<PAGE>
THE GLENMEDE FUND, INC.
THE GLENMEDE PORTFOLIOS
(800) 442-8299
STATEMENT OF ADDITIONAL INFORMATION
January 1, 1998
This Statement of Additional Information is not a prospectus but
should be read in conjunction with The Glenmede Fund, Inc.'s ("Glenmede Fund")
and The Glenmede Portfolios' ("Glenmede Portfolios" and collectively with
Glenmede Fund, the "Funds") Prospectuses dated January 1, 1998 and February
27, 1997, respectively, as amended or supplemented from time to time (the
"Prospectuses"). This Statement of Additional Information is for the
Government Cash, Tax-Exempt Cash, Core Fixed Income, International, Equity,
Small Capitalization Equity, Large Cap Value, Muni Intermediate and New Jersey
Muni Portfolios. To obtain any of the Prospectuses, please call the Funds at
the above telephone number.
Capitalized terms used in this Statement of Additional Information
and not otherwise defined have the same meanings given to them in the Funds'
Prospectuses.
Table of Contents
Page
THE FUNDS.............................................................. 2
INVESTMENT OBJECTIVES AND POLICIES..................................... 2
PURCHASE OF SHARES..................................................... 3
REDEMPTION OF SHARES................................................... 4
SHAREHOLDER SERVICES................................................... 4
PORTFOLIO TURNOVER..................................................... 4
INVESTMENT LIMITATIONS................................................. 4
MANAGEMENT OF THE FUNDS................................................ 8
INVESTMENT ADVISORY AND OTHER SERVICES................................. 9
DISTRIBUTOR............................................................ 12
PORTFOLIO TRANSACTIONS................................................. 12
ADDITIONAL INFORMATION CONCERNING TAXES................................ 13
PERFORMANCE CALCULATIONS............................................... 24
GENERAL INFORMATION.................................................... 29
FINANCIAL STATEMENTS................................................... 30
OTHER INFORMATION...................................................... 30
APPENDIX -- DESCRIPTION OF SECURITIES AND RATINGS......................A-1
<PAGE>
THE FUNDS
On February 27, 1997, the Model Equity Portfolio changed its name to
the Large Cap Value Portfolio. On September 25, 1997, the Intermediate
Government Portfolio changed its name to the Core Fixed Income Portfolio.
References in this Statement of Additional Information are to a Portfolio's
current name.
On March 1, 1991 the Small Capitalization Equity Portfolio commenced
operations offering a single class of shares. On January 1, 1998 the Small
Capitalization Portfolio began to offer a second class of shares known as
"Institutional Shares." The original class of shares has been designated as
"Advisor Shares." Historical information concerning expenses and performance
is that of the Advisor Shares.
INVESTMENT OBJECTIVES AND POLICIES
The following policies supplement the investment objectives and
policies set forth in the Funds' Prospectuses:
Repurchase Agreements
Repurchase agreements that do not provide for payment to a Portfolio
within seven days after notice without taking a reduced price are considered
illiquid securities.
Forward Foreign Exchange Contracts
The International Portfolio may enter into forward foreign exchange
contracts. A forward foreign currency exchange contract involves an obligation
to purchase or sell a specific currency at a future date, which may be any
fixed number of days from the date of the contract as agreed by the parties,
at a price set at the time of the contract. In the case of a cancelable
forward contract, the holder has the unilateral right to cancel the contract
at maturity by paying a specified fee. The contracts are traded in the
interbank market conducted directly between currency traders (usually large
commercial banks) and their customers. A forward contract generally has no
deposit requirement, and no commissions are charged at any stage for trades. A
foreign currency futures contract is a standardized contract for the future
delivery of a specified amount of a foreign currency at a future date at a
price set at the time of the contract. Foreign currency futures contracts
traded in the United States are designed by and traded on exchanges regulated
by the CFTC such as the New York Mercantile Exchange. The International
Portfolio would enter into foreign currency futures contracts solely for
hedging or other appropriate investment purposes as defined in CFTC
regulations.
-2-
<PAGE>
Forward foreign currency exchange contracts differ from foreign
currency futures contracts in certain respects. For example, the maturity date
of a forward contract may be any fixed number of days from the date of the
contract agreed upon by the parties, rather than a predetermined date in any
given month. Forward contracts may be in any amounts agreed upon by the
parties rather than predetermined amounts. Also, forward foreign exchange
contracts are traded directly between currency traders so that no intermediary
is required. A forward contract generally requires no margin or other deposit.
At the maturity of a forward contract, the International Portfolio
may either accept or make delivery of the currency specified in the contract,
or at or prior to maturity enter into a closing transaction involving the
purchase or sale of an offsetting contract. Closing transactions with respect
to forward contracts are usually effected with the currency trader who is a
party to the original forward contract.
Securities Lending
Each Portfolio may lend its investment securities to qualified
institutional investors who need to borrow securities in order to complete
certain transactions, such as covering short sales, avoiding failures to
deliver securities or completing arbitrage operations. By lending its
investment securities, a Portfolio attempts to increase its income through the
receipt of interest on the loan. Any gain or loss in the market price of the
securities loaned that might occur during the term of the loan would be for
the account of the Portfolio. Each Portfolio may lend its investment
securities to qualified brokers, dealers, domestic and foreign banks or other
financial institutions, so long as the terms, the structure and the aggregate
amount of such loans are not inconsistent with the Investment Company Act of
1940 (the "1940 Act") or the rules and regulations or interpretations of the
Securities and Exchange Commission (the "Commission") thereunder. The
Portfolios may, from time to time, pay negotiated fees in connection with the
lending of securities.
PURCHASE OF SHARES
The purchase price of shares of each Portfolio is the net asset value
next determined after receipt of the purchase order by the particular Fund.
Each Portfolio reserves the right in its sole discretion (i) to
suspend the offering of its shares, (ii) to reject purchase orders when in the
judgment of management such rejection is in the best interest of the
particular Fund, and (iii) to reduce or waive the minimum for initial and
subsequent investments from time to time.
-3-
<PAGE>
At the discretion of the Funds, investors may be permitted to
purchase Portfolio shares by transferring securities to the Portfolio that
meet the Portfolios investment objectives and policies.
REDEMPTION OF SHARES
Each Portfolio may suspend redemption privileges or postpone the date
of payment (i) during any period that the Exchange is closed, or trading on
the Exchange is restricted as determined by the Commission, (ii) during any
period when an emergency exists as defined by the rules of the Commission as a
result of which it is not reasonably practicable for a Portfolio to dispose of
securities owned by it, or fairly to determine the value of its assets, and
(iii) for such other periods as the Commission may permit.
No charge is made by any Portfolio for redemptions. Any redemption
may be more or less than the shareholder's initial cost depending on the
market value of the securities held by the Portfolio.
SHAREHOLDER SERVICES
Shareholders may transfer shares of the Portfolios to another person.
An investor wishing to transfer shares should contact the Advisor.
PORTFOLIO TURNOVER
The Portfolios will not normally engage in short-term trading, but
reserve the right to do so. A high portfolio turnover rate can result in
corresponding increases in brokerage commissions; however, the Advisor will
not consider turnover rate a limiting factor in making investment decisions
consistent with that Portfolio's investment objectives and policies. The
Portfolios' portfolio turnover rates for each of the past fiscal years are set
forth under "Financial Highlights" in the Funds' Prospectuses. Changes in the
Portfolios' turnover rates were due to market fluctuations and investment
opportunities.
INVESTMENT LIMITATIONS
Each Portfolio is subject to the following restrictions which are
fundamental policies and may not be changed without the approval of the lesser
of: (1) 67% of the voting securities of the affected Portfolio present at a
meeting if the holders of more than 50% of the outstanding voting securities
of the affected Portfolio are present or represented by proxy, or (2) more
than 50% of the outstanding voting securities of the affected Portfolio. Each
Portfolio will not:
-4-
<PAGE>
(1) invest in commodities or commodity contracts, except that
each Portfolio may invest in futures contracts and options;
(2) purchase or sell real estate, although it may purchase and
sell securities of companies which deal in real estate and
may purchase and sell securities which are secured by
interests in real estate;
(3) make loans, except (i) by purchasing bonds, debentures
or similar obligations (including repurchase
agreements, subject to the limitation described in
investment limitation (9) below, and money market
instruments, including bankers acceptances and
commercial paper, and selling securities on a when
issued, delayed settlement or forward delivery basis)
which are publicly or privately distributed, and (ii)
by lending its portfolio securities to banks, brokers,
dealers and other financial institutions so long as
such loans are not inconsistent with the 1940 Act or
the rules and regulations or interpretations of the
Commission thereunder;
(4) purchase on margin or sell short, except as specified above
in investment limitation (1);
(5) purchase more than 10% of any class of the outstanding
voting securities of any issuer;
(6) issue senior securities, except that a Portfolio may borrow
money in accordance with investment limitation (7) below,
purchase securities on a when issued, delayed settlement or
forward delivery basis and enter into reverse repurchase
agreements;
(7) borrow money, except as a temporary measure for
extraordinary or emergency purposes, and then not in
excess of 10% of its total assets at the time of the
borrowing (entering into reverse repurchase agreements
and purchasing securities on a when issued, delayed
settlement or forward delivery basis are not subject to
this investment limitation);
(8) pledge, mortgage, or hypothecate any of its assets to
an extent greater than 10% of its total assets at fair
market value, except as described in the Prospectus and
this Statement of Additional Information and in
connection with entering into futures contracts, but
the deposit of assets in a segregated account in
connection with the writing of covered put and call
options and the purchase of securities on a when
issued, delayed settlement or forward delivery basis
-5-
<PAGE>
and collateral arrangements with respect to initial or
variation margin for futures contracts will not be deemed to
be pledges of a Portfolio's assets or the purchase of any
securities on margin for purposes of this investment
limitation;
(9) underwrite the securities of other issuers or invest
more than an aggregate of 10% of the total assets of
the Portfolio, at the time of purchase, in securities
subject to legal or contractual restrictions on resale
or securities for which there are no readily available
markets, including repurchase agreements which have
maturities of more than seven days;
(10) invest for the purpose of exercising control over
management of any company;
(11) invest its assets in securities of any investment company,
except in connection with mergers, acquisitions of assets or
consolidations and except as may otherwise be permitted by
the 1940 Act;
(12) acquire any securities of companies within one industry
if, as a result of such acquisition, more than 25% of
the value of the Portfolio's total assets would be
invested in securities of companies within such
industry; provided, however, that there shall be no
limitation on the purchase of obligations issued or
guaranteed by the U.S. Government, its agencies,
enterprises or instrumentalities, or instruments issued
by U.S. banks; and
(13) write or acquire options or interests in oil, gas or other
mineral exploration or development programs.
Each Portfolio, with the exception of the Muni Intermediate and New
Jersey Muni Portfolios, also will not:
(1) with respect as to 75% of its total assets, invest more than
5% of its total assets at the time of purchase in the
securities of any single issuer (other than obligations
issued or guaranteed by the U.S. Government, its agencies,
enterprises or instrumentalities).
Although not a matter of fundamental policy, pursuant to Rule 2a-7
under the 1940 Act, the Government Cash Portfolio will limit its purchases of
any one issuer's securities (other than U.S. Government Securities) to 5% of
the Portfolio's total assets at the time of purchase, except that it may
invest more than 5% (but no more than 25%) of its total assets in First Tier
-6-
<PAGE>
Securities of one issuer for a period of up to three business days.
Each of the Muni Intermediate and New Jersey Muni Portfolios is
classified as a "non-diversified" investment company under the 1940 Act, which
means the Portfolio is not limited by the 1940 Act in the proportion of its
assets that it may invest in the securities of a single issuer. However, each
Portfolio intends to conduct its operations so as to qualify as a "regulated
investment company" for purposes of the Internal Revenue Code of 1986, as
amended, which generally will relieve the Portfolio of any liability for
federal income tax to the extent its earnings are distributed to shareholders.
In order to qualify as a regulated investment company for federal income tax
purposes, the Portfolio generally will limit its investments such that at the
close of each quarter of the taxable year it will not, with respect to 50% of
its total assets, invest more than 5% of its total assets at the time of
purchase in the securities of any single issuer (other than obligations issued
or guaranteed by the U.S. Government, its agencies, enterprises or
instrumentalities).
If a percentage restriction is adhered to at the time an investment
is made, a later increase in percentage resulting from a change in value or
assets will not constitute a violation of such restriction.
With regard to limitation (11), the 1940 Act currently prohibits an
investment company from acquiring securities of another investment company if,
as a result of the transaction, the acquiring company and any company or
companies controlled by it would own in the aggregate: (i) more than 3% of the
total outstanding voting stock of the acquired company, (ii) securities issued
by the acquired company having an aggregate value in excess of 5% of the value
of the total assets of the acquiring company, or (iii) securities issued by
the acquired company and all other investment companies (other than treasury
stock of the acquired company) having an aggregate value in excess of 10% of
the value of the total assets of the acquiring company. In addition to the
advisory fees and other expenses that a Portfolio bears directly in connection
with its own operations, as a shareholder of another investment company, such
Portfolio would bear its "pro rata" portion of the other investment company's
advisory fees and other expenses. Therefore, to the extent that a Portfolio is
invested in shares of other investment companies, such Portfolio's
shareholders will be subject to expenses of such other investment companies,
in addition to expenses of the Portfolio.
As a matter of policy which may be changed by the particular Fund's
Board without shareholder approval, with respect to limitation (12),
Portfolios other than the Government Cash Portfolio and the Tax-Exempt Cash
Portfolio will not invest more
-7-
<PAGE>
than 25% of the value of their respective total assets in instruments issued
by U.S. banks.
In addition, with respect to investment limitation (12), (a) there is
no limitation with respect to (i) instruments issued or guaranteed by the
United States, any state, territory or possession of the United States, the
District of Columbia or any of their authorities, agencies, instrumentalities
or political subdivisions, and (ii) repurchase agreements secured by the
instruments described in clause (i); (b) wholly-owned finance companies will
be considered to be in the industries of their parents if their activities are
primarily related to financing the activities of the parents; and (c)
utilities will be divided according to their services; for example, gas, gas
transaction, electric and gas, electric and telephone will each be considered
a separate industry.
With regard to limitation (13), the purchase of securities of a
corporation, a subsidiary of which has an interest in oil, gas or other
mineral exploration or development programs shall not be deemed to be
prohibited by the limitation.
MANAGEMENT OF THE FUNDS
Each Fund's officers, under the supervision of the particular Board,
manage the day-to-day operations of the Fund. The Board members set broad
policies for each Fund and choose its officers. A list of the Board members
and officers and a brief statement of their current positions and principal
occupations during the past five years is set forth in the Funds'
Prospectuses.
Remuneration of Board Members
Effective June 12, 1996, Glenmede Fund pays each Board member, other
than officers of the Advisor, an annual fee of $8,000 plus $1,250 for each
Board meeting attended and each Board Valuation Committee meeting attended
(unless such meeting was held in conjunction with a Board meeting) and
out-of-pocket expenses incurred in attending Board meetings. Prior to June 12,
1996, Glenmede Fund paid each Director, other than officers of the Advisor, an
annual fee of $6,000 plus $1,250 for each Board meeting attended and
out-of-pocket expenses incurred in attending Board meetings. Glenmede
Portfolios pays each Board member, other than officers of the Advisor, an
annual fee of $1,000 per year and out-of-pocket expenses incurred in attending
Board meetings. Officers of the Funds receive no compensation as officers from
the Funds.
-8-
<PAGE>
Set forth in the table below is the compensation received by Board
members for the fiscal year ended October 31, 1997.
<TABLE>
<CAPTION>
Pension or
Retirement
Aggregate Aggregate Benefits Estimated
Compensation Compensation Total Annual Total
from from Part of Benefits Compensation
Name of Glenmede Glenmede the Funds' Upon from the
Person, Position Fund Portfolios Expense Retirement Funds
- -------------------- ------------- ------------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Dr. H. Franklin Allen, Ph.D., $15,459 $1,041 None None $16,500
Director/Trustee
Willard S. Boothby, Jr., $14,196 $1,054 None None $15,250
Director/Trustee
John W. Church, Jr. None None None None None
Director/Trustee
Francis J. Palamara, $14,196 $1,054 None None $15,250
Director/Trustee
G. Thompson Pew, Jr., $16,696 $1,054 None None $17,750
Director/Trustee
</TABLE>
INVESTMENT ADVISORY AND OTHER SERVICES
The Advisor, The Glenmede Trust Company, is the wholly-owned
subsidiary of The Glenmede Corporation (the "Corporation") whose shares are
closely held by 76 shareholders. The Corporation has a nine person Board of
Directors which, at September 30, 1997, collectively, owned 98.67% of the
Corporation's voting shares and 37.80% of the Corporation's total outstanding
shares. The members of the Board and their respective interests in the
Corporation at September 30, 1997 are as follows:
The Glenmede Corporation Percent of Percent of
Board of Directors Voting Shares Total Shares
Susan W. Catherwood...................... 10.83% 1.23%
Richard F. Pew........................... 10.83% 1.07%
Thomas W. Langfitt, M.D.................. 11.07% 8.69%
Arthur E. Pew III........................ 10.83% 1.07%
J. Howard Pew, II........................ 10.83% 1.43%
J. N. Pew, III........................... 11.07% 5.45%
J. N. Pew, IV............................ 11.07% 1.43%
R. Anderson Pew.......................... 11.07% 6.03%
Ethel Benson Wister...................... 11.07% 11.4%
------ ------
98.67% 37.80%
As noted in the Prospectuses, the Advisor does not receive any fee
from the Government Cash, Tax-Exempt Cash, Core Fixed Income, International,
Equity, Large Cap Value, Muni Intermediate and New Jersey Muni Portfolios for
its investment services. Prior to January 1, 1998, the Advisor did not receive
any fee from The Small Capitalization Equity Portfolio for its investment
-9-
<PAGE>
services. Effective January 1, 1998, the Advisor is entitled to receive a fee
from the Small Capitalization Equity Portfolio for its investment services
computed daily and payable monthly, at an annual rate of .55% of that
Portfolio's average daily net assets. Additionally, all shareholders in the
Portfolios are clients of the Advisor or an Affiliate and, as clients, pay
fees which vary depending on the capacity in which the Advisor or Affiliate
provides fiduciary and investment services to the particular client. Such
services may include personal trust, estate settlement, advisory and custodian
services. For example, for advisory services, the Advisor charges its clients
up to 1% on the first $1 million of principal, .60% on the next $1 million of
principal, .50% on the next $3 million of principal and .40% on the next $5
million of principal, with a minimum annual fee of $10,000. For accounts in
excess of $10 million of principal, the fee would be determined by special
analysis.
Since July 1, 1995, administrative, transfer agency and dividend
paying services have been provided to each of the Funds by ICC, pursuant to a
Master Services Agreement between each of the Funds and ICC. See
"Administrative, Transfer Agency and Dividend Paying Services" in the
Prospectuses for information concerning the substantive provisions of each
Master Services Agreement. For the fiscal year ended October 31, 1997, the
Funds paid ICC fees of $178,351 for the Government Cash Portfolio, $99,450 for
the Tax-Exempt Cash Portfolio, $101,654 for the Core Fixed Income Portfolio,
$342,102 for the International Portfolio, $45,406 for the Equity Portfolio,
$144,610 for the Small Capitalization Equity Portfolio, $24,893 for the Large
Cap Value Portfolio, $7,183 for the Muni Intermediate Portfolio and $3,821 for
the New Jersey Muni Portfolio.
For the fiscal year ended October 31, 1996, the Funds paid ICC fees
of $183,151 for the Government Cash Portfolio, $95,073 for the Tax-Exempt Cash
Portfolio, $110,811 for the Core Fixed Income Portfolio, $216,069 for the
International Portfolio, $33,415 for the Equity Portfolio, $101,413 for the
Small Capitalization Equity Portfolio, $12,716 for the Large Cap Value
Portfolio, $7,474 for the Muni Intermediate Portfolio and $2,571 for the New
Jersey Muni Portfolio.
For the period July 1, 1995 to October 31, 1995, the Funds paid ICC
fees of $59,300 for the Government Cash Portfolio, $30,104 for the Tax-Exempt
Cash Portfolio, $48,906 for the Core Fixed Income Portfolio, $55,781 for the
International Portfolio, $11,445 for the Equity Portfolio, $24,932 for the
Small Capitalization Equity Portfolio, $2,615 for the Large Cap Value
Portfolio, $2,663 for the Muni Intermediate Portfolio and $808 for the New
Jersey Muni Portfolio.
From the close of business on May 6, 1994 to the close of business on
June 30, 1995, administrative services were provided
-10-
<PAGE>
to each Fund by The Shareholder Services Group, Inc. ("TSSG"), pursuant to
Administration Agreements. For the period November 1, 1994 to June 30, 1995,
the Funds paid TSSG administrative fees of $238,455 for the Government Cash
Portfolio, $126,195 for the Tax-Exempt Cash Portfolio, $193,903 for the Core
Fixed Income Portfolio, $172,504 for the International Portfolio, $38,056 for
the Equity Portfolio, $76,001 for the Small Capitalization Equity Portfolio,
$11,371 for the Large Cap Value Portfolio, $11,012 for the Muni Intermediate
Portfolio and $2,829 for the New Jersey Muni Portfolio. For the period May 6,
1994 through October 31, 1994, the Funds paid TSSG administrative fees of
$138,505 for the Government Cash Portfolio, $96,424 for the Tax-Exempt Cash
Portfolio, $166,354 for the Core Fixed Income Portfolio, $126,733 for the
International Portfolio, $28,783 for the Equity Portfolio, $44,272 for the
Small Capitalization Equity Portfolio, $9,019 for the Large Cap Value
Portfolio, $13,154 for the Muni Intermediate Portfolio and $1,858 for the New
Jersey Muni Portfolio.
As described more fully in the Prospectuses, the Advisor provides
shareholder support services to their clients who beneficially own shares of
the Portfolios pursuant to a Shareholder Servicing Agreement ("Agreement")
with each of the Funds. Shareholder servicing fees payable for the fiscal year
ended October 31, 1997 for the Government Cash, Tax-Exempt Cash, Core Fixed
Income, Muni Intermediate, New Jersey Muni, Equity, International, Small
Capitalization Equity and Large Cap Value Portfolios were $233,912, $130,408,
$129,813, $9,418, $5,023, $59,674, $448,678, $189,976 and $32,710,
respectively.
Shareholder servicing fees payable for the fiscal year ended October
31, 1996 for the Government Cash, Tax-Exempt Cash, Core Fixed Income, Muni
Intermediate, New Jersey Muni, Equity, International, Small Capitalization
Equity and Large Cap Value Portfolios were $226,624, $117,082, $136,249,
$9,135, $3,168, $42,934, $265,082, $125,390 and $15,789, respectively.
Shareholder servicing fees payable for the period January 1, 1995 to
October 31, 1995 for the Government Cash, Tax-Exempt Cash, Core Fixed Income,
Muni Intermediate, New Jersey Muni, Equity, International, Small
Capitalization Equity and Large Cap Value Portfolios were $179,403, $88,295,
$137,633, $7,721, $2,177, $29,441, $130,533, $ 61,932, and $7,699,
respectively.
Custody services are provided to each Portfolio by The Chase
Manhattan Bank, N.A., Brooklyn, New York.
-11-
<PAGE>
DISTRIBUTOR
Shares of the Funds are distributed continuously and are offered
without a sales load by ICC Distributors, Inc. ("ICC Distributors"), pursuant
to a Distribution Agreement between the Funds and ICC Distributors. ICC
Distributors receives no fee from the Funds for its distribution services.
PORTFOLIO TRANSACTIONS
The Investment Advisory Agreements authorize the Advisor to select
the brokers or dealers that will execute the purchases and sales of investment
securities for each of the Portfolios and direct the Advisor to use its best
efforts to obtain the best available price and most favorable execution with
respect to all transactions for the Portfolios. The Advisor may, however,
consistent with the interests of a Portfolio, select brokers on the basis of
the research, statistical and pricing services they provide to a Portfolio.
Information and research received from such brokers will be in addition to,
and not in lieu of, the services required to be performed by the Advisor under
the Investment Advisory Agreements. A commission paid to such brokers may be
higher than that which another qualified broker would have charged for
effecting the same transaction, provided that such commissions are paid in
compliance with the Securities Exchange Act of 1934, as amended, and that the
Advisor determines in good faith that such commission is reasonable in terms
either of the transaction or the overall responsibility of the Advisor to a
Portfolio and the Advisor's other clients.
During the fiscal year ended October 31, 1997, the Equity,
International, Small Capitalization Equity and Large Cap Value Portfolios paid
$80,102, $1,256,020, $592,458 and $171,033 in brokerage commissions,
respectively. During the fiscal year ended October 31, 1996, the Equity,
International, Small Capitalization Equity and Large Cap Value Portfolios paid
$99,329, $726,803, $487,995 and $165,881 in brokerage commissions,
respectively. During the fiscal year ended October 31, 1995, the Equity,
International, Small Capitalization Equity and Large Cap Value Portfolios paid
$157,547, $453,721, $343,683 and $165,103 in brokerage commissions,
respectively.
The Government Cash, Core Fixed Income, Muni Intermediate and New
Jersey Muni Portfolios do not currently expect to incur any brokerage
commission expense on transactions in their portfolio securities because debt
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.
Because shares of the Portfolios are not marketed through
intermediary brokers or dealers, it is not the Funds' practice to
-12-
<PAGE>
allocate brokerage or effect principal transactions with dealers on the basis
of sales of shares which may be made through such firms. However, the Advisor
may place portfolio orders with qualified broker-dealers who refer clients to
the Advisor.
Some securities considered for investment by each Portfolio may also
be appropriate for other clients served by the Advisor. If purchase or sale of
securities is consistent with the investment policies of a Portfolio and one
or more of these other clients served by the Advisor and is considered at or
about the same time, transactions in such securities will be allocated among
the Portfolio and clients in a manner deemed fair and reasonable by the
Advisor. While in some cases this practice could have a detrimental effect on
the price, value or quantity of the security as far as a Portfolio is
concerned, in other cases it is believed to be beneficial to the Portfolios.
ADDITIONAL INFORMATION CONCERNING TAXES
General. The following summarizes certain additional tax
considerations generally affecting the Portfolios and their shareholders that
are not described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Portfolios or their shareholders, and
the discussion here and in the Prospectus is not intended as a substitute for
careful tax planning. Potential investors should consult their tax advisers
with specific reference to their own tax situation.
Each Portfolio is treated as a separate corporate entity under the
Internal Revenue Code of 1986, as amended (the "Code"), and intends to qualify
as a regulated investment company. Qualification as a regulated investment
company under the Code requires, among other things, that each Portfolio
distribute to its shareholders an amount equal to at least the sum of 90% of
its investment company taxable income and 90% of its tax-exempt income (if
any) net of certain deductions for a taxable year. In addition, each Portfolio
must satisfy certain requirements with respect to the source of its income for
a taxable year. At least 90% of the gross income of each Portfolio must be
derived from dividends, interest, payments with respect to securities loans,
gains from the sale or other disposition of stock, securities or foreign
currencies, and other income (including, but not limited to, gains from
options, futures, or forward contracts) derived with respect to the
Portfolio's business of investing in such stock, securities or currencies. The
Treasury Department may by regulation exclude from qualifying income foreign
currency gains which are not directly related to a Portfolio's principal
business of investing in stock or securities, or options and futures with
respect to stock or securities. Any income derived by a Portfolio from a
partnership or trust is treated for this purpose as derived with respect to
the Portfolio's business of
-13-
<PAGE>
investing in stock, securities or currencies only to the extent that such
income is attributable to items of income which would have been qualifying
income if realized by the Portfolio in the same manner as by the partnership
or trust.
Any distribution of the excess of net long-term capital gain over net
short-term capital loss is taxable to a shareholder as long-term capital gain,
regardless of how long the shareholder has held the distributing Portfolio's
shares and whether such distribution is received in cash or additional
Portfolio shares. Each Portfolio will designate such distributions as capital
gain dividends in a written notice mailed to shareholders within 60 days after
the close of the Portfolio's taxable year. Shareholders should note that, upon
the sale or exchange of Portfolio shares, if the shareholder has not held such
shares for more than six months, any loss on the sale or exchange of those
shares will be treated as long-term capital loss to the extent of the capital
gain dividends received with respect to the shares.
Under the Taxpayer Relief Act of 1997, for capital gains on
securities recognized after July 28, 1997, the maximum tax rate for
individuals is 20% if the property was held more than 18 months; for property
held for more than 12 months, but no longer than 18 months, the maximum tax
rate on capital gains continues to be 28%. For sales or exchanges on or before
July 28, 1997, an individual's net capital gains are still taxable at a
maximum rate of 28%. Ordinary income of individuals is taxable at a maximum
marginal rate of 39.6%, but because of limitations on itemized deductions
otherwise allowable and the phase-out of personal exemptions, the maximum
effective marginal rate of tax for some taxpayers may be higher. For
corporations, long-term capital gains and ordinary income are both taxable at
a maximum nominal rate of 35% (although surtax provisions apply at certain
income levels to result in marginal rates as high as 39%).
If for any taxable year a Portfolio does not qualify for the special
Federal income tax treatment afforded regulated investment companies, all of
its taxable income will be subject to Federal income tax at regular corporate
rates (without any deduction for distributions to its shareholders). In such
event, dividend distributions (including amounts derived from interest on
tax-exempt obligations in the case of the Tax-Exempt Cash, Muni Intermediate
and New Jersey Muni Portfolios) would be taxable as ordinary income to
shareholders to the extent of the Portfolio's current and accumulated earnings
and profits, and would be eligible for the dividends received deduction for
corporations.
Tax-Exempt Cash, Muni Intermediate and New Jersey Muni Portfolios. As
described in the Prospectus, these Portfolios are designed to provide
investors with current tax-exempt interest income. Shares of the Portfolios
would not be suitable for tax-
-14-
<PAGE>
exempt institutions and may not be suitable for retirement plans qualified
under Section 401 of the Code, H.R. 10 plans and individual retirement
accounts since such plans and accounts are generally tax-exempt and,
therefore, would not only fail to gain any additional benefit from each such
Portfolio's dividends being tax-exempt, but such dividends would be ultimately
taxable to the beneficiaries when distributed to them. In addition, the
Portfolios may not be an appropriate investment for entities which are
"substantial users" of facilities financed by private activity bonds or
"related persons" thereof. "Substantial user" is defined under U.S. Treasury
Regulations to include a non-exempt person who regularly uses a part of such
facilities in his trade or business and whose gross revenues derived with
respect to the facilities financed by the issuance of bonds are more than 5%
of the total revenues derived by all users of such facilities, who occupies
more than 5% of the usable area of such facilities or for whom such facilities
or a part thereof were specifically constructed, reconstructed or acquired.
"Related persons" include certain related natural persons, affiliated
corporations, a partnership and its partners and an S corporation and its
shareholders.
The percentage of total dividends paid by each Portfolio with respect
to any taxable year which qualify as Federal exempt- interest dividends will
be the same for all shareholders receiving dividends for such year. In order
for each Portfolio to pay exempt-interest dividends with respect to any
taxable year, at the close of each quarter of its taxable year at least 50% of
the aggregate value of each Portfolio's assets must consist of exempt-interest
obligations. After the close of its taxable year, each Portfolio will notify
its shareholders of the portion of the dividends paid by it which constitutes
an exempt- interest dividend with respect to such year. However, the aggregate
amount of dividends so designated by each Portfolio cannot exceed the excess
of the amount of interest exempt from tax under Section 103 of the Code
received by the particular Portfolio for the taxable year over any amounts
disallowed as deductions under Sections 265 and 171(a)(2) of the Code.
Interest on indebtedness incurred by a shareholder to purchase or
carry such a Portfolio's shares generally is not deductible for Federal income
tax purposes if the Portfolio distributes exempt-interest dividends during the
shareholder's taxable year.
While each Portfolio will seek to invest substantially all of its
assets in tax-exempt obligations (except on a temporary basis or for temporary
defensive periods), any investment company taxable income earned by a
Portfolio will be distributed. In general, each Portfolio's investment company
taxable income will be its taxable income (including taxable interest received
from temporary investments and any net short-term capital gains
-15-
<PAGE>
realized by a Portfolio) subject to certain adjustments and excluding the
excess of any net long-term capital gains for the taxable year over the net
short-term capital loss, if any, for such year.
Federal Taxation of Certain Financial Instruments. Generally, certain
foreign currency contracts entered into and held by the International
Portfolio at the close of the Fund's taxable year may be treated for Federal
income tax purposes as sold for their fair market value on the last business
day of such year, a process known as "mark-to-market." Forty percent of any
gain or loss resulting from such constructive sale will be treated as
short-term capital gain or loss and sixty percent of such gain or loss will be
treated as long-term capital gain or loss without regard to the length of time
the Portfolio holds the foreign currency contract ("the 40-60 rule"). To
receive such Federal income tax treatment, a foreign currency contract must
meet the following conditions: (1) the contract must require delivery of a
foreign currency of a type in which regulated futures contracts are traded or
upon which the settlement value of the contract depends; (2) the contract must
be entered into at arm's length at a price determined by reference to the
price in the interbank market; and (3) the contract must be traded in the
interbank market. The amount of any capital gain or loss actually realized by
the Portfolio in a subsequent sale or other disposition of those foreign
currency contracts will be adjusted to reflect any capital gain or loss taken
into account by the Portfolio in a prior year as a result of the constructive
sale of the contracts. The Treasury Department has broad authority to issue
regulations under the provisions respecting foreign currency contracts. As of
the date of this Statement of Additional Information, the Treasury has not
issued any such regulations. Other foreign currency contracts entered into by
the International Portfolio may result in the creation of one or more
straddles for Federal income tax purposes, in which case certain loss
deferral, short sales, and wash sales rules and the requirement to capitalize
interest and carrying charges may apply.
With respect to foreign currency contracts and other financial
instruments subject to the mark-to-market rules, the Internal Revenue Service
has ruled in private letter rulings that a gain realized from such a foreign
currency contract or financial instrument will be treated as being derived
from a security held for three months or more (regardless of the actual period
for which the contract or instrument is held) if the gain arises as a result
of a constructive sale under the mark-to-market rules, and will be treated as
being derived from a security held for less than three months only if the
contract or instrument is terminated (or transferred) during the taxable year
(other than by reason of mark-to-market) and less than three months have
elapsed between the date the contract or instrument
-16-
<PAGE>
is acquired and the termination date. In determining whether the 30% test is
met for a taxable year, increases and decreases in the value of a Portfolio's
contracts and other investments that qualify as part of a "designated hedge,"
as defined in the Code, may be netted.
Special rules govern the Federal income tax treatment of certain
transactions denominated in terms of a currency other than the U.S. dollar or
determined by reference to the value of one or more currencies other than the
U.S. dollar. The types of transactions covered by the special rules include
the following: (i) the acquisition of, or becoming the obligor under, a bond
or other debt instrument (including, to the extent provided in Treasury
regulations, preferred stock); (ii) the accruing of certain trade receivables
and payables; and (iii) the entering into or acquisition of any forward
contract, futures contract, option and similar financial instrument if such
instrument is not marked to market. The disposition of a currency other than
the U.S. dollar by a U.S. taxpayer is also treated as a transaction subject to
the special currency rules. However, foreign currency-related regulated
futures contracts and non-equity options are generally not subject to the
special currency rules if they are or would be treated as sold for their fair
market value at year-end under the mark-to-market rules, unless an election is
made to have such currency rules apply. With respect to transactions covered
by the special rules, foreign currency gain or loss is calculated separately
from any gain or loss on the underlying transaction and is normally taxable as
ordinary gain or loss. A taxpayer may elect to treat as capital gain or loss
foreign currency gain or loss arising from certain identified forward
contracts, futures contracts and options that are capital assets in the hands
of the taxpayer and which are not part of a straddle. In accordance with
Treasury regulations under which certain transactions that are part of a
"section 988 hedging transaction" (as defined in the Code and the Treasury
regulations) will be integrated and treated as a single transaction or
otherwise treated consistently for purposes of the Code. Any gain or loss
attributable to the foreign currency component of a transaction engaged in by
a Portfolio which is not subject to the special currency rules (such as
foreign equity investments other than certain preferred stocks) will be
treated as capital gain or loss and will not be segregated from the gain or
loss on the underlying transaction. It is anticipated that some of the
non-U.S. dollar denominated investments and foreign currency contracts the
International Portfolio may make or enter into will be subject to the special
currency rules described above.
-17-
<PAGE>
Special Considerations Regarding Investment In Pennsylvania
Municipal Obligations.
The concentration of investments in Pennsylvania Municipal
Obligations by the Muni Intermediate Portfolio raises special investment
considerations. In particular, changes in the economic condition and
governmental policies of the Commonwealth of Pennsylvania and its
municipalities could adversely affect the value of the Portfolio and its
portfolio securities. This section briefly describes current economic trends
in Pennsylvania.
Pennsylvania's economy historically has been dependent on heavy
industry although recent declines in the coal, steel and railroad industries
have led to diversification of the Commonwealth's economy. Recent sources of
economic growth in Pennsylvania are in the service sector, including trade,
medical and health services, education and financial institutions. Agriculture
continues to be an important component of the Commonwealth's economic
structure, with nearly one-third of the Commonwealth's total land area devoted
to cropland, pasture and farm woodlands.
The Commonwealth utilizes the fund method of accounting and over 120
funds have been established for purposes of recording receipts and
disbursements of the Commonwealth, of which the General Fund is the largest.
Most of the Commonwealth's operating and administrative expenses are payable
from the General Fund. The major tax sources for the General Fund are the
sales tax, the personal income tax and the corporate net income tax. Major
expenditures of the Commonwealth include funding for education, public health
and welfare, transportation, and economic development.
The constitution of the Commonwealth provides that operating budget
appropriations of the Commonwealth may not exceed the estimated revenues and
available surplus in the fiscal year for which funds are appropriated. Annual
budgets are enacted for the General Fund and for certain special revenue funds
which together represent the majority of expenditures of the Commonwealth.
Although the balance in the General Fund of the Commonwealth (the principal
operating fund of the Commonwealth) experienced deficits in fiscal 1990 and
1991, tax increases and spending decreases have resulted in surpluses the last
four years; as of June 30, 1996, the General Fund had a surplus of $35.2
million.
Current constitutional provisions permit the Commonwealth to issue
the following types of debt: (i) electorate approved debt, (ii) debt for
capital projects subject to an aggregate debt limit of 1.75 times the annual
average tax revenues of the preceding five fiscal years, (iii) tax
anticipation notes payable in the fiscal year of issuance and (iv) debt to
suppress insurrection or
-18-
<PAGE>
rehabilitate areas affected by disaster. Certain state-created agencies issue
debt supported by assets of, or revenues derived from, the various projects
financed and the debt of such agencies is not an obligation of the
Commonwealth although some of the agencies are indirectly dependent on
Commonwealth appropriations.
Certain litigation is pending against the Commonwealth that could
adversely affect the ability of the Commonwealth to pay debt service on its
obligations including suits relating to the following matters: (a) the ACLU
has filed suit in federal court demanding additional funding for child welfare
services; the Commonwealth settled a similar suit in the Commonwealth Court of
Pennsylvania and is seeking the dismissal of the federal suit, inter alia,
because of that settlement. After its earlier denial was reversed by the Third
Circuit Court of Appeals, the district court granted class certification to
the ACLU, and the parties are proceeding with discovery (no available
estimates of potential liability); (b) in 1987, the Supreme Court of
Pennsylvania held that the statutory scheme for county funding of the judicial
system to be in conflict with the constitution of the Commonwealth, but stayed
judgment pending enactment by the legislature of funding consistent with the
opinion and the legislature has yet to consider legislation implementing the
judgment; in 1992, a new action in mandamus was filed seeking to compel the
Commonwealth to comply with the original decision; the court issued a writ in
mandamus and appointed a special master in 1996 to submit a plan for
implementation, which it intended to acquire by January 1, 1998. In January
1997, the Court established a committee, consisting of the special master and
representatives of the Executive and Legislature, to develop an implementation
plan; (c) litigation has been filed in both state and federal court by an
association of rural and small schools and several individual school districts
and parents challenging the constitutionality of the Commonwealth's system for
funding local school districts -- the federal case has been stayed pending
resolution of the state case and the state case is in the pre-trial stage (no
available estimate of potential liability); (d) Envirotest/Synterra Partners
("Envirotest") filed suit against the Commonwealth asserting that it sustained
damages in excess of $350 million as a result of investments it made in
reliance on a contract to conduct emissions testing before the emissions
testing program was suspended. Envirotest has entered into a Settlement
Agreement resolve to which Envirotest's claims that will say Environtest a
conditional sum of $195 million over four years; (e) in litigation brought by
the Pennsylvania Human Relations Commission to remedy unintentional conditions
of segregation in the Philadelphia public schools, the School District of
Philadelphia filed a third-party complaint against the Commonwealth asking the
Commonwealth Court to require the Commonwealth to supply funding necessary for
the District to comply with orders of the court; the Commonwealth Court found
that the School District was entitled to receive an additional
-19-
<PAGE>
$45.2 million for the 1996-97 school year, but the Pennsylvania Supreme Court
vacated this decision in September 1996; in January 1997, the Supreme Court
ordered the parties to brief certain issues, but no further decision by the
Supreme Court has been issued (no available estimate of potential liability);
and (f) in February 1997, five residents of the City of Philadelphia, joined
by the City, the School District and Others, filed a civil action in the
Commonwealth Court for declaratory judgment against the Commonwealth and
certain Commonwealth officers and officials that the defendants had failed to
provide an adequate quality of education in Philadelphia, as required by the
Pennsylvania Constitution (no available estimate of potential liability).
Local government units in the Commonwealth of Pennsylvania (which
include, among other things, counties, cities, boroughs, towns, townships,
school districts and other municipally created units such as industrial
development authorities and municipality authorities, including water and
sewer authorities) are permitted to issue debt for capital projects: (i) in
any amount so long as the debt has been approved by the voters of the local
government unit; or (ii) without electoral approval if the aggregate
outstanding principal amount of debt of the local government unit is not in
excess of 100% of its borrowing base (in the case of a school district of the
first class), 300% of its borrowing base (in the case of a county) or 250% of
its borrowing base (in the case of all other local government units); or (iii)
without electoral approval and without regard to the limit described in (ii)
in any amount in the case of certain subsidized debt and self-liquidating debt
(defined to be debt with no claim on taxing power, secured solely by revenues
from a specific source which have been projected to be sufficient to pay debt
service on the related debt). Lease rental debt may also be issued, in which
case the total debt limits described in section (ii) (taking into account all
existing lease rental debt in addition to all other debt) are increased. The
borrowing base for a local government unit is the average of total revenues
for the three fiscal years preceding the borrowing. The risk of investing in
debt issued by any particular local government unit depends, in the case of
general obligation bonds secured by tax revenues, on the creditworthiness of
that issuer or, in the case of revenue bonds, on the revenue producing ability
of the project being financed, and not directly on the credit-worthiness of
the Commonwealth of Pennsylvania as a whole.
The City of Philadelphia (the "City") experienced a series of General
Fund deficits for Fiscal Years 1988 through 1992 and, while its general
financial situation has improved, the City is still seeking a long-term
solution for its economics difficulties. The City has no legal authority to
issue deficit reduction bonds on its own behalf, but state legislation has
been enacted to create an Intergovernmental Cooperation Authority (the
"Authority") to provide fiscal oversight for Pennsylvania cities
-20-
<PAGE>
(primarily Philadelphia) suffering recurring financial difficulties. The
Authority is broadly empowered to assist cities in avoiding defaults and
eliminating deficits by encouraging the adoption of sound budgetary practices
and issuing bonds. In order for the Authority to issue bonds on behalf of the
City, the City and the Authority entered into an intergovernmental cooperative
agreement providing the Authority with certain oversight powers with respect
to the fiscal affairs of the City, and in recent years, the Authority has
issued approximately $1.76 billion of Special Revenue Bonds on behalf of the
City. The City currently is operating under a five year plan approved by the
Authority in 1996, with technical amendments officially incorporated on July
18, 1996. The audited balance of the City's General Fund as of June 30, 1995
showed a surplus of approximately $118.5 million up from approximately $80.5
million as of June 30, 1995.
The Authority's power to issue further bonds to finance capital
projects or deficit expired on December 31, 1994. The Authority's power to
issue debt to finance a cash flow deficit expired on December 31, 1996, and
its ability to refund outstanding bonds is unrestricted. The Authority had
approximately $1.1 billion in Special Revenue Bonds outstanding as of June 30,
1996.
The foregoing information as to certain Pennsylvania risk factors
constitutes only a brief summary, does not purport to be a complete
description of Pennsylvania risk factors and is principally drawn from
official statements relating to securities offerings of the Commonwealth of
Pennsylvania that have come to the Funds' attention and were available as of
the date of this Statement of Additional Information.
Special Considerations Regarding Investment in New Jersey
Municipal Obligations
The State of New Jersey (the "State") and its political subdivisions,
agencies and public authorities are authorized to issue two general classes of
indebtedness; general obligation bonds and revenue bonds. Both classes of
bonds may be included in the New Jersey Muni Portfolio. The repayment of
principal and interest on general obligation bonds is secured by the full
faith and credit of the issuer, backed by the issuer's taxing authority,
without recourse to any special project or source of revenue. Special
obligation or revenue bonds may be repaid only from revenues received in
connection with the project for which the bonds are issued, special excise
taxes, or other special revenue sources and generally are issued by entities
without taxing power. Neither the State of New Jersey nor any of its
subdivisions is liable for the repayment of principal or interest on revenue
bonds except to the extent stated in the preceding sentences.
-21-
<PAGE>
General obligation bonds of the state are repaid from revenues
obtained through the state's general taxing authority. An inability to
increase taxes may adversely affect the state's ability to authorize or repay
debt.
Public authorities, private non-profit corporations, agencies and
similar entities of New Jersey ("Authorities") are established for a variety
of beneficial purposes, including economic development, housing and mortgage
financing, health care facilities and public transportation. The Authorities
are not operating entities of the State of New Jersey, but are separate legal
entities that are managed independently. The state oversees the Authorities by
appointing the governing boards, designating management, and by significantly
influencing operations. The Authorities are not subject to New Jersey
constitutional restrictions on the incurrence of debt, applicable to the State
of New Jersey itself, and may issue special obligation or private activity
bonds in legislatively authorized amounts.
An absence or reduction of revenue will affect a bond- issuing
Authority's ability to repay debt on special obligation bonds and no assurance
can be given that sufficient revenues will be obtained to make such payments,
although in some instances repayment may be guaranteed or otherwise secured.
Various Authorities have issued bonds for the construction of health
care facilities, transportation facilities, office buildings and related
facilities, housing facilities, pollution control facilities, water and
sewerage facilities and power and electric facilities. Each of these
facilities may incur different difficulties in meeting its debt repayment
obligations. Hospital facilities, for example, are subject to changes in
Medicare and Medicaid reimbursement regulations, attempts by Federal and state
legislatures to limit the costs of health care and management's ability to
complete construction projects on a timely basis as well as to maintain
projected rates of occupancy and utilization. At any given time, there are
several proposals pending on a Federal and state level concerning health care
which may further affect a hospital's debt service obligation.
Housing facilities may be subject to increases in operating costs,
management's ability to maintain occupancy levels, rent restrictions and
availability of Federal or state subsidies, while power and electric
facilities may be subject to increased costs resulting from environmental
restrictions, fluctuations in fuel costs, delays in licensing procedures and
the general regulatory framework in which these facilities operate. All of
these entities are constructed and operated under rigid regulatory guidelines.
-22-
<PAGE>
Some entities which financed facilities with proceeds of private
activity bonds issued by the New Jersey Economic Development Authority, a
major issuer of special obligation bonds, have defaulted on their debt service
obligations. Because these special obligation bonds were repayable only from
revenue received from the specific projects which they funded, the New Jersey
Economic Development Authority was unable to repay the debt service to
bondholders for such facilities. Each issue of special obligation bonds,
however, depends on its own revenue for repayment, and thus these defaults
should not affect the ability of the New Jersey Economic Development Authority
to repay obligations on other bonds that it issues in the future.
The state has experienced a gradual economic recovery since hitting a
recessionary peak during 1992. Recently, the state's unemployment rate has
fallen, and job growth has been experienced in several sectors of the state's
economy. To the extent that any adverse conditions exist in the future which
affect the obligor's ability to repay debt, the value of the Portfolio may be
immediately and substantially affected.
The following are cases presently pending or threatened in which the
State has a potential for either a significant loss of revenue or a
significant unanticipated expenditure: (i) several labor unions have
challenged 1994 legislation mandating a revaluation of several public employee
pension funds which resulted in a refund of millions of dollars in public
employer contributions to the State and significant ongoing annual savings to
the State; (ii) several cases filed in the State courts challenged the basis
on which recoveries of certain costs for residents in State psychiatric
hospitals and other facilities are shared between the State Department of
Human Services and the State's county governments, and certain counties are
seeking the recovery from the Department of costs they have incurred for the
maintenance of such residents; (iii) the County of Passaic and other parties
have filed suit alleging the State violated a 1984 consent order concerning
the construction of a resource recovery facility in that county; (iv) several
Medicaid eligible children and the Association for Children of New Jersey have
filed suit claiming the Medicaid reimbursement rates for services rendered to
such children are inadequate under federal law; (v) a coalition of churches
and church leaders in Hudson County have filed suit asserting the State-owned
Liberty State Park in Jersey City violates environmental standards; (vi) Waste
Management of Pennsylvania, Inc. and an affiliate have filed suit alleging
their constitutional rights were violated by the State's issuance of two
emergency redirection orders and a draft permit; (vii) representatives of the
trucking industry have filed a constitutional challenge to annual hazardous
and solid waste licensure renewal fees; (viii) the New Jersey Hospital
Association has filed a constitutional challenge to the State's failure to
provide funding for charity care costs, while
-23-
<PAGE>
requiring hospitals to treat all patients without ability to pay; (ix) the
Education Law Center filed a motion compelling the State to close the spending
gap between poor urban school districts and wealthy rural school districts;
(x) a group of insurance companies have filed a constitutional challenge to
the challenge to the State's assessment of monies pursuant to the Fair
Automobile Insurance Reform Act of 1990; (xi) a class action consisting of
prisoners with serious mental disorders has been filed against officers of the
Department of Corrections, alleging sex discrimination, violation of the
Americans with Disabilities Act of 1990, and constitutional violations; (xii)
a class action has been brought in federal court challenging the State's
method of determining the monthly needs of a spouse of an institutionalized
person under the Medicare Catastrophic Act; (xiii) several suits have been
filed against the State in federal court alleging that the State committed
securities fraud and environmental violations in the financing of a new
Atlantic Cit highway and tunnel; (xiv) a class action has been filed against
the State alleging the State's breach of contract for not paying certain
Medicare co-insurance and deductibles; and (xv) an action has been filed
challenging the State's issuance of bonds to fund the accrued liability in its
pension funds under the Pension Bond Financing Act of 1997.
Although the Portfolio generally intends to invest its assets
primarily in New Jersey Municipal Obligations rated no lower than A, MIG2 or
Prime-1 by Moody's or A SP-1 or A-1 by S&P, there can be no assurance that
such ratings will remain in effect until the bond matures or is redeemed or
will not be revised downward or withdrawn. Such a revision or withdrawal may
have an adverse affect on the market price of such securities.
PERFORMANCE CALCULATIONS
The "yield" and "effective yield" of the Government Cash and
Tax-Exempt Cash Portfolios (the "Cash Portfolios"), and the "tax-equivalent
yield" of the Tax-Exempt Cash Portfolio, are calculated according to formulas
prescribed by the Commission. The standardized seven-day yield of each of
these Portfolios is computed by determining the net change, exclusive of
capital changes, in the value of a hypothetical pre-existing account in the
particular Portfolio having a balance of one share at the beginning of the
period, dividing the net change in account value by the value of the account
at the beginning of the base period to obtain the base period return, and
multiplying the base period return by (365/7). The net change in the value of
an account in the Cash Portfolios includes the value of additional shares
purchased with dividends from the original share, and dividends declared on
both the original share and any such additional shares, net of all fees, other
than nonrecurring account or sales charges, that are charged by the Fund to
all shareholder accounts in proportion to the length of the base period and
-24-
<PAGE>
THE Portfolio's average account size. The capital changes to be excluded from
the calculation of the net change in account value are realized gains and
losses from the sale of securities and unrealized appreciation and
depreciation. An effective annualized yield for the Cash Portfolios may be
computed by compounding the unannualized base period return (calculated as
above) by adding 1 to the base period return, raising the sum to a power equal
to 365 divided by 7, and subtracting 1 from the result.
The Tax-Exempt Cash Portfolio's "7-day tax-equivalent yield" may be
computed by dividing the tax-exempt portion of the Portfolio's yield
(calculated as above) by one minus a stated Federal income tax rate and adding
the product to that portion, if any, of the Portfolio's yield that is not
tax-exempt. The Tax-Exempt Cash Portfolio's tax-equivalent yield, and the Cash
Portfolios' yield and effective yield, do not reflect any fees charged by the
Advisor to its clients. See "Investment Advisor."
Set forth below is an example, for purposes of illustration only, of
the current yield calculations for each of the Cash Portfolios for the seven
day period ended October 31, 1997.
Government Cash Tax-Exempt
Portfolio Cash Portfolio
10/31/97 10/31/97
7-Day Yield (Net Change
X 365/7 average net
asset value) 5.56% 3.52%
7-Day Effective Yield 5.71% 3.58%
7-Day Tax-Equivalent Yield 8.06% 5.10%*
- --------------------------------
* Assumes an effective Federal income tax rate of 31%
The Commission yield of the Core Fixed Income Portfolio, Muni
Intermediate Portfolio and the New Jersey Muni Portfolio for the 30-day period
ended October 31, 1997 was 7.22%, 4.75% and 4.22%, respectively. These yields
were calculated by dividing the net investment income per share (as described
below) earned by the Portfolio during a 30-day (or one month) period by the
maximum offering price per share on the last day of the period and annualizing
the result on a semi-annual basis by adding one to the quotient, raising the
sum to the power of six, subtracting one from the result and then doubling the
difference. The Portfolio's net investment income per share earned during the
period is based on the average daily number of shares outstanding during the
period entitled to receive dividends and includes dividends and interest
earned during the period minus expenses accrued for the period, net of
reimbursements. This calculation can be expressed as follows:
-25-
<PAGE>
Yield = 2 [( a-b + 1)6 - 1]
---
cd
Where: a = dividends and interest earned during the
period.
b = expenses accrued for the period net of
reimbursements.
c = the average daily number of
shares outstanding during the
period that were entitled to
receive dividends.
d = maximum offering price per share
on the last day of the period.
For the purpose of determining net investment income earned during
the period (variable "a" in the formula), interest earned on any debt
obligations held by the Core Fixed Income, Muni Intermediate or New Jersey
Muni Portfolios is calculated by computing the yield to maturity of each
obligation held by the Portfolio based on the market value of the obligation
(including actual accrued interest) at the close of business on the last
business day of each month, or, with respect to obligations purchased during
the month, the purchase price (plus actual accrued interest) and dividing the
result by 360 and multiplying the quotient by the market value of the
obligation (including actual accrued interest) in order to determine the
interest income on the obligation for each day of the subsequent month that
the obligation is held by the particular Portfolio. For purposes of this
calculation, it is assumed that each month contains 30 days. The maturity of
an obligation with a call provision is the next call date on which the
obligation reasonably may be expected to be called or, if none, the maturity
date. With respect to debt obligations purchased at a discount or premium, the
formula generally calls for amortization of the discount or premium. The
amortization schedule will be adjusted monthly to reflect changes in the
market values of such debt obligations.
Undeclared earned income will be subtracted from the maximum offering
price per share (variable "d" in the formula). Undeclared earned income is the
net investment income which, at the end of the base period, has not been
declared as a dividend, but is reasonably expected to be and is declared and
paid as a dividend shortly thereafter. The Core Fixed Income, Muni
Intermediate and New Jersey Muni Portfolios' yields do not reflect any fees
charged by the Advisor or an Affiliate to its clients. See "Investment
Advisor."
-26-
<PAGE>
The Muni Intermediate and New Jersey Muni Portfolios' "tax-
equivalent" yield is computed by dividing the portion of the yield that is
exempt from Federal and/or State income taxes by one minus a stated Federal
income tax rate and/or the State income tax rate and by adding that figure to
that portion, if any, of the yield that is not tax-exempt. The 30 day tax-
equivalent yield for the Muni Intermediate Portfolio and New Jersey Portfolio
for the 30-day period ended October 31, 1997 was 7.18% and 6.65%, respectively
(assuming a marginal Federal income tax rate of 31% and marginal Pennsylvania
and New Jersey income tax rates of 2.80% and 5.525%, respectively).
The Core Fixed Income, Equity, International, Small Capitalization
Equity, Muni Intermediate, New Jersey Muni and Large Cap Value Portfolios each
compute their respective average annual total returns separately for each
class by determining the average annual compounded rates of return during
specified periods that equate the initial amount invested to the ending
redeemable value of such investment. This is done by dividing the ending
redeemable value of a hypothetical $1,000 initial payment by $1,000 and
raising the quotient to a power equal to one divided by the number of years
(or fractional portion thereof) covered by the computation and subtracting one
from the result. This calculation can be expressed as follows:
T = [( ERV )1/n - 1]
---
P
Where: T = average annual total return.
ERV = ending redeemable value
at the end of the period
covered by the
computation of a
hypothetical $1,000
payment made at the
beginning of the period.
P = hypothetical initial
payment of $1,000.
n = period covered by the computation,
expressed in terms of years.
The Core Fixed Income, Equity, International, Small Capitalization
Equity, Muni Intermediate, New Jersey Muni and Large Cap Value Portfolios
compute their aggregate total returns separately for each class by determining
the aggregate rates of return during specified periods that likewise equate
the initial amount invested to the ending redeemable value of such investment.
The formula for calculating aggregate total return is as follows:
-27-
<PAGE>
T = [( ERV ) - 1]
---
P
The calculations of average annual total return and aggregate total
return assume the reinvestment of all dividends and capital gain
distributions. The ending redeemable value (variable "ERV" in each formula) is
determined by assuming complete redemption of the hypothetical investment and
the deduction of all nonrecurring charges at the end of the period covered by
the computations. Each Portfolio's average annual total return and aggregate
total return do not reflect any fees charged by the Advisor to its clients.
See "Investment Advisor."
As of January 1, 1998, the Small Capitalization Equity Portfolio
began to offer Institutional Shares. Institutional Shares are subject to an
annual .05% fee payable pursuant to the Amended and Restated Shareholder
Servicing Plan ("Shareholder Servicing Fee"). Prior to January 1, 1998, the
Small Capitalization Equity Portfolio did not have an advisory fee and Advisor
Shares had a .05% Shareholder Servicing Fee. Performance of the Institutional
Shares prior to January 1, 1998 is represented by performance of the Advisor
Shares.
Set forth below are the average annual total return figures for the
Core Fixed Income, Equity, International, Small Capitalization Equity, Muni
Intermediate, Large Cap Value and New Jersey Muni Portfolios since inception
and for the one year and five year periods ended October 31, 1997.
<TABLE>
<CAPTION>
Small
Capitalization
Equity
Core Fixed Portfolio Muni
Income Equity International Advisor Institutional Intermediate
Portfolio Portfolio Portfolio Shares Shares Portfolio
---------- --------- -------------- ----------------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
1 Year Ended 10/31/97 8.63% 36.39% 16.35% 41.80% N/A 6.69%
5 Years Ended 10/31/97 6.65% 20.71% 15.98% 22.83% N/A 5.97%
Inception to 10/31/97 8.55% 15.79% 11.61% 19.05% N/A 5.65%
</TABLE>
Large Cap New
Value Jersey Muni
Portfolio Portfolio
--------- ------------
1 Year Ended 10/31/97 36.55% 6.90%
Inception to 10/31/97 18.44% 4.62%
Inception Dates:
Core Fixed Income Portfolio.................................. 11/17/88
Equity Portfolio............................................. 07/20/89
International Portfolio...................................... 11/17/88
Small Capitalization Equity Portfolio........................ 03/01/91
Muni Intermediate Portfolio.................................. 06/05/92
Large Cap Value Portfolio.................................... 12/31/92
New Jersey Muni Portfolio.................................... 11/01/93
Set forth below are the aggregate total return figures for the Core
Fixed Income, Equity, International, Small
-28-
<PAGE>
Capitalization Equity, Muni Intermediate, Large Cap Value and New Jersey Muni
Portfolios from inception to October 31, 1997.
<TABLE>
<CAPTION>
Portfolio Inception Date Aggregate Total Return
- --------- -------------- ----------------------
<S> <C> <C>
Core Fixed Income 11/17/88 108.50%
Equity 07/20/89 236.96%
International 11/17/88 167.39%
Small Capitalization Equity 03/01/91 219.93%
Muni Intermediate 06/05/92 34.65%
Large Cap Value 12/31/92 126.25%
New Jersey Muni 11/01/93 19.73%
</TABLE>
GENERAL INFORMATION
Dividends and Capital Gains Distributions
Each Portfolio's policy is to distribute substantially all of its net
investment income, if any, together with any net realized capital gains in the
amount and at the times that will avoid both income (including capital gains)
taxes on it and the imposition of the Federal excise tax on undistributed
income and gains (see discussion under "Dividends, Capital Gains Distributions
and Taxes" in the Prospectus). As set forth in the Prospectuses, the
Government Cash and the Tax-Exempt Cash Portfolios declare dividends daily and
normally distribute substantially all of their net investment income to
shareholders monthly; the International, Equity, Small Capitalization Equity
and Large Cap Value Portfolios normally distribute substantially all of their
net investment income to shareholders in the form of a quarterly dividend and
the Core Fixed Income, Muni Intermediate and New Jersey Muni Portfolios
normally distribute substantially all of their net investment income to
shareholders in the form of a monthly dividend. If any net capital gains are
realized by a Portfolio, that Portfolio normally distributes such gains at
least once a year. The amounts of any income dividends or capital gains
distributions for a Portfolio cannot be predicted.
Any dividend or distribution paid shortly after the purchase of
shares of a Portfolio by an investor may have the effect of reducing the per
share net asset value of that Portfolio by the per share amount of the
dividend or distribution. Furthermore, such dividends or distributions,
although in effect a return of capital, are subject to income taxes as set
forth in the Prospectus.
Certain Record Holders
As of November 30, 1997, the Advisor held of record substantially all
of the outstanding shares of each Portfolio. For more information about the
Advisor, see "Investment Advisor" in the Prospectus. As of November 30, 1997
the directors/trustees and officers of the Funds collectively owned less than
1% of the outstanding shares of each of the Funds' Portfolios.
-29-
<PAGE>
FINANCIAL STATEMENTS
The Funds' Financial Statements for the Government Cash, Tax-Exempt
Cash, Core Fixed Income, Equity, Small Capitalization Equity, Large Cap Value,
International, Muni Intermediate and New Jersey Muni Portfolios for the year
ended October 31, 1997 and the financial highlights for each of the respective
periods presented, appearing in the 1997 Annual Report to Shareholders, and
the reports thereon of Coopers & Lybrand L.L.P., the Funds' independent
accountants, also appearing therein, are incorporated by reference in this
Statement of Additional Information. No other parts of the 1997 Annual Report
to Shareholder are incorporated herein.
OTHER INFORMATION
The Prospectus and this Statement of Additional Information do not
contain all the information included in the Registration Statement filed with
the Commission under the Securities Act of 1933 with respect to the securities
offered by the Prospectus. Certain portions of the Registration Statement have
been omitted from the Prospectus and this Statement of Additional Information
pursuant to the rules and regulations of the SEC. The Registration Statement,
including the exhibits filed therewith, may be examined at the office of the
SEC in Washington, D.C.
Statements contained in the Prospectus or in this Statement of
Additional Information as to the contents of any contract or other documents
referred to are not necessarily complete, and in each instance reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement of which the Prospectus and this Statement of
Additional Information form a part, each such statement being qualified in all
respects by such reference.
-30-
<PAGE>
APPENDIX -- DESCRIPTION OF SECURITIES AND RATINGS
I. Description of Bond Ratings
Excerpts from Moody's description of its highest bond ratings: Aaa --
judged to be the best quality; carry the smallest degree of investment risk;
Aa -- judged to be of high quality by all standards; A -- judged to be of
upper medium quality; factors giving security to principal and interest
considered adequate but elements may be present which suggest a susceptibility
to impairment sometime in the future; Baa -- judged to be of medium quality;
lacking outstanding investment characteristics and in fact having speculative
characteristics.
Excerpts from S&P description of its highest bond ratings: AAA --
highest grade obligations; indicates an extremely strong capacity to pay
interest and repay principal; AA -- also qualify as high grade obligations;
indicates a very strong capacity to pay interest and repay principal and
differs from AAA issues only in small degree; A -- qualifies as upper medium
grade obligations; have strong capacity to pay interest and repay principal,
although somewhat more susceptible to adverse effects of change in
circumstances and economic conditions than higher rated bonds; BBB --
indicates adequate capacity to pay interest and repay principal, although
adverse economic conditions are likely to weaken such capacity.
Description of Moody's ratings of state and municipal notes: Moody's
ratings for state and municipal notes, other short-term obligations and
variable rate demand obligations are as follows: MIG-1/VMIG-1 -- Best quality,
enjoying strong protection by established cash flows, superior liquidity
support or demonstrated broadbased access to the market for refinancing;
MIG-2/VMIG-2 -- High quality with margins of protection ample although not so
large as in the preceding group.
Description of Moody's highest commercial paper rating: Prime-1
("P-1") -- judged to be of the best quality. Issuers rated P-1 (or related
supporting institutions) are considered to have a superior capacity for
repayment of short-term promissory obligations.
Excerpt from S&P rating of municipal note issues: SP-1+ --
overwhelming capacity to pay principal and interest; SP-1 -- very strong or
strong capacity to pay principal and interest.
Description of S&P highest commercial papers ratings: A-1+ -- this
designation indicates the degree of safety regarding timely payment is
overwhelming. A-1 -- this designation indicates the degree of safety regarding
timely payment is either overwhelming or very strong.
A-1
<PAGE>
II. Description of Mortgage-Backed Securities
Mortgage-backed securities represent an ownership interest in a pool
of residential mortgage loans. These securities are designed to provide
monthly payments of interest and principal to the investor. The mortgagor's
monthly payments to his/her lending institution are "passed-through" to an
investor such as the Government Cash Portfolio and the Core Fixed Income
Portfolio. Most issuers or poolers provide guarantees of payments, regardless
of whether or not the mortgagor actually makes the payment. The guarantees
made by issuers or poolers are supported by various forms of credit,
collateral, guarantees or insurance, including individual loan, title, pool
and hazard insurance purchased by the issuer. There can be no assurance that
the private issuers or poolers can meet their obligations under the policies.
Mortgage-backed securities issued by private issuers or poolers, whether or
not such securities are subject to guarantees, may entail greater risk than
securities directly or indirectly guaranteed by the U.S. Government.
About Mortgage-Backed Securities. Interests in pools of
mortgage-backed securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their residential
mortgage loans, net of any fees paid. Additional payments are caused by
repayments resulting from the sale of the underlying residential property,
refinancing or foreclosure net of fees or costs which may be incurred. Some
mortgage-backed securities are described as "modified pass-through." These
securities entitle the holders to receive all interest and principal payments
owed on the mortgages in the pool, net of certain fees, regardless of whether
or not the mortgagors actually make the payments.
Residential mortgage loans are pooled by the Federal Home Loan
Mortgage Corporation (FHLMC). FHLMC is a corporate instrumentality of the U.S.
Government and was created by Congress in 1970 for the purpose of increasing
the availability of mortgage credit for residential housing. Its stock is
owned by the twelve Federal Home Loan Banks. FHLMC issues Participation
Certificates ("PC's") which represent interests in mortgages from FHLMC's
national portfolio. FHLMC guarantees the timely payment of interest and
ultimate collection of principal.
The Federal National Mortgage Association (FNMA) is a Government
sponsored corporation owned entirely by private stockholders. It is subject to
general regulation by the Secretary of Housing and Urban Development. FNMA
purchases
A-2
<PAGE>
residential mortgages from a list of approved seller/servicers which include
state and federally-chartered savings and loan associations, mutual savings
banks, commercial banks and credit unions and mortgage bankers. Pass-through
securities issued by FNMA are guaranteed as to timely payment of principal and
interest by FNMA.
The principal Government guarantor of mortgage-backed securities is
the Government National Mortgage Association (GNMA). GNMA is a wholly-owned
U.S. Government corporation within the Department of Housing and Urban
Development. FNMA is authorized to guarantee, with the full faith and credit
of the U.S. Government, the timely payment of principal and interest on
securities issued by approved institutions and backed by pools of FHA-insured
or VA-guaranteed mortgages.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of conventional residential mortgage loans. Pools
created by such non-governmental issuers generally offer a higher rate of
interest than Government and Government-related pools because there are no
direct or indirect Government guarantees of payments in the former pools.
However, timely payment of interest and principal of these pools is supported
by various forms of insurance or guarantees, including individual loan, title,
pool and hazard insurance purchased by the issuer. The insurance and
guarantees are issued by Governmental entities, private insurers and the
mortgage poolers. There can be no assurance that the private insurers or
mortgage poolers can meet their obligations under the policies.
The Funds expect that Governmental or private entities may create
mortgage loan pools offering pass-through investments in addition to those
described above. The mortgages underlying these securities may be alternative
mortgage instruments, that is, mortgage instruments whose principal or
interest payment may vary or whose terms to maturity may be shorter than
previously customary. As new types of mortgage-backed securities are developed
and offered to investors, each of the Government Cash Portfolio and the Core
Fixed Income Portfolio will, consistent with its investment objective and
policies, consider making investments in such new types of securities.
Underlying Mortgages. Pools consist of whole mortgage loans or
participations in loans. The majority of these loans are made to purchasers of
1-4 family homes. The terms and characteristics of the mortgage instruments
are generally uniform within a pool but may vary among pools. For example, in
addition to fixed-rate, fixed-term mortgages, the Core Fixed Income Portfolio
may purchase pools of variable rate mortgages (VRM), growing equity mortgages
(GEM), graduated payment mortgages (GPM) and other
A-3
<PAGE>
types where the principal and interest payment procedures vary. VRMs are
mortgages which reset the mortgage's interest rate periodically with changes
in open market interest rates. To the extent that the Portfolio is actually
invested in VRMs, the Portfolio's interest income will vary with changes in
the applicable interest rate on pools of VRMs. GPM and GEM pools maintain
constant interest rates, with varying levels of principal repayment over the
life of the mortgage. These different interest and principal payment
procedures should not impact the Portfolio's net asset value since the prices
at which these securities are valued will reflect the payment procedures.
All poolers apply standards for qualification to local lending
institutions which originate mortgages for the pools. Poolers also establish
credit standards and underwriting criteria for individual mortgages included
in the pools. In addition, some mortgages included in pools are insured
through private mortgage insurance companies.
Average Life. The average life of pass-through pools varies with the
maturities of the underlying mortgage instruments. In addition, a pool's term
may be shortened by unscheduled or early payments of principal and interest on
the underlying mortgages. The occurrence of mortgage prepayments is affected
by factors including the level of interest rates, general economic conditions,
the location and age of the mortgage and other social and demographic
conditions.
As prepayment rates of individual pools vary widely, it is not
possible to accurately predict the average life of a particular pool. For
pools of fixed rate 30 year mortgages, common industry practice is to assume
that prepayments will result in a 12-year average life. Pools of mortgages
with other maturities or different characteristics will have varying
assumptions for average life.
Returns on Mortgage-Backed Securities. Yields on mortgage-backed
pass-through securities are typically quoted based on the maturity of the
underlying instruments and the associated average life assumption. Actual
prepayment experience may cause the yield to differ from the assumed average
life yield.
Reinvestment of prepayments may occur at higher or lower interest
rates than the original investment, thus affecting the yields of the
Portfolios which invest in them. The compounding effect from reinvestments of
monthly payments received by a Portfolio will increase its yield to
shareholders, compared to bonds that pay interest semi-annually.
A-4
<PAGE>
III. Description of U.S. Government Securities and Certain Other
Securities
The term "U.S. Government securities" refers to a variety of
securities which are issued or guaranteed by the United States Government, and
by various instrumentalities which have been established or sponsored by the
United States Government.
U.S. Treasury securities are backed by the "full faith and credit" of
the United States. Securities issued or guaranteed by Federal agencies and
U.S. Government sponsored enterprises or instrumentalities may or may not be
backed by the full faith and credit of the United States. In the case of
securities not backed by the full faith and credit of the United States, an
investor must look principally to the agency, enterprise or instrumentality
issuing or guaranteeing the obligation for ultimate repayment, and may not be
able to assert a claim against the United States itself in the event the
agency, enterprise or instrumentality does not meet its commitment. Agencies
which are backed by the full faith and credit of the United States include the
Export Import Bank, Farmers Home Administration, Federal Financing Bank and
others. Certain agencies, enterprises and instrumentalities, such as the
Government National Mortgage Association are, in effect, backed by the full
faith and credit of the United States through provisions in their charters
that they may make "indefinite and unlimited" drawings on the Treasury, if
needed to service its debt. Debt from certain other agencies, enterprises and
instrumentalities, including the Federal Home Loan Bank and Federal National
Mortgage Association, are not guaranteed by the United States, but those
institutions are protected by the discretionary authority for the U.S.
Treasury to purchase certain amounts of their securities to assist the
institution in meeting its debt obligations. Finally, other agencies,
enterprises and instrumentalities, such as the Farm Credit System and the
Federal Home Loan Mortgage Corporation, are federally chartered institutions
under Government supervision, but their debt securities are backed only by the
creditworthiness of those institutions, not the U.S.
Government.
Some of the U.S. Government agencies that issue or guarantee
securities include the Export-Import Bank of the United States, Farmers Home
Administration, Federal Housing Administration, Maritime Administration, Small
Business Administration and The Tennessee Valley Authority.
An instrumentality of the U.S. Government is a Government agency
organized under Federal charter with Government supervision. Instrumentalities
issuing or guaranteeing securities include, among others, Overseas Private
Investment Corporation, Federal Home Loan Banks, the Federal Land Banks,
A-5
<PAGE>
Central Bank for Cooperatives, Federal Intermediate Credit Banks and the
Federal National Mortgage Association.
International institutions that issue securities which the Core Fixed
Income Portfolio may purchase include the Asian Development Bank,
Inter-American Development Bank and the International Bank for Reconstruction
and Development (the "World Bank").
IV. Description of Municipal Obligations
Municipal Obligations generally include debt obligations issued by
states and their political subdivisions, and duly constituted authorities and
corporations, to obtain funds to construct, repair or improve various public
facilities such as airports, bridges, highways, hospitals, housing, schools,
streets and water and sewer works. Municipal Obligations may also be issued to
refinance outstanding obligations as well as to obtain funds for general
operating expenses and for loan to other public institutions and facilities.
The two principal classifications of Municipal Obligations are
"general obligation" and "revenue" or "special tax" bonds. General obligation
bonds are secured by the issuer's pledge of its full faith, credit and taxing
power for the payment of principal and interest. Revenue or special tax bonds
are payable only from the revenues derived from a particular facility or class
of facilities or, in some cases, from the proceeds of a special excise or
other tax, but not from general tax revenues. The Tax-Exempt Cash Portfolio
may also invest in tax-exempt industrial development bonds, short-term
municipal obligations (rated SP-1+ or SP-1 by S&P or MIG-1/VMIG-1 by Moody's),
project notes, demand notes and tax-exempt commercial paper (rated A-1+ or A-1
by S&P or P-1 by Moody's), and municipal bonds with a remaining effective
maturity of 13 months or less (rated AA or better by S&P or Aa or better by
Moody's).
Industrial revenue bonds in most cases are revenue bonds and
generally do not have the pledge of the credit of the issuer. The payment of
the principal and interest on such industrial revenue bonds is dependent
solely on the ability of the user of the facilities financed by the bonds to
meet its financial obligations and the pledge, if any, of real and personal
property so financed as security for such payment. Short-term municipal
obligations issued by states, cities, municipalities or municipal agencies,
include Tax Anticipation Notes, Revenue Anticipation Notes, Bond Anticipation
Notes, Construction Loan Notes and Short-Term Discount Notes. Project Notes
are instruments guaranteed by the Department of Housing and Urban Development
but issued by a state or local housing agency. While the issuing agency has
the primary obligation on Project Notes, they are also secured by the full
faith and credit of the United States.
A-6
<PAGE>
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.
Note obligations with demand or put options may have a stated
maturity in excess of 13 months, but permit any holder to demand payment of
principal plus accrued interest upon a specified number of days' notice.
Frequently, such obligations are secured by letters of credit or other credit
support arrangements provided by banks. The issuer of such notes normally has
a corresponding right, after a given period, to repay in its discretion the
outstanding principal of the note plus accrued interest upon a specific number
of days' notice to the bondholders. The interest rate on a demand note may be
based upon a known lending rate, such as a bank's prime rate, and be adjusted
when such rate changes, or the interest rate on a demand note may be a market
rate that is adjusted at specified intervals. The demand notes in which the
Tax-Exempt Cash Portfolio will invest are payable on not more than thirteen
months notice.
The yields of Municipal Obligations depend on, among other things,
general money market conditions, conditions in the Municipal Obligation
market, the size of a particular offering, the maturity of the obligation, and
the rating of the issue. The ratings of Moody's and S&P represent their
opinions of the quality of the Municipal Obligations rated by them. It should
be emphasized that such ratings are general and are not absolute standards of
quality. Consequently, Municipal Obligations with the same maturity, coupon
and rating may have different yields, while Municipal Obligations of the same
maturity and coupon, but with different ratings may have the same yield. It
will be the responsibility of the Advisor to appraise independently the
fundamental quality of the bonds held by the Tax-Exempt Cash Portfolio.
Municipal Obligations are sometimes purchased on a "when issued"
basis, which means the buyer has committed to purchase certain specified
securities at an agreed upon price when they are issued. The period between
commitment date and issuance date can be a month or more. It is possible that
the securities will never be issued and the commitment cancelled.
From time to time proposals have been introduced before Congress to
restrict or eliminate the Federal income tax exemption for interest on
Municipal Obligations. Similar proposals may be introduced in the future. If
any such proposal were enacted, it might restrict or eliminate the ability of
the
A-7
<PAGE>
Tax-Exempt Cash, Muni Intermediate and New Jersey Muni Portfolios to achieve
their investment objectives. In that event the Funds' Board members and
officers would reevaluate the Tax-Exempt Cash, Muni Intermediate and New
Jersey Muni Portfolios' investment objectives and policies and consider
recommending to their shareholders changes in such objectives and policies.
V. Foreign Investments
Investors should recognize that investing in foreign companies
involves certain special considerations which are not typically associated
with investing in U.S. companies. Because the stocks of foreign companies are
frequently denominated in foreign currencies, and because the Equity,
International, Small Capitalization Equity and Large Cap Value Portfolios may
temporarily hold uninvested reserves in bank deposits in foreign currencies,
the Equity, International, Small Capitalization Equity and Large Cap Value
Portfolios may be affected favorably or unfavorably by changes in currency
rates and in exchange control regulations, and may incur costs in connection
with conversions between various currencies. The investment policies of the
International Portfolio permit the Portfolio to enter into forward foreign
currency exchange contracts in order to hedge the Portfolio's holdings and
commitments against changes in the level of future currency rates. Such
contracts involve an obligation to purchase or sell a specific currency at a
future date at a price set at the time of the contract.
As foreign companies are not generally subject to uniform accounting,
auditing and financial reporting standards and they may have policies that are
not comparable to those of domestic companies, there may be less information
available about certain foreign companies than about domestic companies.
Securities of some foreign companies are generally less liquid and more
volatile than securities of comparable domestic companies. There is generally
less government supervision and regulation of stock exchanges, brokers and
listed companies than in the U.S. In addition, there is the possibility of
expropriation or confiscatory taxation, political or social instability, or
diplomatic developments which could affect U.S. investments in foreign
countries.
Although the Equity, International, Small Capitalization Equity and
Large Cap Value Portfolios will endeavor to achieve most favorable execution
costs in its portfolio transactions, commissions on many foreign stock
exchanges are generally higher than negotiated commissions on U.S. exchanges.
A-8
<PAGE>
Certain foreign governments levy withholding taxes on dividend and
interest income. Although in some countries a portion of these taxes are
recoverable, the non-recovered portion of foreign withholding taxes will
reduce the income received from the foreign companies comprising the Equity,
International, Small Capitalization Equity and Large Cap Value Portfolios.
A-9
