beneficiary of such bonds) may have made certain representations or
covenants in connection with the issuance of such bonds to satisfy certain
requirements of the Code that must be satisfied subsequent to the issuance of
such bonds. Investors should be aware that exempt-interest dividends derived
from such bonds may become subject to federal income taxation retroactively to
the date of issuance thereof if such representations are determined to have
been inaccurate or if the issuer of such bonds (or the beneficiary of such
bonds) fails to comply with such covenants.
Distributions of net investment income received by the PCS Tax-Free Money
Market Portfolio from investments in debt securities (other than interest on
tax-exempt Municipal Obligations) and any net short-term capital gains
distributed by the Portfolio will be taxable to shareholders as ordinary
income and will not be eligible for the dividends received deduction for
corporate shareholders. Although the PCS Tax-Free Money Market Portfolio
generally does not expect to receive net investment income other than
Tax-Exempt Interest, up to 20% of the net assets of the Portfolio may be
invested in Municipal Obligations that do not bear Tax-Exempt Interest, and
any taxable income recognized by the Portfolio will be distributed and taxed
to its shareholders.
25
<PAGE>
ADDITIONAL INFORMATION CONCERNING FUND SHARES
The Fund does not currently intend to hold annual meetings of shareholders
except as required by the 1940 Act or the Maryland General Corporation law.
Shareholders have the right to call for a special meeting of shareholders to
consider the removal of one or more directors upon the written request of
those shareholders entitled to cast at least 10 percent of all the votes
entitled to be cast at such a meeting. To the extent required by law, the
Fund will assist in shareholder communication in such matters.
Unless otherwise provided by federal or state law, or by the Fund's Articles
of Incorporation, the Fund may take or authorize any corporate action upon the
favorable vote of the holders of more than 50% of all of the outstanding
shares of Common Stock voting without regard to Portfolio.
MISCELLANEOUS
COUNSEL. The law firm of Morgan, Lewis & Bockius LLP serves as counsel to the
Fund.
INDEPENDENT ACCOUNTANTS. Coopers & Lybrand L.L.P. serves as the Fund's
independent accountants. The Fund's financial statements which appear in this
Statement of Additional Information have been audited by Coopers & Lybrand
L.L.P., as set forth in their report, which also appears in this Statement of
Additional Information. Coopers & Lybrand L.L.P. has offices at 2400 Eleven
Penn Center, Philadelphia, Pennsylvania 19103.
CONTROL PERSONS. The names and address of the holders of 5% or more of the
outstanding shares of the Fund's PCS Money Market Portfolio and PCS Government
Obligations Money Market Portfolio as of September 30, 1995, and the percentage
of outstanding shares of each such Portfolio owned by such shareholders as of
such date, to Fund Management's knowledge, are as follows:
PCS Money Market Portfolio. As of September 30, 1995, there was one
beneficial owner of 5% or more of the outstanding shares of the PCS Money
Market Portfolio.
26
<PAGE>
Amoco Sub Custodian Chase Manhattan, One Pierrepont Plaza, 10th Floor,
Brooklyn, New York 11201, owned 7% of such Portfolio's total outstanding
shares.
PCS Government Obligations Money Market Portfolio. As of September 30, 1995
there were four beneficial owners of 5% or more of the outstanding shares of
the PCS Government Obligations Money Market Portfolio: Zweig-Dimenna
Partnership L.P. c/o Prime Brokerage, Attn: Sheung Tam, One Pierrepont Plaza,
10th Floor, Brooklyn, New York 11021 owned 12% of such Portfolio's total
outstanding shares; Desantis Capital Management A/C Desantis Capital Partners,
One Busch Street, Suite 1800, San Francisco, California 94104, owned 23% of
such Portfolio's total outstanding shares; Zweig-Dimenna Special Opportunities,
L.P., Attn: Sheung Tam, One Pierrepont Plaza, 10th FLoor, Brooklyn, New York
11201, owned 7% of such Portfolio's total outstanding shares; and Boston Safe
Deposit & Trust Company As Trustee for the Kodak Retirement Income Plan c/o
Wyser-Pratte & Co., Inc., 63 Wall Street, 24th Floor, New York, New York 10005,
owned 6% of such Portfolio's total outstanding shares.
As of October 11, 1995, the directors and officers of the Fund owned,
beneficially or of record, an aggregate of less than 1% of the Fund's
outstanding shares of either Portfolio on such date.
LITIGATION. There is currently no material litigation affecting the Fund.
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 issuing, underwriting, selling or distributing securities, but
such banking laws and regulations do not prohibit such a holding company or
affiliate or banks generally from acting as investment advisor, 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 such a customer. PNC Bank and
PFPC are subject to such banking laws and regulations.
FINANCIAL STATEMENTS
SEE NEXT PAGE.
27
<PAGE>
PCS CASH FUND, INC.
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO
STATEMENT OF NET ASSETS
JUNE 30, 1995
FACE
AMOUNT
(000) VALUE
----------- ------------
<S> <C> <C>
AGENCY OBLIGATIONS (38.0%)
Federal Home Loan Mortgage Corporation Discount Notes
5.87%, 07/05/95 ................................... $ 9,104 $ 9,098,062
5.88%, 07/14/95 ................................... 5,000 4,989,383
5.85%, 07/21/95 ................................... 10,000 9,967,500
5.91%, 07/24/95 ................................... 5,000 4,981,121
Federal National Mortgage Association Discount Notes
5.87%, 07/05/95 ................................... 6,140 6,135,995
5.86%, 07/06/95 ................................... 5,000 4,995,931
5.87%, 07/07/95 ................................... 5,305 5,299,810
5.91%, 08/04/95 ................................... 5,000 4,972,092
5.70%, 09/07/95 ................................... 5,000 4,946,167
5.81%, 09/08/95 ................................... 5,000 4,944,321
5.88%, 11/14/95 ................................... 5,000 4,888,933
-----------
TOTAL AGENCY OBLIGATIONS (COST $65,219,315) ............ 65,219,315
-----------
COMMERCIAL PAPER (8.7%)
FINANCIAL (5.8%)
ABN - AMRO Bank , 5.86%, 10/16/95 ................. 5,000 4,912,914
UBS Financial Inc. , 6.13%, 07/05/95 .............. 5,000 4,996,597
-----------
TOTAL FINANCIAL ................................... 9,909,511
-----------
OIL & GAS (2.9%)
Koch Industries, Inc. , 6.20%, 07/05/95 ........... 5,000 4,996,555
-----------
TOTAL COMMERCIAL PAPER (COST $14,906,066) .............. 14,906,066
-----------
U.S. TREASURY OBLIGATIONS (2.9%)
U.S. TREASURY BILL
6.28%, 10/19/95 ................................... 5,000 4,904,056
-----------
TOTAL U.S. TREASURY OBLIGATIONS (COST $4,904,056) ...... 4,904,056
-----------
</TABLE>
See accompanying notes to financial statements
FS-1
<PAGE>
PCS CASH FUND, INC.
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO
STATEMENT OF NET ASSETS (CONTINUED)
JUNE 30, 1995
FACE
AMOUNT
(000) VALUE
----------- ------------
<S> <C> <C>
VARIABLE RATE OBLIGATIONS (29.7%)
Federal National Mortgage Association Floating Rate Notes
5.97%, 07/03/95** ..................................... $ 5,000 $ 4,999,708
5.58%, 07/05/95** ..................................... 5,000 5,000,000
5.58%, 07/05/95** ..................................... 6,000 6,000,000
6.02%, 07/07/95** ..................................... 15,000 15,000,000
General Electric Capital Corporation Floating Rate Note
6.35%, 07/03/95** ..................................... 5,000 5,000,000
Student Loan Marketing Association Floating Rate Note
5.86%, 07/05/95** ..................................... 15,000 15,014,549
-----------
TOTAL VARIABLE RATE OBLIGATIONS (COST $51,014,257) ......... 51,014,257
-----------
REPURCHASE AGREEMENT (20.6%)
Goldman Sachs & Co. 6.05%, 07/02/95, (Agreement
dated 06/30/95, to be repurchased at $35,397,837
collateralized by $24,640,000, U.S. Treasury Bonds
10.625%, due 08/15/15. The total market value
and accrued interest of the collateral is $37,100,710)
(cost $35,380,000) .................................... 35,380 35,380,000
------------
TOTAL INVESTMENTS (COST $171,423,694*) .............. 99.9% 171,423,694
OTHER ASSETS ........................................ 0.3% 484,534
LIABILITIES ......................................... (0.2%) (393,661)
----- ------------
NET ASSETS (BASED ON 171,526,234 SHARES, HAVING A PAR
VALUE OF $.001 PER SHARE) ........................ 100.0% $171,514,567
===== ============
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER
SHARE ($171,514,567 / 171,526,234 SHARES
OUTSTANDING) ..................................... $1.00
=====
- ----------------
<FN>
* Also cost for Federal income tax purposes.
** Variable Rate Obligations -- the interest rate shown is the rate as of June
30, 1995 and the maturity date is the shorter of the next interest readjustment
date or the date the principal amount can be recovered through demand.
</FN>
</TABLE>
See accompanying notes to financial statements.
FS-2
<PAGE>
PCS CASH FUND, INC.
<TABLE>
<CAPTION>
GOVERNMENT OBLIGATIONS MONEY MARKET PORTFOLIO
STATEMENT OF NET ASSETS
JUNE 30, 1995
FACE
AMOUNT
(000) VALUE
----------- ------------
<S> <C> <C>
AGENCY OBLIGATIONS (36.8%)
Federal Home Loan Mortgage Corporation Discount Note
5.88%, 07/14/95 ....................................... $ 5,000 $ 4,989,383
Federal National Mortgage Association Discount Notes
5.86%, 07/06/95 ....................................... 10,000 9,991,861
5.70%, 09/07/95 ....................................... 5,000 4,946,167
5.81%, 09/08/95 ....................................... 5,000 4,944,321
-----------
TOTAL AGENCY OBLIGATIONS (COST $24,871,732) ................ 24,871,732
-----------
U.S. TREASURY OBLIGATIONS (21.8%)
U.S. TREASURY BILL
6.28%, 10/19/95 ....................................... 15,000 14,712,167
-----------
TOTAL U.S. TREASURY OBLIGATIONS (COST $14,712,167) ......... 14,712,167
-----------
VARIABLE RATE OBLIGATIONS (23.7%)
Federal National Mortgage Association Floating Rate Notes
5.97%, 07/03/95** ..................................... 5,000 4,999,708
5.58%, 07/05/95** ..................................... 5,000 5,000,000
5.58%, 07/05/95** ..................................... 6,000 6,000,000
-----------
TOTAL VARIABLE RATE OBLIGATIONS (COST $15,999,708) ......... 15,999,708
-----------
REPURCHASE AGREEMENT (17.7%)
Goldman Sachs & Co. 6.05%, 07/02/95, (Agreement dated
06/30/95, to be repurchased at $11,936,015 collateralized
by $8,310,000, U.S. Treasury Bonds 10.625%, due 08/15/15.
The total market value and accrued interest of the
collateral is $12,512,455)
(cost $11,930,000) ....................................... 11,930 11,930,000
-----------
</TABLE>
See accompanying notes to financial statements
FS-3
<PAGE>
PCS CASH FUND, INC.
<TABLE>
<CAPTION>
GOVERNMENT OBLIGATIONS MONEY MARKET PORTFOLIO
STATEMENT OF NET ASSETS (CONTINUED)
JUNE 30, 1995
VALUE
------------
<S> <C> <C>
TOTAL INVESTMENTS (COST $67,513,607*) ............... 100.0% $67,513,607
OTHER ASSETS ........................................ 0.3% 202,430
LIABILITIES ......................................... (0.3%) (211,479)
===== ===========
NET ASSETS (BASED ON 67,492,623 SHARES, HAVING A PAR
VALUE OF $.001 PER SHARE) ...................... 100.0% $67,504,558
===== ===========
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER
SHARE ($67,504,558 / 67,492,623 SHARES ......... $1.00
=====
- ---------------
<FN>
* Also cost for Federal income tax purposes.
** Variable Rate Obligations -- the interest rate shown is the rate as of June
30, 1995 and the maturity date is the shorter of the next interest
readjustment date or the date the principal amount can be recovered through
demand.
</FN>
</TABLE>
See accompanying notes to financial statements.
FS-4
<PAGE>
PCS CASH FUND, INC.
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1995
GOVERNMENT OBLIGATIONS
MONEY MARKET MONEY MARKET
PORTFOLIO PORTFOLIO
-------------- ----------------
<S> <C> <C>
INVESTMENT INCOME
Interest ......................................................................... $ 8,439,619 $ 11,276,200
----------- ------------
EXPENSES
Distribution fees (Note 2) ....................................................... 776,511 1,013,063
Investment advisory fees (Note 2) ................................................ 698,859 897,867
Administration fees (Note 2) ..................................................... 155,302 191,527
Transfer agent fees (Note 2) ..................................................... 41,708 11,331
Custodian fees (Note 2) .......................................................... 36,275 45,350
Registration fees ................................................................ 34,094 29,291
Directors' fees .................................................................. 27,250 27,250
Insurance expense ................................................................ 20,262 13,509
Audit fees ....................................................................... 19,500 19,500
Legal fees ....................................................................... 13,250 13,250
Printing fees .................................................................... 10,000 10,000
Miscellaneous expense ............................................................ 6,750 4,750
----------- ------------
1,839,761 2,276,688
LESS FEES VOLUNTARILY WAIVED (NOTE 2) ............................................... (317,800) (351,869)
----------- ------------
Total Expenses ................................................................... 1,521,961 1,924,819
----------- ------------
NET INVESTMENT INCOME ............................................................... 6,917,658 9,351,381
NET REALIZED GAIN (LOSS) ON INVESTMENTS ............................................. (11,667) 11,936
----------- ------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ................................ $ 6,905,991 $ 9,363,317
=========== ============
</TABLE>
See accompanying notes to financial statements
FS-5
<PAGE>
PCS CASH FUND, INC.
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR FOR THE YEAR
ENDED ENDED
JUNE 30, 1995 JUNE 30, 1994
--------------- ---------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income ........................................................ $ 6,917,658 $ 4,332,323
Net realized gain (loss) on investments ...................................... (11,667) 7,945
------------- -------------
Net increase in net assets resulting from operations ......................... 6,905,991 4,340,268
------------- -------------
Dividends to shareholders from:
Net investment income ($.0446 and $.0246 per share, respectively) ............ (6,917,658) (4,332,323)
Net realized gains ($.0001 and $.0000 per share, respectively) ............... (7,700) --
------------- -------------
Total dividends to shareholders ................................................. (6,925,358) (4,332,323)
------------- -------------
Increase (decrease) in net assets derived
from capital share transactions (Note 3) ...................................... (5,064,947) 20,280,942
------------- -------------
Total increase (decrease) in net assets ......................................... (5,084,314) 20,288,887
NET ASSETS:
Beginning of year ............................................................... 176,598,881 156,309,994
------------- -------------
End of year ..................................................................... $ 171,514,567 $ 176,598,881
============= =============
</TABLE>
See accompanying notes to financial statements
FS-6
<PAGE>
PCS CASH FUND, INC.
<TABLE>
<CAPTION>
GOVERNMENT OBLIGATIONS MONEY MARKET PORTFOLIO
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR FOR THE YEAR
ENDED ENDED
JUNE 30, 1995 JUNE 30, 1994
--------------- ---------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income ................................................................. $ 9,351,381 $ 2,341,763
Net realized gain on investments ...................................................... 11,936 112,478
------------- -------------
Net increase in net assets resulting from operations .................................. 9,363,317 2,454,241
------------- -------------
Dividends to shareholders from:
Net investment income ($.0448 and $.0243 per share, respectively) (9,351,381) (2,341,763)
Net realized gains ($.0000 and $.0011 per share, respectively) ........................ (572) (108,656)
------------- -------------
Total dividends to shareholders .......................................................... (9,351,953) (2,450,419)
------------- -------------
Increase (decrease) in net assets derived
from capital share transactions (Note 3) ............................................... (35,057,979) 811,251
------------- -------------
Total increase (decrease) in net assets .................................................. (35,046,615) 815,073
NET ASSETS:
Beginning of year ........................................................................ 102,551,173 101,736,100
------------- -------------
End of year .............................................................................. $ 67,504,558 $ 102,551,173
============= =============
</TABLE>
See accompanying notes to financial statements
FS-7
<PAGE>
PCS CASH FUND, INC.
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGH EACH PERIOD)
MONEY MARKET PORTFOLIO
FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED ENDED ENDED
JUNE 30, 1995 JUNE 30, 1994 JUNE 30, 1993 JUNE 30, 1992 JUNE 30, 1991
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ..... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- ---------- ---------- ---------- ----------
Income from investment operations:
Net investment income ................. 0.0446 0.0246 0.0243 0.0402 0.0652
Net realized gains on investments ..... 0.0001 -- 0.0001 -- --
Less dividends to shareholders from:
Net investment income ................. (0.0446) (0.0246) (0.0243) (0.0402) (0.0652)
Net realized gains .................... (0.0001) -- (0.0001) -- --
---------- ---------- ---------- ---------- ----------
NET ASSET VALUE, END OF PERIOD ........... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========== ========== ========== ==========
Total return ............................. 4.55% 2.49% 2.47% 4.11% 6.72%
Ratios of expenses to average net assets . 0.98%(b) 0.98%(b) 0.98%(b) 0.98%(b) 0.98%(b)
Ratios of net investment income to average
net assets ............................ 4.45%(b) 2.45%(b) 2.44%(b) 3.97%(b) 6.40%(b)
Net assets at end of period (000) ........ $ 171,515 $ 176,599 $ 156,310 $ 190,034 $ 140,594
</TABLE>
<TABLE>
<CAPTION>
GOVERNMENT OBLIGATIONS MONEY MARKET PORTFOLIO
FOR THE PERIOD
MARCH 12,1992
FOR THE YEAR FOR THE YEAR FOR THE YEAR (COMMENCEMENT
ENDED ENDED ENDED OF OPERATIONS)
JUNE 30, 1995 JUNE 30, 1994 JUNE 30,1993 TO JUNE 30, 1992
------------- ------------- ------------ -----------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ............... $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- ---------- ---------- ----------
Income from investment operations:
Net investment income ........................... 0.0448 0.0243 0.0246 0.0094
Net realized gains on investments ............... -- 0.0011 0.0002 --
Less dividends to shareholders from:
Net investment income ........................... (0.0448) (0.0243) (0.0246) (0.0094)
Net realized gains .............................. -- (0.0011) (0.0002) --
--------- ---------- ---------- ----------
Net asset value, end of period ..................... $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========== ========== ==========
Total return ....................................... 4.58% 2.45% 2.51% 0.94%(c)
Ratio of expenses to average net assets ............ 0.95%(b) 0.95%(b) 0.95%(b) 0.95%(a)(b)
Ratio of net investment income to average net assets 4.61%(b) 2.40%(b) 2.50%(b) 3.07%(a)(b)
Net assets at end of period (000) .................. $ 67,505 $ 102,551 $ 101,736 $ 269,627
- ---------------
<FN>
(a) Annualized.
(b) Without the voluntary waiver of advisory and distribution fees, the ratios
of expenses to average net assets would have been 1.18%, 1.19%, 1.20%, 1.27%
and 1.27% annualized, for the Money Market Portfolio and 1.12%, 1.22%, 1.19%
and 1.29% annualized for the Government Obligations Money Market Portfolio.
The ratios of net investment income to average net assets would have been
4.25%, 2.24%, 2.22%, 3.68% and 6.11% annualized, for the Money Market
Portfolio and 4.44%, 2.13%, 2.26% and 2.73% annualized for the Government
Obligations Money Market Portfolio.
(c) Not annualized. Total return, if on annualized basis, would have been 3.16%
for the Government Obligations Money Market Portfolio.
</FN>
</TABLE>
See accompanying notes to financial statements.
FS-8
<PAGE>
PCS CASH FUND, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995
NOTE 1-- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PCS Cash Fund, Inc. (the "Fund"), an open-end, diversified management
investment company, was incorporated in Maryland on January 5, 1989, and is
registered with the Securities and Exchange Commission under the Investment
Company Act of 1940.
The Fund is authorized to issue 10 billion shares, $.001 par value per
share, of which 1 billion are classified in each of the following three
portfolios: PCS Money Market Portfolio, PCS Tax-Free Money Market Portfolio, and
PCS Government Obligations Money Market Portfolio. There are currently no shares
outstanding in the Tax-Free Money Market Portfolio.
A) SECURITY VALUATION--Portfolio securities are valued under the
amortized cost method, which approximates current market value. Under this
method, securities are valued at cost when purchased and, thereafter, a
constant proportionate amortization of any discount or premium is recorded
until maturity of the security. Regular review and monitoring of the
valuation is performed in an attempt to avoid dilution or other unfair
results to shareholders. The Fund seeks to maintain net asset value per
share at $1.00. INVESTMENT IN SHARES OF THE FUND IS NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT. THERE IS NO ASSURANCE THAT THE FUND WILL
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
B) SECURITY TRANSACTIONS AND INVESTMENT INCOME--Security transactions
are accounted for on the trade date. The cost of investments sold is
determined by use of the specific identification method for both financial
reporting and income tax purposes. Interest income is recorded on the
accrual basis.
C) DIVIDENDS TO SHAREHOLDERS--Dividends from net investment income are
declared daily and paid monthly. Any net realized capital gains will be
distributed at least annually.
D) FEDERAL INCOME TAXES--The Fund intends to continue to qualify for
the tax treatment applicable to regulated investment companies under the
Internal Revenue Code and make the requisite distributions to its
shareholders which will be sufficient to relieve it from Federal income and
Federal excise taxes. Therefore, no provision has been recorded for Federal
income or Federal excise taxes.
E) REPURCHASE AGREEMENTS--The Fund may purchase money market
instruments from financial institutions, such as banks and non-bank
dealers, subject to the seller's agreement to repurchase them at an agreed
upon date and price (repurchase agreements). Collateral for repurchase
agreements may have longer maturities than the maximum permissible
remaining maturity of portfolio investments. The seller will be required on
a daily basis to maintain the value of the securities subject to the
agreement at not less than the repurchase price, marked-to-market daily.
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.
FS-9
<PAGE>
PCS CASH FUND, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1995 NOTE
2--TRANSACTIONS WITH AFFILIATES AND OTHERS
The Fund has entered into an investment advisory agreement with Morgan
Stanley Asset Management Inc. (the "Advisor"), a wholly owned subsidiary of
Morgan Stanley Group Inc. The Fund has also entered into an Administration and
Accounting Services Agreement with PFPC Inc., a wholly owned subsidiary of PNC
Bank Corp., and a distribution agreement with Morgan Stanley & Co. Inc. PNC Bank
Corp. serves as custodian for each of the Fund's portfolios. PFPC Inc. also
serves as the Fund's transfer agent.
For the advisory services provided and expenses assumed by it, the Advisor
is entitled to receive from each Portfolio a fee, computed daily and payable
monthly, at an annual rate of .45% of the first $250 million of the Portfolio's
daily net assets, .40% of the next $250 million of the Portfolio's daily net
assets and .35% of the Portfolio's daily net assets in excess of $500 million.
The Advisor may, at its discretion from time to time, waive voluntarily all or
any portion of its advisory fee or reimburse the Portfolio for a portion of the
expenses of its operations. For the year ended June 30, 1995, advisory fees,
(net of voluntary fee waivers), for the Money Market Portfolio were $611,754 and
$897,867 for the Government Obligations Money Market Portfolio.
As required by various state regulations in which the Fund is registered to
sell shares, the Advisor will reimburse each Portfolio if and to the extent that
the aggregate operating expenses of the Portfolio exceed applicable state limits
for the fiscal year. Currently, the most restrictive of such applicable limits
is 2.5% of the first $30 million of average annual net assets, 2.0% of the next
$70 million of average annual net assets, and 1.5% of the remaining average
annual net assets. Certain expenses such as brokerage commissions, taxes,
interest, and extraordinary items are excluded from this limitation. No such
reimbursements were required for the year ended June 30, 1995.
For administration services provided, PFPC Inc. is entitled to receive from
each Portfolio a fee, computed daily and payable monthly, at an annual rate of
.10% of the first $200 million daily net assets, .075% of the next $200 million
of daily net assets, .05% of the next $200 million of daily net assets and .03%
of the daily assets in excess of $600 million.
The Fund has adopted a Plan of Distribution and pursuant thereto has
entered into an agreement under which the distributor, Morgan Stanley & Co.
Inc., (the "Distributor") is entitled to receive from each Portfolio
compensation of its distribution costs at an annual rate of up to .50% of daily
net assets. The Distributor may at its discretion from time to time, waive
voluntarily all or any portion of its distribution fee. For the year ended June
30, 1995, distribution fees, net of voluntary fee waivers, were $545,816 for the
Money Market Portfolio and $661,194 for the Government Obligations Money Market
Portfolio.
FS-10
<PAGE>
PCS CASH FUND, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1995
NOTE 3 -- CAPITAL STOCK
Transactions in capital stock for each Portfolio were as follows:
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO
For the Year For the Year
Ended Ended
June 30, 1995 June 30, 1994
----------------------------------- -----------------------------------
Shares Value Shares Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Shares sold ................................ 1,261,410,987 $ 1,261,410,987 1,735,883,817 $ 1,735,883,817
Shares issued in reinvestment of dividends . 6,579,514 6,579,514 4,016,368 4,016,368
Shares redeemed ............................ (1,273,055,448) (1,273,055,448) (1,719,619,243) (1,719,619,243)
--------------- --------------- --------------- ---------------
Net increase (decrease) .................... (5,064,947) $ (5,064,947) 20,280,942 $ 20,280,942
=============== =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
GOVERNMENT OBLIGATIONS MONEY MARKET PORTFOLIO
For the Year For the Year
Ended Ended
June 30, 1995 June 30, 1994
---------------------------------- ----------------------------------
Shares Value Shares Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Shares sold ................................ 2,017,389,099 $ 2,017,389,099 1,209,126,057 $ 1,209,126,057
Shares issued in reinvestment of dividends . 9,053,037 9,053,037 2,244,969 2,244,969
Shares redeemed ............................ (2,061,500,115) (2,061,500,115) (1,210,559,775) (1,210,559,775)
--------------- --------------- --------------- ---------------
Net increase (decrease) .................... (35,057,979) $ (35,057,979) 811,251 $ 811,251
=============== =============== =============== ===============
</TABLE>
NOTE 4 -- NET ASSETS
At June 30, 1995, net assets consisted of the following:
<TABLE>
<CAPTION>
Money Market Government Obligations
Portfolio Money Market Portfolio
------------------ ------------------------
<S> <C> <C>
Capital Paid-in............................................ $171,526,234 $67,492,622
Accumulated Net Realized Gain (Loss) on Investments........ (11,667) 11,936
------------ -----------
$171,514,567 $67,504,558
============ ===========
</TABLE>
FS-11
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of The PCS Cash Fund, Inc.:
We have audited the accompanying statements of net assets of the PCS Cash Fund,
Inc. (Money Market and Government Obligations Money Market Portfolios), as of
June 30, 1995 and the related statements of operations for the year then ended,
the statements of changes in net assets for each of the periods in the two years
then ended, and the financial highlights for each of the periods presented.
These financial statements and financial highlights are the responsiblity of the
Fund's management. Our responsiblity is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments held by the
custodian as of June 30, 1995. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
PCS Cash Fund, Inc. (Money Market and Government Obligations Money Market
Portfolios) as of June 30, 1995 and the results of their operations for the year
then ended, the changes in their net assets for each of the periods in the two
years then ended and the financial highlights for each of the periods presented,
in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
July 28, 1995
FS-12
<PAGE>
APPENDIX
Investments in portfolio securities may be precluded unless a particular
instrument is an "Eligible Security" as defined in Rule 2a-7 under the 1940
Act. (See "Valuation of Shares.") Rule 2a-7 defines "Eligible Security" as
follows:
(i) a security with a remaining maturity of 397 days or less that is rated
(or that has been issued by an issuer that is rated with respect to a class of
Short-term debt obligations, or any security within that class, that is
comparable in priority and security with the security) by the Requisite
NRSROs (1) in one of the two highest rating categories for Short-term debt
obligations (within which there may be sub-categories or gradations indicating
relative standing); or
(ii) a security:
(A) that at the time of issuance was a Long-term security but that has a
remaining maturity of 397 calendar days or less, and
(B) whose issuer has received from the Requisite NRSROs a rating, with
respect to a class of Short-term debt obligations (or any security within that
class) that is now comparable in priority and security with the security, in
one of the two highest rating categories for Short-term debt obligations
(within which there may be sub-categories or gradations indicating relative
standing); or
(iii) an Unrated Security that is of comparable quality to a security
meeting the requirements of paragraphs (i) or (ii) above, as determined by the
money market fund's board of directors; provided, however, that:
(A) the board of directors may base its determination that a Standby
Commitment is an Eligible Security upon a finding that the issuer of the
commitment presents a minimal risk of default; and
(B) a security that at the time of issuance was a Long-term security but
that has a remaining maturity of 397 calendar days or less and that is an
Unrated Security (2) is not an Eligible Security if the security has a
Long-term rating from any NRSRO that is not within the NRSRO's two highest
categories (within which there may be sub-categories or gradations
indicating relative standing).
_______________
(1) "Requisite NRSRO" shall mean (a) any two nationally recognized statistical
rating organizations that have issued a rating with respect to a security or
class of debt obligations of an issuer, or (b) if only one NRSRO has issued a
rating with respect to such security or issuer at the time the fund purchases or
rolls over the security, that NRSRO. At present the NRSROs are: Standard &
Poor's Ratings Group, Moody's Investors Service, Inc., Duff and Phelps, Inc.,
Fitch Investors Services, Inc., Thomson BankWatch and, with respect to certain
types of securities, IBCA Limited and its affiliates, IBCA Inc. Subcategories or
gradations in ratings (such as a "+" or "-") do not count as rating categories.
(2) An "Unrated Security" is (i) a security with a remaining maturity of 397
days or less issued by an issuer that does not have a current short-term rating
from any NRSRO, either as to the particular security or as to any other
short-term obligations of comparable priority and security; and (ii) that was a
long-term security at the time of issuance but that has a remaining maturity of
397 calendar days or less and whose issuer has not received from any NRSRO a
rating with respect to a class of short-term debt obligations (or any security
within that class) that now is comparable in priority and security with the
security; and (iii) a security that is rated and is the subject of an external
credit support agreement not in effect when the security (or the issuer) was
assigned its rating. A security is not an unrated security if any short-term
debt obligation issued by the same issuer and comparable in priority and
security with that security is rated by any NRSRO.
A-1
<PAGE>
DESCRIPTION OF BOND RATINGS
The following summarizes the highest two ratings used by Standard & Poor's
Ratings Group for bonds:
AAA-Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA-Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from AAA issues only in small degree. The "AA" rating
may be modified by the addition of a plus or minus sign to show relative
standing within the AA rating category.
The following summarizes the highest two ratings used by Moody's Investors
Service, Inc. for bonds:
Aaa-Bonds that are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa-Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities. Moody's applies numerical modifiers (1, 2 and 3) with respect to
bonds rated Aa. The modifier 1 indicates that the bond being rated ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the bond ranks in the
lower end of its generic rating category.
The rating SP-1 is the highest rating assigned by Standard & Poor's to
municipal notes and indicates very strong or strong capacity to pay principal
and interest. Those issues determined to possess overwhelming safety
characteristics are given a plus designation.
The following summarizes the two highest ratings used by Moody's for
short-term notes and variable rate demand obligations:
MIG-1/VMIG-1. Obligations bearing these designations are of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
MIG-2/VMIG-2. Obligations bearing these designations are of high quality
with margins of protection ample although not as large as in the preceding
group.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
Commercial paper rated A-1 by Standard & Poor's indicates that the degree of
safety regarding timely payment is strong. Those issues determined to possess
overwhelming safety characteristics are denoted in A-1+. Capacity for timely
payment on commercial paper rated A-2 is satisfactory, but the relative degree
of safety is not as high as for issues designated A-1.
A-2
<PAGE>
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated Prime-1 (or related supporting institutions) are
considered to have a superior capacity for repayment of short-term promissory
obligations. Issuers rated Prime-2 (or related supporting institutions) are
considered to have strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics
of issuers rated Prime-1 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 alternate liquidity is maintained.
A-3
