497 1 g02-0335_497prosp.txt SCHNEIDER 497 FILING THE SCHNEIDER VALUE FUND OF THE RBB FUND, INC. This prospectus gives vital information about the Schneider Value Fund, an investment portfolio of The RBB Fund, Inc. (the "Company"), including information on investment policies, risks and fees. For your own benefit and protection, please read it before you invest and keep it on hand for future reference. PROSPECTUS AUGUST 1, 2002, revised as of October 1, 2002 -------------------------------------------------------------------------------- THE SECURITIES DESCRIBED IN THIS PROSPECTUS HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC). THE SEC, HOWEVER, HAS NOT JUDGED THESE SECURITIES FOR THEIR INVESTMENT MERIT AND HAS NOT DETERMINED THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANYONE WHO TELLS YOU OTHERWISE IS COMMITTING A CRIMINAL OFFENSE. -------------------------------------------------------------------------------- (LOGO) SCHNEIDER CAPITAL MANAGEMENT [GRAPHIC OMITTED] TABLE OF CONTENTS -------------------------------------------------------------------------------- FUND DESCRIPTION Investment Goal .............................................. 3 Primary Investment Strategies ................................ 3 Key Risks .................................................... 3 Risk/Return Information ...................................... 3 Expenses and Fees ............................................ 4 Additional Information on the Fund's Investment Objective and Principal Strategies .............. . 5 Risks of Investing in the Fund ............................... 6 MANAGEMENT OF THE FUND Investment Adviser ........................................... 6 Portfolio Manager ............................................ 6 Service Provider Chart ....................................... 7 SHAREHOLDER INFORMATION Pricing of Fund Shares ....................................... 8 Purchase of Fund Shares ...................................... 8 Redemption of Fund Shares .................................... 10 Dividends and Distributions .................................. 12 Taxes ........................................................ 12 FOR MORE INFORMATION ........................................Back Cover A LOOK AT THE GOALS, STRATEGIES AND RISKS OF THE FUND. DETAILS ABOUT THE SERVICE PROVIDERS. POLICIES AND INSTRUCTIONS FOR OPENING, MAINTAINING AND CLOSING AN ACCOUNT IN THE FUND. 2 SCHNEIDER VALUE FUND -------------------------------------------------------------------------------- INVESTMENT GOAL The Fund seeks long-term capital growth by investing primarily in common stocks of companies which have a market capitalization of $1 billion or greater and which Schneider Capital Management Company (the "Adviser") believes are undervalued. There can be no guarantee that the Fund will achieve its investment objective. PRIMARY INVESTMENT STRATEGIES Under normal circumstances, at least 65% of the Fund's net assets (including borrowings for investment purposes) will be invested in companies with capitalizations as described above. The Adviser examines various factors in determining the value characteristics of such companies including price-to-book value ratios and price-to-earnings ratios. KEY RISKS [] The Fund invests in common stocks which are subject to market, economic and business risks that will cause their prices to fluctuate over time. Therefore, the value of your investment in the Fund may go up and down, sometimes rapidly and unpredictably, and you could lose money. [] Value investing involves the risk that the Fund's investment in companies whose securities are believed to be undervalued, relative to their underlying profitability, will not appreciate in value as anticipated. RISK/RETURN INFORMATION The bar chart and performance table have been omitted because the Fund has been in operation for less than one calendar year. 3 EXPENSES AND FEES As a shareholder you pay certain fees and expenses. Annual Fund operating expenses are paid out of Fund assets and are reflected in the Fund's price. The table below describes the fees and expenses that you may pay if you buy and hold shares of the Fund. SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT) Redemption fee 1 ......................................... 1.00% ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) Management Fees .......................................... 0.70% Distribution and Service (12b-1) fees .................... None Other Expenses 2 ......................................... 0.26% ------ Total Annual Fund Operating Expenses ..................... 0.96% Fee Waiver and Expense Reimbursements 3 .................. (0.11)% ------ Net Expenses ............................................. 0.85% ====== 1. Shares of the Fund not purchased through reinvested dividends or capital gains distributions and held less than one year are subject to the above redemption fee. This fee is intended to encourage long-term investment in the Fund, to avoid transaction and other expenses caused by early redemption, and to facilitate portfolio management. See "Redemption of Fund Shares -- Transaction Fee on Certain Redemptions" below for more information. 2. "Other Expenses" include audit, administration, custody, legal, registration, transfer agency and miscellaneous other Fund expenses. These expenses are based on estimates for the current fiscal year. 3. The Adviser has agreed that, until December 31, 2003, it will waive advisory fees and reimburse expenses to the extent total operating expenses exceed 0.85%.
EXAMPLE: THIS EXAMPLE IS INTENDED TO HELP YOU COMPARE THE COST OF INVESTING IN THE FUND WITH THE COST OF INVESTING IN OTHER MUTUAL FUNDS. THE EXAMPLE ASSUMES THAT YOU INVEST $10,000 IN THE FUND FOR THE TIME PERIODS INDICATED AND THEN REDEEM ALL OF YOUR SHARES AT THE END OF EACH PERIOD. THE EXAMPLE ALSO ASSUMES THAT YOUR INVESTMENT HAS A 5% RETURN EACH YEAR AND THAT THE FUND'S OPERATING EXPENSES REMAIN THE SAME, EXCEPT FOR THE EXPIRATION OF THE FEE WAIVERS AND REIMBURSEMENTS ON DECEMBER 31, 2003. ALTHOUGH YOUR ACTUAL COSTS MAY BE HIGHER OR LOWER, BASED ON THESE ASSUMPTIONS YOUR COST WOULD BE: 1 YEAR 3 YEARS ------ ------- $87 $295 4 ADDITIONAL INFORMATION ON THE FUND'S INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES The Fund seeks long-term capital growth by investing primarily in common stocks of companies which have capitalizations of $1 billion or greater and which the Adviser believes are undervalued. The Fund's investment objective and the policies described above may be changed by the Company's Board of Directors without the approval of the Fund's shareholders. However, as a matter of policy, the Fund would not materially change its investment objective or primary investment strategy without informing shareholders at least 60 days in advance of any such change. The Adviser selects securities for the Fund based on a continued study of trends in industries and companies, industry literature, company reports, financial reports, company presentations, earnings power and growth and other investment criteria. Although the Adviser selects securities for long-term capital growth, these same securities may produce dividend income. The Fund may invest in securities that the Adviser believes may exhibit the following characteristics: [] have low price-to-earnings and low price-to-book value ratios; [] are typically considered out of favor by the market as a result of decelerating revenue growth, declining profit margins and increasing competition. The Fund may sell securities when the Adviser believes: [] a security becomes widely recognized by the professional investment community as a result of accelerating revenue growth, expanding margins and decreased competition; [] a security appreciates in value to the point that it is considered to be overvalued; [] the Fund's holdings should be rebalanced to include a more attractive stock or stocks; or [] an issuer's earnings potential is in jeopardy. The Fund may invest in convertible securities. A convertible security is a bond, debenture, note, preferred stock or other security that may be converted into or exchanged for a prescribed amount of common stock of the same or a different issuer within a particular period of time at a specified price or formula. A convertible security entitles the holder to receive interest paid or accrued on debt or the dividend paid on preferred stock until the convertible security matures or is redeemed, converted or exchanged. Before conversion, convertible securities have characteristics similar to nonconvertible debt securities in that they ordinarily provide a stable stream of income with generally higher yields than those of common stocks of the same or similar issuers. The Fund will invest in convertible securities without regard to their credit ratings. The Fund may invest up to 20% of the value of its net assets in securities of foreign issuers including American Depositary Receipts ("ADRs"). ADRs are receipts typically issued by a U.S. bank or trust company which evidence ownership of underlying securities issued by a foreign corporation. For the purposes of the percentage limitation above, a security of a foreign company whose primary business is in the U.S. will not be considered a foreign security if it is denominated in U.S. dollars and is principally traded on a U.S. exchange. While the Adviser intends to fully invest the Fund's assets at all times in accordance with the above-mentioned policies, the Fund reserves the right to hold up to 100% of its assets, as a temporary defensive measure, in cash and eligible U.S. dollar-denominated money market instruments. Eligible money market instruments include bank obligations, such as certificates of deposit and bankers' acceptances issued by foreign or domestic banks or financial institutions that have total assets of more than $2.5 billion, and commercial paper rated in the top rating category by S&P, Moody's or Fitch and unrated commercial paper determined to be of comparable quality by the Adviser. The Adviser will determine when market conditions warrant temporary defensive measures. 5 RISKS OF INVESTING IN THE FUND Investing in the Fund involves the following principal risks: COMMON STOCK RISK. Investments in common stocks are subject to market, economic and business risks that will cause their price to fluctuate over time. Therefore, an investment in the Fund may be more suitable for long-term investors who can bear the risk of these fluctuations. FOREIGN SECURITY RISK. Since foreign securities are usually denominated in foreign currencies, the value of the Fund's portfolio could be affected by currency exchange rates and exchange control regulations. Other risks include: [] seizure, expropriation or nationalization of a company's assets; [] less publicly available information and differing regulations and standards; [] the impact of political, social or economic instability, or diplomatic events; [] securities that are less liquid and harder to value than those of a U.S. issuer. As a result of these risks, the Fund may be more volatile than a fund investing solely in U.S. companies. These risks may be greater if the Fund invests in developing countries. OPPORTUNITY RISK. As with all mutual funds, the Fund is subject to the risk of missing out on an opportunity because the assets necessary to take advantage of it are tied up in less advantageous investments. VALUE STOCK RISK. Although the Fund will invest in stocks the Adviser believes to be undervalued, there is no guarantee that the prices of these stocks will not move even lower. TEMPORARY INVESTMENT RISK. The value of money market instruments tends to fall when current interest rates rise. Money market instruments are generally less sensitive to interest rate changes than longer-term securities. When the Fund's assets are invested in these instruments, the Fund may not be achieving its investment objective. CONVERTIBLE SECURITIES RISK. Convertible securities have characteristics of both equity and fixed income securities. The value of a convertible security tends to move with the market value of the underlying stock, but may also be affected by interest rates, credit quality of the issuer and any call provisions. In particular, when interest rates increase, fixed-income securities will decline in value. Convertible securities frequently have speculative characteristics and may be acquired without regard to minimum quality ratings. Lower quality convertible securities, also known as "junk bonds," involve greater risk of default or price changes due to the issuer's creditworthiness. The market prices of these securities may fluctuate more than those of higher quality securities and may decline significantly in periods of general economic difficulty, which may follow periods of rising rates. Securities in the lowest quality category may present the risk of default, or may be in default. MANAGEMENT OF THE FUND -------------------------------------------------------------------------------- INVESTMENT ADVISER Schneider Capital Management Company, located at 460 East Swedesford Road, Suite 1080, Wayne, PA 19087, serves as the Fund's investment adviser. The Adviser provides investment management and investment advisory services to investment companies and other institutional accounts that had aggregate total assets under management of approximately $2.1 billion as of March 31, 2002. Schneider Capital Management Company is 100% employee-owned, and was founded in 1996. PORTFOLIO MANAGER The President and Chief Investment Officer of the Adviser, Arnold C. Schneider III, is primarily responsible for the day-to-day management of the Fund's investment portfolio. Mr. Schneider founded the Adviser in 1996, and has managed the Fund since its inception. Prior to 1996, he was a senior vice president and partner of Wellington Management Company, where he was responsible for institutional accounts and mutual fund portfolios since 1987. 6 ============================ SHAREHOLDERS ============================ Distribution and Shareholder Services ============================ PRINCIPAL DISTRIBUTOR PFPC DISTRIBUTORS, INC. 3200 HORIZON DRIVE KING OF PRUSSIA, PA 19406 Distributes shares of the Fund. ============================ ============================ TRANSFER AGENT PFPC INC. 400 BELLEVUE PARKWAY WILMINGTON, DE19809 Handles shareholder services, including record-keeping and statements, distribution of dividends and processing of buy and sell requests. ============================ Asset Management ============================ INVESTMENT ADVISER SCHNEIDER CAPITAL MANAGEMENT COMPANY 460 EAST SWEDESFORD ROAD, SUITE 1080 WAYNE, PA 19087 Manages the Fund's business and investment activities. ============================ ============================ CUSTODIAN PFPC TRUST COMPANY 8800 TINICUM BLVD. SUITE 200 PHILADELPHIA, PA 19153 Holds the Fund's assets, settles all portfolio trades and collects most of the valuation data required for calculating the Fund's net asset value ("NAV"). ============================ Fund Operations ============================ ADMINISTRATOR AND FUND ACCOUNTING AGENT PFPC INC. 400 BELLEVUE PARKWAY WILMINGTON, DE 19809 Provides facilities, equipment and personnel to carry out administrative services related to the Fund and calculates the Fund's NAV, dividends and distributions. ============================ ============================ BOARD OF DIRECTORS Supervises the Fund's activities. ============================ 7 SHAREHOLDER INFORMATION -------------------------------------------------------------------------------- PRICING OF FUND SHARES Shares of the Fund are priced at their net asset value ("NAV"). The NAV of the Fund is calculated as follows: Value of Assets Attributable to a Class NAV = - Value of Liabilities Attributable to the Same Class ----------------------------------------------------- Number of Outstanding Shares of the Class The Fund's NAV is calculated as of the close of regular trading hours (currently 4:00 p.m. Eastern time) on each day the New York Stock Exchange (the "NYSE") is open for business. The Fund will effect purchases or redemptions of Fund shares at the next NAV calculated after receipt of your order or request in proper form as described below under "Purchase of Fund Shares" or "Redemption of Fund Shares," as applicable. Equity securities held by the Fund are valued using the closing price or the last sale price on the exchange or in the principal over-the-counter market where they are traded. If the last sale price is unavailable, the mean of the last available bid and asked price is normally used. Debt securities held by the Fund generally are valued based on the mean of the bid and asked prices. Short term debt investments having maturities of 60 days or less are amortized to maturity based on their cost. If market quotations are unavailable or if an event occurs after the close of an exchange that is expected to materially affect the value of a security held by the Fund, securities and other assets will be valued at fair value as determined in good faith by the Adviser according to procedures adopted by the Fund's Board of Directors. If the Fund holds foreign equity securities, the calculation of the Fund's NAV will not occur at the same time as the determination of the value of the foreign equity securities in the Fund's portfolio, since these securities are traded on foreign exchanges. Additionally if the foreign equity securities held by the Fund trade on days when the Fund does not price its shares, the NAV of the Fund's shares may change when shareholders will not be able to purchase or redeem the Fund's shares. As a result, the Fund's pricing may not reflect fluctuations in the value of foreign securities. PURCHASE OF FUND SHARES Shares are offered on a continuous basis and are sold without any sales charges. You may purchase the Fund's shares directly from the Fund at the NAV per share next calculated after your order is received by the Transfer Agent in proper form. After an initial purchase is made, the Transfer Agent will set up an account for you on the Fund's records, which will show all of your transactions and the balance of the shares you own. You can only purchase shares on days the NYSE is open and through the means described below. Initial investments in the Fund must be at least $20,000, and subsequent minimum investments must be at least $2,500. For purposes of meeting the minimum initial purchase, clients which are part of endowments, foundations or other related groups may be aggregated. The Fund's officers are authorized to waive the minimum initial and subsequent investment requirements. Investors may be charged a fee if they effect transactions through a broker or agent. Brokers and other intermediaries are authorized to accept orders on the Fund's behalf and those orders will receive the following day's NAV. 8 THIS PAGE INTENTIONALLY LEFT BLANK SCHNEIDER VALUE FUND SCHNEIDER CAPITAL MANAGEMENT COMPANY ACCOUNT APPLICATION PLEASE NOTE:Do not use this form to open a retirement plan account. For an IRA application or help with this Application, please call 1-888-520-3277. (Please check the appropriate box(es) below.) 1 [ ] Individual [ ] Joint Tenant [ ] Other Account Registration: ___________________________________________________________ NAME SOCIAL SECURITY NUMBER OR TAX ID# OF PRIMARY OWNER ___________________________________________________________ NAME OF JOINT OWNER ___________________________________________________________ JOINT OWNER SOCIAL SECURITY NUMBER OR TAX ID # For joint accounts, the account registrants will be joint tenants with right of survivorship and not tenants in common unless tenants in common or community property registrations are requested. ------------------ GIFT TO MINOR [ ] UNIFORM GIFTS/TRANSFER TO MINOR'S ACT ------------------ ___________________________________________________________ NAME OF ADULT CUSTODIAN (ONLY ONE PERMITTED) ___________________________________________________________ NAME OF MINOR (ONLY ONE PERMITTED) ___________________________________________________________ MINOR'S SOCIAL SECURITY NUMBER AND DATE OF BIRTH ------------------ CORPORATION PARTNERSHIP, TRUST ___________________________________________________________ OR OTHER ENTITY: NAME OF CORPORATION, PARTNERSHIP, OR OTHER NAME(S) OF ------------------ TRUSTEE(S) ___________________________________________________________ TAXPAYER IDENTIFICATION NUMBER ___________________________________________________________ STREET OR P.O. BOX AND/OR APARTMENT NUMBER 2 ___________________________________________________________ MAILING CITY STATE ZIP CODE ADDRESS: ___________________________________________________________ DAY PHONE NUMBER EVENING PHONE NUMBER Minimum initial investment of $20,000. 3 Amount of investment $___________ INVESTMENT INFORMATION: Make the check payable to Schneider Value Fund. Shareholders may not purchase shares of this Fund with a check issued by a third party and endorsed over to the Fund. ---------------- DISTRIBUTION NOTE: Dividends and capital gains may be reinvested or paid OPTIONS: by check. If no options are selected below, both dividends ---------------- and capital gains will be reinvested in additional Fund shares. DIVIDENDS: Pay by check [ ] Reinvest [ ] CAPITAL GAINS: Pay by check [ ] Reinvest [ ] To use this option, you must initial the appropriate line 4 below. TELEPHONE I authorize the Transfer Agent to accept instructions from REDEMPTION: any persons to redeem or exchange shares in my account(s) by telephone in accordance with the procedures and conditions set forth in the Fund's current prospectus. __________________ ____________________ individual initial joint initial Redeem shares, and send the proceeds to the address of record. ---------------- ___________________________________________________________ BANK OF RECORD BANK NAME STREET ADDRESS OR P.O. BOX ---------------- ___________________________________________________________ CITY STATE ZIP CODE ___________________________________________________________ BANK ABA NUMBER BANK ACCOUNT NUMBER 5 THE UNDERSIGNED WARRANTS THAT I (WE) HAVE FULL AUTHORITY SIGNATURES AND, IF A NATURAL PERSON, I (WE) AM (ARE) OF LEGAL AGE TO PURCHASE SHARES PURSUANT TO THIS ACCOUNT APPLICATION, AND I (WE) HAVE RECEIVED A CURRENT PROSPECTUS FOR THE FUND IN WHICH I (WE) AM (ARE) INVESTING. UNDER THE INTEREST AND DIVIDEND TAX COMPLIANCE ACT OF 1983, THE FUND IS REQUIRED TO HAVE THE FOLLOWING CERTIFICATION: UNDER PENALTIES OF PERJURY, I CERTIFY THAT: (1) THE NUMBER SHOWN ON THIS FORM IS MY CORRECT TAXPAYER IDENTIFICATION NUMBER (OR I AM WAITING FOR A NUMBER TO BE ISSUED TO ME), AND (2) I AM NOT SUBJECT TO BACKUP WITHHOLDING BECAUSE (A) I AM EXEMPT FROM BACKUP WITHHOLDING, OR (B) I HAVE NOT BEEN NOTIFIED BY THE INTERNAL REVENUE SERVICE THAT I AM SUBJECT TO 31% BACKUP WITHHOLDING AS A RESULT OF A FAILURE TO REPORT ALL INTEREST OR DIVIDENDS, OR (C) THEIRS HAS NOTIFIED ME THAT I AM NO LONGER SUBJECT TO BACKUP WITHHOLDING. (3) I AM A U.S. PERSON (INCLUDING A U.S. RESIDENT ALIEN). NOTE: YOU MUST CROSS OUT ITEM (2) ABOVE IF YOU HAVE BEEN NOTIFIED BY THE IRS THAT YOU ARE CURRENTLY SUBJECT TO BACKUP WITHHOLDING BECAUSE YOU HAVE FAILED TO REPORT ALL INTEREST AND DIVIDENDS ON YOUR TAX RETURN. THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY PROVISION OF THIS DOCUMENT OTHER THAN THE CERTIFICATION REQUIRED TO AVOID BACKUP WITHHOLDING. ___________________________________________________________ SIGNATURE OF APPLICANT DATE ___________________________________________________________ PRINT NAME TITLE (IF APPLICABLE) ___________________________________________________________ SIGNATURE OF JOINT OWNER DATE ___________________________________________________________ PRINT NAME TITLE (IF APPLICABLE) (If you are signing for a corporation, you must indicate corporate office or title. If you wish additional signatories on the account, please include a corporate resolution. If signing as a fiduciary, you must indicate capacity.) For information on additional options, such as IRA Applications, rollover requests for qualified retirement plans, or for wire instructions, please call us at 1-888-520-3277. MAIL COMPLETED ACCOUNT APPLICATION AND CHECK TO: THE SCHNEIDER VALUE FUND C/O PFPC INC. P.O. BOX 9837 PROVIDENCE, RI 02940 NOT PART OF THE PROSPECTUS THIS PAGE INTENTIONALLY LEFT BLANK INITIAL INVESTMENT BY MAIL. Subject to acceptance by the Fund, an account may be opened by completing and signing an Account Application and mailing it to the Fund at the address noted below, together with a check payable to Schneider Value Fund. Third party endorsed checks or foreign checks will not be accepted. Schneider Value Fund c/o PFPC Inc. P.O. Box 9837 Providence, RI 02940 Subject to acceptance by the Fund, payment for the purchase of shares received by mail will be credited to a shareholder's account at the NAV per share of the Fund next determined after receipt of payment in good order. INITIAL INVESTMENT BY WIRE. Subject to acceptance by the Fund, shares may be purchased by wiring federal funds to PNC Bank (see instructions below). A completed Account Application must be forwarded to the Transfer Agent at the address noted above under "Initial Investment by Mail" in advance of the wire. Notification must be given to the Transfer Agent at (888) 520-3277 prior to 4:00 p.m., Eastern time, on the wire date. (Prior notification must also be received from investors with existing accounts.) Funds should be wired to: PNC Bank, NA Philadelphia, Pennsylvania 19103 ABA# 0310-0005-3 Account #86-0172-6452 F/B/O Schneider Value Fund Ref. (Shareholder's Name; Account Number) Federal funds purchases will be accepted only on a day on which the Fund and PNC Bank, NA are open for business. ADDITIONAL INVESTMENTS. Additional investments may be made at any time ($2,500 minimum) by purchasing shares at NAV by mailing a check to the Transfer Agent at the address noted above under "Initial Investment by Mail" (payable to Schneider Value Fund) or by wiring monies to the custodian bank as outlined above under "Initial Investment by Wire." Notification must be given to the Transfer Agent at (888) 520-3277 prior to 4:00 p.m., Eastern time, on the wire date. Initial and additional purchases made by check cannot be redeemed until payment of the purchase has been collected, which may take up to fifteen days from the purchase date. OTHER PURCHASE INFORMATION. The Fund reserves the right, in its sole discretion, to suspend the offering of Shares or to reject purchase orders when, in the judgment of management, such suspension or rejection is in the best interest of the Fund. The Adviser will monitor the Fund's total assets and may decide to close the Fund at any time to new investments or to new accounts due to concerns that a significant increase in the size of the Fund may adversely affect the implementation of the Fund's strategy. The Adviser may also choose to reopen the Fund to new investments at any time, and may subsequently close the Fund again should concerns regarding the Fund's size recur. If the Fund closes to new investments, the Fund may be offered only to certain existing shareholders of the Fund and certain other persons, who may be subject to cumulative, maximum purchase amounts. Distributions to all shareholders of the Fund will continue to be reinvested unless a shareholder elects otherwise. The Adviser reserves the right to implement specific purchase limitations at the time of closing, including limitations on current shareholders. Purchases of the Fund's shares will be made in full and fractional shares of the Fund calculated to three decimal places. 9 REDEMPTION OF FUND SHARES You may redeem Shares of the Fund at the next NAV calculated after a redemption request is received by the Transfer Agent in proper form. You can only redeem shares of the Fund on days the NYSE is open and through the means described below. You may redeem Shares of the Fund by mail, or, if you are authorized, by telephone. The value of shares redeemed may be more or less than the purchase price, depending on the market value of the investment securities held by the Fund. There is no charge for redemptions of shares held for more than one year. REDEMPTION BY MAIL. Your redemption requests should be addressed to Schneider Value Fund, c/o PFPC Inc., P.O. Box 9837, Providence, RI 02940 and must include: [] a letter of instruction, if required, or a stock assignment specifying the number of shares or dollar amount to be redeemed, signed by all registered owners of the shares in the exact names in which they are registered; [] any required Medallion signature guarantees, which are required when (i) the redemption request proceeds are to be sent to someone other than the registered shareholder(s), (ii) the redemption request is for $10,000 or more, or (iii) a share transfer request is made. A Medallion signature guarantee is a special signature guarantee that may be obtained from a domestic bank or trust company, broker, dealer, clearing agency or savings association who are participants in a Medallion signature guarantee program recognized by the Securities Transfer Association. A Medallion imprint or Medallion stamp indicates that the financial institution is a member of a Medallion signature guarantee program and is an acceptable signature guarantor. The three recognized Medallion signature guarantee programs are Securities Transfer Agent Medallion Program (STAMP), Stock Exchanges Medallion Program (SEMP) and New York Stock Exchange, Inc. Medallion Program (MSP). Signature guarantees which are not a part of these programs will not be accepted. Please note that a notary public stamp or seal is not acceptable; and [] other supporting legal documents, if required, in the case of estates, trusts, guardianships, custodianships, corporations, pension and profit sharing plans and other organizations. REDEMPTION BY TELEPHONE. In order to utilize the Telephone Redemption Option, you must indicate that option on your Account Application. You may then initiate a redemption of shares by calling the Transfer Agent at (888) 520-3277 and requesting that the redemption proceeds be mailed to the primary registration address or wired per the authorized instructions. If the Telephone Redemption Option is authorized, the Transfer Agent may act on telephone instructions from any person representing himself or herself to be a shareholder and believed by the Transfer Agent to be genuine. The Transfer Agent's records of such instructions are binding and shareholders, not the Fund or its Transfer Agent, bear the risk of loss in the event of unauthorized instructions reasonably believed by the Fund or its Transfer Agent to be genuine. The Transfer Agent will employ reasonable procedures to confirm that instructions communicated are genuine and, if it does not, it may be liable for any losses due to unauthorized or fraudulent instructions. The procedures employed by the Transfer Agent in connection with transactions initiated by telephone include tape recording of telephone instructions and requiring some form of personal identification prior to acting upon instructions received by telephone. TRANSACTION FEE ON CERTAIN REDEMPTIONS. The Fund requires the payment of a transaction fee on redemptions of Shares held for less than one year equal to 1.00% of the net asset value of such Shares redeemed at the time of redemption. This additional transaction fee is paid to the Fund, NOT to the adviser, distributor or transfer agent. It is NOT a sales charge or a contingent deferred sales charge. The fee does not apply to redeemed Shares that were purchased through reinvested dividends or capital gain distributions. The purpose of the additional transaction fee is to indirectly allocate transaction costs associated with redemptions to those investors making redemptions after holding their shares for a short period, thus protecting existing shareholders. These costs include: (1) brokerage costs; (2) market impact costs -- i.e., the decrease in market prices which may result when the Fund sells certain securities in order to raise cash to meet the redemption request; (3) the realization of capital gains by the other shareholders in the Fund; and (4) the effect of the "bid-ask" spread in the over-the-counter market. The 1.00% amount represents the Fund's 10 estimate of the brokerage and other transaction costs which may be incurred by the Fund in disposing of stocks in which the Fund may invest. Without the additional transaction fee, the Fund would generally be selling its shares at a price less than the cost to the Fund of acquiring the portfolio securities necessary to maintain its investment characteristics, resulting in reduced investment performance for all shareholders in the Fund. With the additional transaction fee, the transaction costs of selling additional stocks are not borne by all existing shareholders, but the source of funds for these costs is the transaction fee paid by those investors making redemptions. For purposes of this redemption feature, shares purchased first will be considered to be shares first redeemed. SYSTEMATIC WITHDRAWAL PLAN. If your account has a value of at least $20,000, you may establish a Systematic Withdrawal Plan and receive regular periodic payments. A request to establish a Systematic Withdrawal Plan must be submitted in writing to the Transfer Agent at P.O. Box 9837, Providence, RI 02940. Each withdrawal redemption will be processed on or about the 25th of the month and mailed as soon as possible thereafter. There are no service charges for maintenance; the minimum amount that you may withdraw each period is $100. (This is merely the minimum amount allowed and should not be mistaken for a recommended amount.) The holder of a Systematic Withdrawal Plan will have any income dividends and any capital gains distributions reinvested in full and fractional shares at net asset value. To provide funds for payment, Shares will be redeemed in such amount as is necessary at the redemption price. The systematic withdrawal of Shares may reduce or possibly exhaust the Shares in your account, particularly in the event of a market decline. The Fund requires the payment of a transaction fee on redemptions of Shares held for less than one year equal to 1.00% of the net asset value of such Shares redeemed at the time of redemption. As with other redemptions, a systematic withdrawal payment is a sale for federal income tax purposes. Payments made pursuant to a Systematic Withdrawal Plan cannot be considered as actual yield or income since part of such payments may be a return of capital. You will ordinarily not be allowed to make additional investments of less than the aggregate annual withdrawals under the Systematic Withdrawal Plan during the time you have the plan in effect. You will receive a confirmation of each transaction showing the sources of the payment and the Share and cash balance remaining in your account. The Systematic Withdrawal Plan may be terminated on written notice by the shareholder or by the Fund and will terminate automatically if all Shares are liquidated or withdrawn from the account or upon the death or incapacity of the shareholder. You may change the amount and schedule of withdrawal payments or suspend such payments by giving written notice to the Fund's transfer agent at least ten Business Days prior to the end of the month preceding a scheduled payment. OTHER REDEMPTION INFORMATION. Redemption proceeds for shares of the Fund recently purchased by check may not be distributed until payment for the purchase has been collected, which may take up to fifteen days from the purchase date. Shareholders can avoid this delay by utilizing the wire purchase option. If the Board of Directors determines that it would be detrimental to the best interests of the remaining shareholders of the Fund to make payment wholly or partly in cash, redemption proceeds may be paid in whole or in part by an in-kind distribution of readily marketable securities held by the Fund instead of cash in conformity with applicable rules of the SEC. Investors generally will incur brokerage charges on the sale of portfolio securities so received in payment of redemptions. The Fund has elected, however, to be governed by Rule 18f-1 under the Investment Company Act of 1940, so that the Fund is obligated to redeem its shares solely in cash up to the lesser of $250,000 or 1% of its net asset value during any 90-day period for any one shareholder of the Fund. INVOLUNTARY REDEMPTION. The Fund reserves the right to redeem your account at any time the net asset value of the account falls below $500 as the result of a redemption or an exchange request. You will be notified in writing that the value of your account is less than $500 and will be allowed 30 days to make additional investments before the redemption is processed. 11 DIVIDENDS AND DISTRIBUTIONS The Fund will distribute substantially all of the net investment income and net realized capital gains, if any, of the Fund to the Fund's shareholders. All distributions are reinvested in the form of additional full and fractional Shares unless you elect otherwise. The Fund will declare and pay dividends from net investment income annually and pays them in the calendar year in which they are declared. Net realized capital gains (including net short-term capital gains), if any, will be distributed at least annually. TAXES FEDERAL TAXES. The Fund contemplates declaring as dividends each year all or substantially all of its taxable income, including its net capital gain (the excess of long-term capital gain over short-term capital loss). Distributions attributable to the net capital gain of the Fund will be taxable to you as long-term capital gain, regardless of how long you have held your shares. Other Fund distributions (other than exempt-interest dividends, discussed below) will generally be taxable as ordinary income. You will be subject to income tax on Fund distributions regardless whether they are paid in cash or reinvested in additional shares. You will be notified annually of the tax status of distributions to you. You should note that if you purchase shares just before a distribution, the purchase price will reflect the amount of the upcoming distribution, but you will be taxed on the entire amount of the distribution received, even though, as an economic matter, the distribution simply constitutes a return of a portion of your purchase price. This is known as "buying into a dividend." You will recognize taxable gain or loss on a sale, exchange or redemption of your shares, based on the difference between your tax basis in the shares and the amount you receive for them. (To aid in computing your tax basis, you generally should retain your account statements for the periods during which you held shares.) Any loss realized on shares held for six months or less will be treated as a long-term capital loss to the extent of any capital gain dividends that were received on the shares. Additionally, any loss realized on a sale or redemption of shares of the Fund may be disallowed under "wash sale" rules to the extent the shares disposed of are replaced with other shares of the Fund within a period of 61 days beginning 30 days before and ending 30 days after the shares are disposed of, such as pursuant to a dividend reinvestment in shares of the Fund. If disallowed, the loss will be reflected in an adjustment to the basis of the shares acquired. The one major exception to these tax principles is that distributions on, and sales, exchanges and redemptions of, shares held in an IRA (or other tax-qualified plan) will not be currently taxable. The foregoing is only a summary of certain tax considerations under current law, which may be subject to change in the future. Shareholders who are nonresident aliens, foreign trusts or estates, or foreign corporations or partnerships, may be subject to different United States federal income tax treatment. You should consult your tax adviser for further information regarding federal, state, local and/or foreign tax consequences relevant to your specific situation. STATE AND LOCAL TAXES. Shareowners may also be subject to state and local taxes on distributions and redemptions. State income taxes may not apply, however, to the portions of the Fund's distributions, if any, that are attributable to interest on federal securities or interest on securities of the particular state or localities within the state. Shareowners should consult their tax advisers regarding the tax status of distributions in their state and locality. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS OR IN THE COMPANY STATEMENT OF ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE COMPANY OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. 12 THIS PAGE INTENTIONALLY LEFT BLANK THIS PAGE INTENTIONALLY LEFT BLANK THIS PAGE INTENTIONALLY LEFT BLANK THE SCHNEIDER VALUE FUND FOR MORE INFORMATION: This prospectus contains important information you should know before you invest. Read it carefully and keep it for future reference. More information about the Schneider Value Fund is available free, upon request, including: ANNUAL/SEMI-ANNUAL REPORT These reports will contain additional information about the Fund's investments, describe the Fund's performance, list portfolio holdings, and discuss recent market conditions and economic trends. The annual report will include fund strategies that significantly affected the Fund's performance during its last fiscal year. STATEMENT OF ADDITIONAL INFORMATION (SAI) A Statement of Additional Information, dated August 1, 2002, revised as of October 1, 2002 has been filed with the Securities and Exchange Commission. The SAI, which includes additional information about the Schneider Value Fund, may be obtained free of charge, along with the Schneider Value Fund annual and semi-annual reports, by calling (888) 520-3277. The SAI, as supplemented from time to time, is incorporated by reference into this Prospectus (and is legally considered a part of this Prospectus). SHAREHOLDER ACCOUNT SERVICE REPRESENTATIVES Representatives are available to discuss account balance information, mutual fund prospectuses, literature, programs and services available. Hours: 8 a.m. to 6 p.m. (Eastern time) Monday-Friday. Call: (888) 520-3277. PURCHASES AND REDEMPTIONS Call your registered representative or (888) 520-3277. WRITTEN CORRESPONDENCE Schneider Value Fund, c/o PFPC Inc., 400 Bellevue Parkway Wilmington, DE 19809 SECURITIES AND EXCHANGE COMMISSION (SEC) You may review and obtain copies of Fund documents by visiting the SEC's Public Reference Room in Washington, D.C. You may also obtain copies of Fund documents by sending your request and a duplicating fee to the SEC's Public Reference Section, Washington, D.C. 20549-6009 or by electronic request at publicinfo@sec.gov. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-202-942-8090. Text-only versions of the Fund's documents are available on the SEC's website at http://www.sec.gov. INVESTMENT COMPANY ACT FILE NO. 811-05518 SCHNEIDER VALUE FUND (AN INVESTMENT PORTFOLIO OF THE RBB FUND, INC.) STATEMENT OF ADDITIONAL INFORMATION AUGUST 1, 2002, revised as of October 1, 2002 This Statement of Additional Information provides supplementary information pertaining to shares (the "Shares") representing interests in the Schneider Value Fund (the "Fund") of The RBB Fund, Inc. (the "Company"). This Statement of Additional Information is not a prospectus, and should be read only in conjunction with the Schneider Value Fund Prospectus, dated August 1, 2002, revised as of October 1, 2002 (the "Prospectus"). A copy of the Prospectus may be obtained free of charge by calling toll-free (888) 520-3277. TABLE OF CONTENTS PAGE FUND HISTORY AND CLASSIFICATION...............................................2 INVESTMENT STRATEGIES.........................................................2 DIRECTORS AND OFFICERS.......................................................10 CODE OF ETHICS...............................................................14 INVESTMENT ADVISORY, DISTRIBUTION AND SERVICING ARRANGEMENTS.................15 FUND TRANSACTIONS............................................................18 PURCHASE AND REDEMPTION INFORMATION..........................................19 TELEPHONE TRANSACTION PROCEDURES.............................................20 VALUATION OF SHARES..........................................................21 PERFORMANCE INFORMATION......................................................22 TAXES .......................................................................23 ADDITIONAL INFORMATION CONCERNING RBB SHARES.................................24 MISCELLANEOUS................................................................26 FINANCIAL STATEMENTS.........................................................27 CONTROL PERSONS..............................................................27 APPENDIX A..................................................................A-1 FUND HISTORY AND CLASSIFICATION The RBB Fund, Inc. (the "Company") is an open-end management investment company currently operating or proposing to operate 14 separate investment portfolios. The Company was organized as a Maryland corporation on February 29, 1988. This Statement of Additional Information pertains to one class of shares representing interests in one diversified portfolio of the Company, the Schneider Value Fund (the "Fund"), which is offered by a Prospectus dated August 1, 2002, revised as of October 1, 2002. Capitalized terms used herein and not otherwise defined have the same meanings as are given to them in the Prospectus. INVESTMENT STRATEGIES The following supplements the information contained in the Prospectus concerning the investment objectives and policies of the Fund. ADDITIONAL INFORMATION ON FUND INVESTMENTS. LENDING OF FUND SECURITIES. The Fund may lend securities to brokers, dealers and other financial institutions desiring to borrow securities to complete transactions and for other purposes. Because the government securities or other assets that are pledged as collateral to the Fund in connection with these loans generate income, securities lending enables the Fund to earn income that may partially offset expenses. These loans may not exceed 33 1/3% of the Fund's total assets. The documentation for these loans will provide that the Fund will receive collateral equal to at least 102% of the current market value of the loaned securities, as marked to market each day that the net asset value of the Fund is determined, consisting of government securities or other assets permitted by applicable regulations and interpretations. The Fund will pay administrative and custodial fees in connection with the loan of securities. The Fund will invest collateral in short-term investments, and will bear the risk of loss of the invested collateral. In addition, the Fund will be exposed to the risk of loss should a borrower default on its obligation to return the borrowed securities. The Fund's share of income from the loan collateral will be included in its gross investment income. Securities lending would involve risks of delay in receiving additional collateral in the event the value of the collateral decreased below the value of the securities loaned or of delay in recovering the securities loaned or even loss of rights in the collateral should the borrower of the securities fail financially. However, loans will be made only to borrowers deemed by Schneider Capital Management Company (the "Adviser") to be of good standing and only when, in the Adviser's judgment, the income to be earned from the loans justifies the attendant risks. Any loans of the Fund's securities will be marked to market daily. INDEXED SECURITIES. The Fund may invest in indexed securities whose value is linked to securities indices. Most such securities have values which rise and fall according to the change in one or more specified indices, and may have characteristics similar to direct - 2 - investments in the underlying securities. Depending on the index, such securities may have greater volatility than the market as a whole. The Fund does not presently intend to invest more than 5% of its net assets in indexed securities. REPURCHASE AGREEMENTS. The Fund may agree to purchase securities from financial institutions subject to the seller's agreement to repurchase them at an agreed-upon time and price ("repurchase agreements"). The securities held subject to a repurchase agreement may have stated maturities exceeding 13 months, provided the repurchase agreement itself matures in less than 13 months. The financial institutions with whom the Fund may enter into repurchase agreements will be banks which the Adviser considers creditworthy pursuant to criteria approved by the Board of Directors and non-bank dealers of U.S. Government securities that are listed on the Federal Reserve Bank of New York's list of reporting dealers. The Adviser will consider the creditworthiness of a seller in determining whether to cause the Fund to enter into a repurchase agreement. The seller under a repurchase agreement will be required to maintain the value of collateral at not less than the repurchase price plus accrued interest. The Adviser will monitor daily the value of the collateral, and will, if necessary, require the seller to increase the collateral so that its value is not less than the repurchase price. Default by or bankruptcy of the seller would, however, expose the Fund to the risk of loss because of possible market declines in the value of the collateral or delays in connection with its disposition. REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS. The Fund may enter into reverse repurchase agreements with respect to portfolio securities for temporary purposes (such as to obtain cash to meet redemption requests) when the liquidation of portfolio securities is deemed disadvantageous or inconvenient by the Adviser. Reverse repurchase agreements involve the sale of securities held by the Fund pursuant to the Fund's agreement to repurchase the securities at an agreed-upon price, date and rate of interest. Such agreements are considered to be borrowings under the Investment Company Act of 1940 (the "1940 Act"), and may be entered into only for temporary or emergency purposes. While reverse repurchase transactions are outstanding, the Fund will maintain in a segregated account with the Fund's custodian or a qualified sub-custodian, cash or liquid securities of an amount at least equal to the market value of the securities, plus accrued interest, subject to the agreement and will monitor the account to ensure that such value is maintained. Reverse repurchase agreements involve the risk that the market value of the securities sold by the Fund may decline below the price of the securities the Fund is obligated to repurchase and the return on the cash exchanged for the securities. The Fund may also enter into "dollar rolls," in which it sells fixed income securities for delivery in the current month and simultaneously contracts to repurchase substantially similar (same type, coupon and maturity) securities on a specified future date. During the roll period, the Fund would forgo principal and interest paid on such securities. The Fund would be compensated by the difference between the current sales price and the forward price for the future purchase, as well as by the interest earned on the cash proceeds of the initial sale. The return on dollar rolls may be negatively impacted by fluctuations in interest rates. The Fund does not presently intend to engage in reverse repurchase or dollar roll transactions involving more than 5% of the Fund's net assets. U.S. GOVERNMENT OBLIGATIONS. The Fund may purchase U.S. Government agency and instrumentality obligations that are debt securities issued by U.S. Government- - 3 - sponsored enterprises and federal agencies. Some obligations of agencies and instrumentalities of the U.S. Government are supported by the full faith and credit of the U.S. Government or by U.S. Treasury guarantees, such as securities of the Government National Mortgage Association and the Federal Housing Authority; others, by the ability of the issuer to borrow, provided approval is granted, from the U.S. Treasury, such as securities of the Federal Home Loan Mortgage Corporation and others, only by the credit of the agency or instrumentality issuing the obligation, such as securities of the Federal National Mortgage Association and the Federal Loan Banks. U.S. government obligations that are not backed by the full faith and credit of the U.S. government are subject to greater risks than those that are. U.S. government obligations that are backed by the full faith and credit of the U.S. government are subject to interest rate risk. The Fund's net assets may be invested in obligations issued or guaranteed by the U.S. Treasury or the agencies or instrumentalities of the U.S. Government, including options and futures on such obligations. The maturities of U.S. Government securities usually range from three months to thirty years. Examples of types of U.S. Government obligations include U.S. Treasury Bills, Treasury Notes and Treasury Bonds and the obligations of Federal Home Loan Banks, Federal Farm Credit Banks, Federal Land Banks, the Federal Housing Administration, Farmers Home Administration, Export-Import Bank of the United States, Small Business Administration, Federal National Mortgage Association, Government National Mortgage Association, General Services Administration, Student Loan Marketing Association, Central Bank for Cooperatives, Federal Home Loan Mortgage Corporation, Federal Intermediate Credit Banks, the Maritime Administration, the Asian-American Development Bank and the Inter-American Development Bank. HEDGING INVESTMENTS. At such times as the Adviser deems it appropriate and consistent with the investment objective of the Fund, the Fund may invest in financial futures contracts and options on financial futures contracts. The purpose of such transactions is to hedge against changes in the market value of securities in the Fund caused by fluctuating interest rates and to close out or offset its existing positions in such futures contracts or options as described below. Such instruments will not be used for speculation. Futures contracts and options on futures are discussed below. FUTURES CONTRACTS. The Fund may invest in financial futures contracts with respect to those securities listed on the S&P 500 Stock Index. Financial futures contracts obligate the seller to deliver a specific type of security called for in the contract, at a specified future time, and for a specified price. Financial futures contracts may be satisfied by actual delivery of the securities or, more typically, by entering into a transaction that offsets the financial futures contract. The Fund will comply with guidelines established by the SEC with respect to coverage of options and futures strategies by mutual funds, and if the guidelines so require will set aside cash and high grade liquid debt securities in a segregated account with its custodian bank in the amount prescribed. Securities held in a segregated account cannot be sold while the futures or option strategy is outstanding, unless they are replaced with similar securities. As a result, there is a possibility that segregation of a large percentage of the Fund's assets could impede portfolio management or the Fund's ability to meet redemption requests or other current obligations. Depending on the asset levels that are required to be segregated, the Fund may be required to sell off assets it would not otherwise liquidate. There are risks that are - 4 - associated with the use of futures contracts for hedging purposes. In certain market conditions, as in a rising interest rate environment, sales of futures contracts may not completely offset a decline in value of the portfolio securities against which the futures contracts are being sold. In the futures market, it may not always be possible to execute a buy or sell order at the desired price, or to close out an open position due to market conditions, limits on open positions, and/or daily price fluctuations. Risks in the use of futures contracts also result from the possibility that changes in the market interest rates may differ substantially from the changes anticipated by the Fund's investment adviser when hedge positions were established. The Fund does not presently intend to invest more than 5% of the value of its net assets in futures contracts. OPTIONS ON FUTURES. The Fund may purchase and write call and put options on futures contracts with respect to those securities listed on the S&P 500 Stock Index and enter into closing transactions with respect to such options to terminate an existing position. An option on a futures contract gives the purchaser the right, in return for the premium paid, to assume a position in a futures contract. The Fund may use options on futures contracts in connection with hedging strategies. The purchase of put options on futures contracts is a means of hedging against the risk of rising interest rates. The purchase of call options on futures contracts is a means of hedging against a market advance when the Fund is not fully invested. The Fund may seek to terminate its position in a put option it writes before exercise by closing out the option in the secondary market at its current price. If the secondary market is not liquid for an option the Fund has written, however, the Fund must continue to be prepared to pay the strike price while the option is outstanding, regardless of price changes, and must continue to set aside assets to cover its position. The characteristics of writing call options are similar to those of writing put options, as described above, except that writing covered call options generally is a profitable strategy if prices remain the same or fall. Through receipt of the option premium, the Fund would seek to mitigate the effects of a price decline. At the same time, because the Fund would have to be prepared to deliver the underlying instrument in return for the strike price, even if its current value is greater, the Fund would give up some ability to participate in security price increases when writing call options. Because there are a limited number of types of futures contracts, it is likely that the standardized futures contracts available to the Fund will not match the Fund's current or anticipated investments. Futures prices can also diverge from the prices of their underlying instruments, even if the underlying instruments match the Fund's investments well. Futures prices are affected by such factors as current and anticipated short-term interest rates, changes in volatility of the underlying instrument, and the time remaining until expiration of the contract, which may not affect security prices the same way. Imperfect correlation between the Fund's investments and its futures positions may also result from differing levels of demand in the futures markets and the securities markets, from structural differences in how futures and securities are traded, or from imposition of daily price fluctuation limits for futures contracts. The Fund may purchase or sell futures contracts with a greater or lesser value than the securities it wishes to hedge or intends to purchase in order to attempt to compensate for differences in historical volatility between the futures contract and the securities, although this may not be successful in all cases. If price changes in the Fund's futures positions are poorly correlated with its other investments, its futures positions may fail to produce anticipated gains or result in losses - 5 - that are not offset by the gains in the Fund's other investments. There is no assurance that the Fund will be able to close out its financial futures positions at any time, in which case it would be required to maintain the margin deposits on the contract. The Fund does not presently intend to invest more than 5% of its net assets in options on futures. BANK AND CORPORATE OBLIGATIONS. The Fund may purchase obligations of issuers in the banking industry, such as short-term obligations of bank holding companies, certificates of deposit, bankers' acceptances and time deposits issued by U.S. or foreign banks or savings institutions having total assets at the time of purchase in excess of $1 billion. Investment in obligations of foreign banks or foreign branches of U.S. banks may entail risks that are different from those of investments in obligations of U.S. banks due to differences in political, regulatory and economic systems and conditions. Such obligations are not FDIC insured and the Fund bears the risk of their failure. The Fund may also make interest-bearing savings deposits in commercial and savings banks in amounts not in excess of 5% of its total assets. The Fund may invest in debt obligations, such as bonds and debentures, issued by corporations and other business organizations that are rated at the time of purchase within the three highest ratings categories of S&P or Moody's (or which, if unrated, are determined by the Adviser to be of comparable quality). Unrated securities will be determined to be of comparable quality to rated debt obligations if, among other things, other outstanding obligations of the issuers of such securities are rated A or better. See Appendix "A" for a description of corporate debt ratings. An issuer of debt obligations may default on its obligation to pay interest and repay principal. Also, changes in the financial strength of an issuer or changes in the credit rating of a security may affect its value. COMMERCIAL PAPER. The Fund may purchase commercial paper rated (at the time of purchase) "A-1" by S&P or "Prime-1" by Moody's or, when deemed advisable by the Adviser, issues rated "A-2" or "Prime-2" by S&P or Moody's, respectively. These rating symbols are described in Appendix "A" hereto. The Fund may also purchase unrated commercial paper provided that such paper is determined to be of comparable quality by the Fund's Adviser pursuant to guidelines approved by the Fund's Board of Directors. Commercial paper issues in which the Fund may invest include securities issued by corporations without registration under the Securities Act of 1933, as amended (the "1933 Act") in reliance on the exemption from such registration afforded by Section 3(a)(3) thereof, and commercial paper issued in reliance on the so-called "private placement" exemption from registration, which is afforded by Section 4(2) of the 1933 Act ("Section 4(2) paper"). Section 4(2) paper is restricted as to disposition under the federal securities laws in that any resale must similarly be made in an exempt transaction. Section 4(2) paper is normally resold to other institutional investors through or with the assistance of investment dealers who make a market in Section 4(2) paper, thus providing liquidity. RULE 144A SECURITIES. The Fund may invest up to 15% of the value of its net assets in securities that are illiquid and may be difficult to value. The Fund may purchase securities which are not registered under the 1933 Act, as - 6 - amended, but which can be sold to "qualified institutional buyers" in accordance with Rule 144A under the 1933 Act. Any such security will not be considered illiquid so long as it is determined by the Adviser, acting under guidelines approved and monitored by the Board, that an adequate trading market exists for that security. This investment practice could have the effect of increasing the level of illiquidity in the Fund during any period that qualified institutional buyers become uninterested in purchasing these restricted securities. FOREIGN SECURITIES. The Fund may invest in foreign securities, either directly or indirectly through American Depositary Receipts and European Depositary Receipts. Investments in foreign securities involve higher costs than investments in U.S. securities, including higher transaction costs as well as the imposition of additional taxes by foreign governments. In addition, foreign investments may include additional risks associated with currency exchange rates, less complete financial information about the issuers, less market liquidity and political stability. Future political and economic information, the possible imposition of withholding taxes on interest income, the possible seizure or nationalization of foreign holdings, the possible establishment of exchange controls, or the adoption of other governmental restrictions, might adversely affect the payment of principal and interest on foreign obligations. Transactions in foreign securities may involve greater time from the trade date until the settlement date than domestic securities transactions, and may involve the risk of possible losses through the holding of securities in custodians and securities depositories in foreign countries. These factors could interfere with the Adviser's ability to sell the securities. Although the Fund may invest in securities denominated in foreign currencies, the Fund values its securities and other assets in U.S. dollars. As a result, the net asset value of the Fund's shares may fluctuate with U.S. dollar exchange rates as well as the price changes of the Fund's securities in the various local markets and currencies. Thus, an increase in the value of the U.S. dollar compared to the currencies in which the Fund makes its investments could reduce the effect of increases and magnify the effect of decreases in the price of the Fund's securities in their local markets. Conversely, a decrease in the value of the U.S. dollar may have the opposite effect of magnifying the effect of increases and reducing the effect of decreases in the prices of the Fund's securities in its foreign markets. In addition to favorable and unfavorable currency exchange rate developments, the Fund is subject to the possible imposition of exchange control regulations or freezes on convertibility of currency. FUNDAMENTAL INVESTMENT LIMITATIONS. The Company has adopted the following fundamental investment limitations, which may not be changed without the affirmative vote of the holders of a majority of the Fund's outstanding Shares (as defined in Section 2(a)(42) of the 1940 Act). As used in this Statement of Additional Information and in the Prospectus, "shareholder approval" and a "majority of the outstanding shares" of a class, series or Portfolio means, with respect to the approval of an investment advisory agreement, a distribution plan or a change in a fundamental investment limitation, the lesser of: (1) 67% of the shares of the particular class, series or Portfolio represented at a meeting at which the holders of more than 50% of the outstanding shares of such class, series or Portfolio are present in person or by proxy; or (2) more than 50% of the outstanding shares of such class, series or Portfolio. The Fund may not: - 7 - 1. Borrow money or issue senior securities, except that the Fund may borrow from banks and enter into reverse repurchase agreements and dollar rolls for temporary purposes in amounts up to one-third of the value of its total assets at the time of such borrowing; or mortgage, pledge or hypothecate any assets, except in connection with any such borrowing and then in amounts not in excess of one-third of the value of the Fund's total assets at the time of such borrowing. The Fund will not purchase securities while its aggregate borrowings (including reverse repurchase agreements, dollar rolls and borrowings from banks) are in excess of 5% of its total assets. Securities held in escrow or separate accounts in connection with the Fund's investment practices are not considered to be borrowings or deemed to be pledged for purposes of this limitation; 2. Act as an underwriter of securities within the meaning of the Securities Act, except insofar as it might be deemed to be an underwriter upon disposition of certain portfolio securities acquired within the limitation on purchases of restricted securities; 3. Purchase or sell real estate (including real estate limited partnership interests), provided that the Fund may invest (a) in securities secured by real estate or interests therein or issued by companies that invest in real estate or interests therein or (b) in real estate investment trusts; 4. Purchase or sell commodities or commodity contracts, except that the Fund may deal in forward foreign exchanges between currencies of the different countries in which it may invest and purchase and sell stock index and currency options, stock index futures, financial futures and currency futures contracts and related options on such futures; 5. Make loans, except through loans of portfolio instruments and repurchase agreements, provided that for purposes of this restriction the acquisition of bonds, debentures or other debt instruments or interests therein and investment in government obligations, loan participations and assignments, short-term commercial paper, certificates of deposit and bankers' acceptances shall not be deemed to be the making of a loan; 6. Invest 25% or more of its assets, taken at market value at the time of each investment, in the securities of issuers in any particular industry (excluding the U.S. Government and its agencies and instrumentalities); 7. Purchase the securities of any one issuer, other than securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities, if immediately after and as a result of such purchase, more than 5% of the value of the Fund's total assets would be invested in the securities of such issuer, or more than 10% of the outstanding voting securities of such issuer would be owned by the Fund, except that up to 25% of the value of the Fund's total assets may be invested without regard to such limitations; or 8. Purchase any securities which would cause, at the time of purchase, 25% or more of the value of the total assets of the Fund to be invested in the obligations of issuers in any single industry, provided that there is no limitation with respect to investments in U.S. Government obligations. - 8 - (For purposes of Investment Limitation No. 1, any collateral arrangements with respect to, if applicable, the writing of options and futures contracts, options on futures contracts, and collateral arrangements with respect to initial and variation margin are not deemed to be a pledge of assets. For purposes of Investment Limitation No. 2, neither the foregoing arrangements nor the purchase or sale of futures or related options are deemed to be the issuance of senior securities.) The Fund may invest in securities issued by other investment companies within the limits prescribed by the 1940 Act. As a shareholder of another investment company, the Fund would bear, along with other shareholders, its pro rata portion of the other investment company's expenses, including advisory fees. These expenses would be in addition to the advisory and other expenses that the Fund bears directly in connection with its own operations. Except as required by the 1940 Act with respect to the borrowing of money and the limitation on illiquid holdings, if a percentage restriction is adhered to at the time of investment, a later increase or decrease in percentage resulting from a change in market values of portfolio securities or amount of total or net assets will not be considered a violation of any of the foregoing restrictions. Securities held by the Fund generally may not be purchased from, sold or loaned to the Adviser or its affiliates or any of their directors, officers or employees, acting as principal, unless pursuant to a rule or exemptive order under the 1940 Act. - 9 - DIRECTORS AND OFFICERS The business and affairs of the Company are managed under the direction of the Company's Board of Directors pursuant to Maryland law. The Directors and executive officers of the Company, their ages, business addresses and principal occupations during the past five years are: INDEPENDENT DIRECTORS*:
POSITION(S) TERM OF OFFICE NAME, ADDRESS, AND HELD WITH AND LENGTH OF AGE** THE COMPANY TIME SERVED*** PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS ------------------ ----------- -------------- ---------------------------------------------- Julian A. Brodsky Director Since 1988 Director and Vice Chairman, Comcast Corporation (cable television Age: 69 and communications) since 1969; Director, NDS Group PLC (provider of systems and applications for digital pay TV).
NUMBER OF PORTFOLIOS IN FUND COMPLEX NAME, ADDRESS, AND OVERSEEN BY OTHER DIRECTORSHIPS HELD BY AGE** DIRECTOR**** DIRECTOR***** ------------------ -------------- ----------------------------- Julian A. Brodsky 14 Director, Comcast Corporation Age: 69 * Directors who are not deemed to be "interested persons" of the Company as defined in the 1940 Act are referred to as "independent directors". Directors who are deemed to be "interested persons" of the Company are referred to as "interested directors". ** Each Director may be contacted by writing to the Director, c/o Edward J. Roach, The RBB Fund, Inc., Suite 100, Bellevue Park Corporate Center, 400 Bellevue Parkway, Wilmington, De 19809. *** Each Director holds office for an indefinite term until the earliest of (i) the next meeting of shareholders, if any, called for the purpose of considering the election or re-election of such Director and until the election and qualification of his or her successor, if any, elected, at such meeting, or (ii) the date a Director resigns or retires, or a Director is removed by the Board of Directors or shareholders. **** The Company consists of 14 portfolios, including the portfolio described in this Statement of Additional Information. The Fund Complex includes the Company and all other registered investment companies for which the investment advisers of the Company or their affiliates serve as investment adviser. ***** This column includes only directorships of companies required to report to the SEC under the Securities Exchange Act of 1934 (i.e. public companies) or other investment companies registered under the 1940 Act.
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POSITION(S) TERM OF OFFICE NAME, ADDRESS, AND HELD WITH AND LENGTH OF AGE** THE COMPANY TIME SERVED*** PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS ------------------ ----------- -------------- ---------------------------------------------- Francis J. McKay Director Since 1988 Executive Vice President, Fox Chase Cancer Center Age: 66 (biomedical research and medical care) since 1963. Arnold M. Reichman Director Since 1991 Director, Gabelli Partners, L.P. (an investment Age: 54 partnership) since December 2000; Chief Operating Officer and member of the Board of Directors of Outercurve Technologies (wireless enabling services) until April 2001; Chief Operating Officer and a member of the Executive Operating Committee of Warburg Pincus Asset Management, Inc.; Executive Officer and Director of Credit Suisse Asset Management Securities, Inc. (formerly Counselors Securities, Inc.) and Director/Trustee of various investment companies advised by Warburg Pincus Asset Management, Inc. until September 15, 1999; Prior to 1997, Managing Director of Warburg Pincus Asset Management, Inc. Marvin E. Sternberg Director Since 1988 Chairman, Director and President, Moyco Technologies, Inc. Age: 68 (manufacturer of precision coated and industrial abrasives) since since 1974; Director, Pennsylvania Business Bank. INTERESTED DIRECTORS*: J. Richard Carnall 1 Director and Since 2002 Director of PFPC Inc. (financial services) since 1987; Age: 63 Chairman of Chairman and Chief Executive Officer of PFPC Inc. from the Board 1987 to 2002; Executive Vice President of PNC Bank, National Association from 1981 to 2002; Director PFPC International Ltd. (financial services) from 1993 to 2002; Director of PFPC International (Cayman) Ltd. (financial services) from 1996 to 2002; Director of International Dollar Reserve Fund, Ltd. (Cayman Mutual Fund Company) from 1993 until 2002; Governor of the Investment Company Institute (investment company industry trade organization) from 1996 to 2002; Director of PNC Asset Management, Inc. (investment advisory) from 1994 to 1998; Director of PNC National Bank from 1995 to 1997; Director of Haydon Bolts, Inc. since 1984; and Director of Parkway Real Estate Company since 1984. Mr. Carnall provides consulting services from time to time to PFPC Inc. Robert Sablowsky 1 Director Since 1991 Senior Vice President of Fahnestock & Co., Inc. (financial services). Age: 64
NUMBER OF PORTFOLIOS IN FUND COMPLEX NAME, ADDRESS, AND OVERSEEN BY OTHER DIRECTORSHIPS HELD BY AGE++ DIRECTOR**** DIRECTOR***** ------------------ ------------- ----------------------------- Francis J. McKay 14 None Age: 66 Arnold M. Reichman 14 None Age: 54 Marvin E. Sternberg 14 Chairman and Director, Moyco Age: 68 Technologies, Inc. INTERESTED DIRECTORS* J. Richard Carnall 1 14 None Age: 63 Robert Sablowsky 1 14 None Age: 64
- 11 - 1 Mr. Carnall is considered an "interested Director" of the Company because he owns shares of The PNC Financial Services Group, Inc. The investment adviser to the Company's Money Market Portfolio, BlackRock Institutional Management Corporation and the Company's principal underwriter, PFPC Distributors, Inc. are indirect subsidiaries of The PNC Financial Services Group, Inc. Mr. Carnall also owns shares of PFPC Inc., the Company's administrator. Mr. Sablowsky is considered an "interested Director" of the Company by virtue of his position as an officer of a registered broker-dealer. OFFICERS OF THE COMPANY+:
POSITIONS TERM OF OFFICE AND HELD WITH THE LENGTH OF TIME NAME, ADDRESS AND AGE COMPANY SERVED* PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS --------------------- ------------- ------------------ ---------------------------------------------- Edward J. Roach President Since 1991 Certified Public Accountant; Vice Chairman of the Board, Fox Suite 100 and Chase Cancer Center (biomedical research and medical care); Bellevue Park Corporate Center Treasurer Since 1988 Trustee Emeritus, Pennsylvania School for the Deaf; Trustee 400 Bellevue Parkway Emeritus, Immaculata College; President or Vice President and Wilmington, DE 19809 Treasurer of various investment companies advised by Age: 78 subsidiaries of PNC Bank Corp. (1981-1997); Managing General Partner and Treasurer of Chestnut Street Exchange Fund; Director of the Bradford Funds, Inc. (1996-2000). Timothy K. Biedrzycki Secretary Since 2000 Director and Vice President, Fund Accounting and Suite 100 and Administration, PFPC Inc. (financial services) since 1998; Bellevue Park Corporate Center Assistant Since 1998 Director and Vice President, Fund Accounting and 400 Bellevue Parkway Treasurer Administration, Federated Services Company (financial Wilmington, DE 19809 services) from 1994-1997. Age: 54 + Each officer holds office at the pleasure of the Board of Directors until the next annual meeting of the Company or until his or her successor is duly elected and qualified, or until he or she dies, resigns, is removed, or becomes disqualified.
- 12 - STANDING BOARD COMMITTEES The Board of Directors has established three standing committees in connection with their governance of the Company: Audit; Executive; and Nominating. Messrs. McKay, Sternberg and Brodsky are members of the Audit Committee of the Board of Directors. The Audit Committee, among other things, reviews results of the annual audit and recommends to the Company the firm to be selected as independent auditors. During the fiscal year ended August 31, 2002, the Audit Committee convened two times. Messrs. Reichman and McKay are members of the Executive Committee of the Board of Directors. The Executive Committee may generally carry on and manage the business of the Company when the Board of Directors is not in session. The Executive Committee did not convene during the fiscal year ended August 31, 2002. Messrs. McKay and Brodsky are members of the Nominating Committee of the Board of Directors. The Nominating Committee recommends to the Board all persons to be nominated as directors of the Company. The Nominating Committee will consider nominees recommended by shareholders. Recommendations should be submitted to the Committee in care of the Company's Secretary. The Nominating Committee convened once during the fiscal year ended August 31, 2002. DIRECTOR OWNERSHIP OF SHARES OF THE COMPANY The following table shows the dollar range of shares of the Company owned by each Director in the investment portfolios of the Company as of December 31, 2001.
AGGREGATE DOLLAR RANGE OF EQUITY SECURITIES IN NAME OF THE DIRECTOR DOLLAR RANGE OF EQUITY SECURITIES IN THE FUND ALL PORTFOLIOS IN MUTUAL FUND FAMILY -------------------- --------------------------------------------- ---------------------------------------------- INDEPENDENT DIRECTORS --------------------- Julian A. Brodsky None None Francis J. McKay None $50,001-$100,000 Arnold M. Reichman None None Marvin E. Sternberg None None Donald van Roden* None None INTERESTED DIRECTORS -------------------- J. Richard Carnall** None None Robert Sablowsky None over $100,000 * Retired from the Board as of July 1, 2002. ** Elected to the Board on August 30, 2002.
- 13 - As of December 31, 2001, Mr. Sternberg directly or indirectly held $11,644 in money market accounts with PNC Bank, an affiliate of the investment adviser to the Company's Money Market Portfolio, BlackRock Institutional Management Corporation, and the Company's principal underwriter, PFPC Distributors, Inc. Mr. Sternberg liquidated these money market accounts prior to July 1, 2002. As a result, Mr. Sternberg is no longer considered an interested Director of the Company. DIRECTORS' COMPENSATION The Company currently pays directors $15,000 annually and $1,250 per meeting of the Board or any committee thereof that is not held in conjunction with a Board meeting. In addition, the Chairman of the Board receives an additional fee of $6,000 per year for his services in this capacity. Directors are reimbursed for any expenses incurred in attending meetings of the Board of Directors or any committee thereof. For the year ended August 31, 2002, each of the following members of the Board of Directors received compensation from the Company in the following amounts:
TOTAL COMPENSATION AGGREGATE PENSION OR RETIREMENT ESTIMATED ANNUAL FROM FUND AND FUND COMPENSATION FROM BENEFITS ACCRUED AS BENEFITS UPON COMPLEX PAID TO NAME OF PERSON/POSITION REGISTRANT PART OF FUND EXPENSES RETIREMENT DIRECTORS ------------------------------------------------------------------------------------------------------------------------------ Julian A. Brodsky, Director $21,250 N/A N/A $21,250 Francis J. McKay, Director $22,500 N/A N/A $22,500 Arnold M. Reichman, Director $18,750 N/A N/A $18,750 Marvin E. Sternberg, Director $22,500 N/A N/A $22,500 Donald van Roden, former Director $27,250 N/A N/A $27,250 and former Chairman* ------------------------------------------------------------------------------------------------------------------------------ J. Richard Carnall, Director N/A N/A N/A N/A and Chairman** Robert Sablowsky, Director $21,250 N/A N/A $21,250 * Retired from the Board as of July 1, 2002. ** Elected to the Board on August 30, 2002.
On October 24, 1990 the Company adopted, as a participating employer, the Fund Office Retirement Profit-Sharing Plan and Trust Agreement, a retirement plan for employees (currently Edward J. Roach), pursuant to which the Company will contribute on a quarterly basis amounts equal to 10% of the quarterly compensation of each eligible employee. By virtue of the services performed by the Company's advisers, custodians, administrators and distributor, the Company itself requires only one part-time employee. No officer, director or employee of the Adviser or the Distributor currently receives any compensation from the Company. CODE OF ETHICS The Company, the Adviser and PFPC Distributors, Inc. have adopted codes of ethics that permit personnel subject to the codes to invest in securities, including securities that may be purchased or held by the Company. - 14 - INVESTMENT ADVISORY, DISTRIBUTION AND SERVICING ARRANGEMENTS ADVISORY AGREEMENT. The Adviser renders advisory services to the Fund pursuant to an Investment Advisory Agreement dated August 1, 2002 (the "Advisory Agreement"). The Adviser is a Pennsylvania corporation controlled by its majority shareholder, Arnold C. Schneider, III. The Adviser has been managing assets for institutional accounts since 1996. The Adviser currently acts as investment adviser for the Schneider Small Cap Value Fund, also an investment portfolio of the Company, and for one other investment company registered under the 1940 Act, Impact Management Investment Trust, and as investment sub-adviser for the following investment companies registered under the 1940 Act: the Quaker Mid-Cap Value Fund; the Liberty All-Star Equity Fund; and the Liberty All-Star Equity Fund Variable Series. As of March 31, 2002, the Adviser managed approximately $2.1 billion in assets. The Adviser is a registered investment advisor under the Investment Advisers Act of 1940, as amended. The Adviser is an active, equity value manager that believes a disciplined fundamental approach can consistently add value in a market that has shown to be extremely efficient with current data, but less so with future events. The Adviser is research intensive and focuses on new ideas, believing that the market is slow to react to change, particularly where out-of-favor stocks are concerned. The Advisor strives to act on them as soon as possible to generate above-average returns. The Adviser has investment discretion for the Fund and will make all decisions affecting assets in the Fund under the supervision of the Company's Board of Directors and in accordance with the Fund's stated policies. The Adviser will select investments for the Fund. For its services to the Fund, the Adviser is entitled to receive a monthly advisory fee under the Advisory Agreement computed at an annual rate of 0.70% of the Fund's average daily net assets. Until December 31, 2003, the Adviser has agreed to waive its fees to the extent necessary to maintain an annualized expense ratio for the Fund of 0.85%. There can be no assurance that the Adviser will continue such waivers thereafter. The Fund bears its own expenses not specifically assumed by the Adviser. General expenses of the Company not readily identifiable as belonging to a portfolio of the Company are allocated among all investment portfolios by or under the direction of the Company's Board of Directors in such manner as the Board determines to be fair and equitable. Expenses borne by a portfolio include, but are not limited to, the following (or a portfolio's share of the following): (a) the cost (including brokerage commissions) of securities purchased or sold by a portfolio and any losses incurred in connection therewith; (b) fees payable to and expenses incurred on behalf of a portfolio by the Adviser; (c) any costs, expenses or losses arising out of a liability of or claim for damages or other relief asserted against the Company or a portfolio for violation of any law; (d) any extraordinary expenses; (e) fees, voluntary assessments and other expenses incurred in connection with membership in investment company organizations; (f) the cost of investment company literature and other publications provided by the Company to its directors and officers; (g) organizational costs; (h) fees to the Adviser and PFPC; (i) fees and expenses of officers and directors who are not affiliated with the Adviser or Distributor; (j) taxes; - 15 - (k) interest; (l) legal fees; (m) custodian fees; (n) auditing fees; (o) brokerage fees and commissions; (p) certain of the fees and expenses of registering and qualifying the Fund and its shares for distribution under federal and state securities laws; (q) expenses of preparing prospectuses and statements of additional information and distributing annually to existing shareholders that are not attributable to a particular class of shares of the Company; (r) the expense of reports to shareholders, shareholders' meetings and proxy solicitations that are not attributable to a particular class of shares of the Company; (s) fidelity bond and directors' and officers' liability insurance premiums; (t) the expense of using independent pricing services; and (u) other expenses which are not expressly assumed by the Adviser under its advisory agreement with the portfolio. Each class of the Fund pays its own distribution fees, if applicable, and may pay a different share than other classes of other expenses (excluding advisory and custodial fees) if those expenses are actually incurred in a different amount by such class or if it receives different services. Under the Advisory Agreement, the Adviser will not be liable for any error of judgment or mistake of law or for any loss suffered by the Fund or the Company in connection with the performance of the Advisory Agreement, except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Adviser in the performance of its duties or from reckless disregard of its duties and obligations thereunder. The Advisory Agreement was approved on January 23, 2002 by vote of the Company's Board of Directors, including a majority of those directors who are not parties to the Advisory Agreement or interested persons (as defined in the 1940 Act) of such parties. In connection with such approval, the Directors considered, with the assistance of independent counsel, their legal responsibilities and reviewed the nature and quality of the Adviser's services to be provided to the Fund and the Adviser's experience and qualifications. Among other items, the Directors also reviewed and considered: (1) a report on the Fund's advisory fee structure; (2) a report on the expected assets, advisory fee and expense reimbursements for the Fund; (3) a report comparing: (i) the contractual management fee for the Fund to that of comparable funds, and (ii) the estimated expenses for the Fund to those of its peer group; and (4) a report on soft dollar commissions which included information on the types of research and services expected to be obtained by the Adviser in connection with soft dollar commissions. Additional information on soft dollar arrangements and commissions are described under "Portfolio Transactions and Brokerage." After discussion, the Board of Directors concluded that the Adviser had the capabilities, resources and personnel necessary to manage the Fund. The Board of Directors also concluded that based on the services that the Adviser would provide to the Fund under the Advisory Agreement and the estimated expenses to be incurred by the Adviser in the performance of such services, the compensation to be paid to the Adviser was fair and equitable. Based upon such information as it considered necessary to the exercise of its reasonable business judgment, the Board of Directors concluded unanimously that it was in the best interests of the Company to approve the Advisory Agreement. - 16 - The Advisory Agreement has been approved by written consent of the Fund's sole shareholder. The Advisory Agreement is terminable by vote of the Company's Board of Directors or by the holders of a majority of the outstanding voting securities of the Fund, at any time without penalty, on 60 days' written notice to the Adviser. The Advisory Agreement may also be terminated by the Adviser on 60 days' written notice to the Company. The Advisory Agreement terminates automatically in the event of its assignment. CUSTODIAN AND TRANSFER AGENCY AGREEMENTS. PFPC Trust Company, 8800 Tinicum Boulevard, Suite 200, Philadelphia, PA 19153 (the "Custodian") serves as the custodian of the Fund's assets pursuant to a custodian agreement between the Custodian and the Company dated August 16, 1988, as amended and supplemented (the "Custodian Agreement"). Under the Custodian Agreement, the Custodian (a) maintains a separate account or accounts in the name of the Fund (b) holds and transfers portfolio securities on account of the Fund, (c) accepts receipts and makes disbursements of money on behalf of the Fund, (d) collects and receives all income and other payments and distributions on account of the Fund's portfolio securities and (e) makes periodic reports to the Company's Board of Directors concerning the Fund's operations. The Custodian is authorized to select one or more banks or trust companies to serve as sub-custodian on behalf of the Fund, provided that the Custodian remains responsible for the performance of all of its duties under the Custodian Agreement and holds the Fund harmless from the acts and omissions of any sub-custodian. For its services to the Fund under the Custodian Agreement, the Custodian receives a fee calculated at .03% of the Fund's average daily net assets. PFPC Inc. ("PFPC"), with offices at 400 Bellevue Parkway, Wilmington, DE 19809, an affiliate of PFPC Trust Company, serves as the transfer and dividend disbursing agent for the Fund pursuant to a Transfer Agency Agreement dated November 5, 1991, as supplemented (the "Transfer Agency Agreement"), under which PFPC: (a) issues and redeems shares of the Fund; (b) addresses and mails all communications by the Fund to record owners of the Shares, including reports to shareholders, dividend and distribution notices and proxy materials for its meetings of shareholders; (c) maintains shareholder accounts and, if requested, sub-accounts; and (d) makes periodic reports to the Company's Board of Directors concerning the operations of the Fund. PFPC may, on 30 days' notice to the Company, assign its duties as transfer and dividend disbursing agent to any other affiliate of PNC Bank Corp. For its services to the Fund under the Transfer Agency Agreement, PFPC receives a monthly fee at the annual rate of $10 per account in the Fund, exclusive of out-of-pocket expenses, and also receives reimbursement of its out-of-pocket expenses. DISTRIBUTION AGREEMENT. PFPC Distributors, Inc. ("PFPC Distributors"), whose principal business address is 3200 Horizon Drive, King of Prussia, PA 19406, serves as the distributor of the Fund pursuant to the terms of a distribution agreement dated as of January 2, 2001, as supplemented (the "Distribution Agreement") entered into by PFPC Distributors and the Company. No compensation is payable by the Company to PFPC Distributors for distribution services with respect to the Fund. ADMINISTRATION AND ADMINISTRATIVE SERVICES AGREEMENTS. PFPC also serves as administrator and fund accounting agent to the Fund pursuant to an Administration and Accounting Services Agreement - 17 - dated August 1, 2002 (the "Administration Agreement"). PFPC has agreed to furnish to the Fund statistical and research data, clerical, accounting and bookkeeping services, and certain other services required by the Fund. In addition, PFPC has agreed to, prepare and file various reports with appropriate regulatory agencies. The Administration Agreement provides that PFPC shall be obligated to exercise care and diligence in the performance of its duties, to act in good faith and to use its best efforts, within reasonable limits, in performing services thereunder. PFPC shall be responsible for failure to perform its duties under the Administration Agreement arising out of PFPC's gross negligence. For its services to the Fund, PFPC is entitled to receive a fee calculated at an annual rate of .125% of the Fund's average daily net assets, with a minimum monthly fee of $8,333. As of the date of this Statement of Additional Information, the Fund had not commenced investment operations and, accordingly, PFPC has received no fees from the Fund pursuant to the Administration Agreement. PFPC Distributors provides certain administrative services to the Fund that are not provided by PFPC, pursuant to an Administrative Services Agreement between the Company and PFPC Distributors. These services include furnishing corporate secretarial, data processing and clerical services, acting as liaison between the shares of the Fund and various service providers and coordinating the preparation of proxy statements and annual, semi-annual and quarterly reports. As compensation for such administrative services, PFPC Distributors is entitled to a monthly fee for the previous month calculated at the annual rate of .15% of the Fund's average daily net assets. PFPC Distributors is currently waiving fees in excess of 0.03% of the Fund's average daily net assets. FUND TRANSACTIONS Subject to policies established by the Board of Directors and applicable rules, the Adviser is responsible for the execution of portfolio transactions and the allocation of brokerage transactions for the Fund. In executing portfolio transactions, the Adviser seeks to obtain the best price and most favorable execution for the Fund, taking into account such factors as the price (including the applicable brokerage commission or dealer spread), size of the order, difficulty of execution and operational facilities of the firm involved. While the Adviser generally seeks reasonably competitive commission rates, payment of the lowest commission or spread is not necessarily consistent with obtaining the best price and execution in particular transactions. The Fund has no obligation to deal with any broker or group of brokers in the execution of portfolio transactions. The Adviser may, consistent with the interests of the Fund and subject to the approval of the Board of Directors, select brokers on the basis of the research, statistical and pricing services they provide to the Fund and other clients of the Adviser. Information and research received from such brokers will be in addition to, and not in lieu of, the services required to be performed by the Adviser under its respective contracts. A commission paid to such brokers may be higher than that which another qualified broker would have charged for effecting the same transaction, provided that the Adviser, as applicable, determines in good faith that such commission is reasonable in terms either of the transaction or the overall - 18 - responsibility of the Adviser, as applicable, to the Fund and its other clients and that the total commissions paid by the Fund will be reasonable in relation to the benefits to the Fund over the long-term. The Adviser typically aggregates orders for the purchase and sale of securities for client portfolios including the registered investment companies it advises. In this process, orders for registered investment companies in which the Adviser or persons associated with the Adviser have an interest may be aggregated with orders for other client portfolios. Securities purchased or proceeds of securities sold through aggregated orders are allocated to the account of each client or fund that bought or sold such securities at the average execution price. If less than the total of the aggregated orders is executed, purchased securities or proceeds will be allocated pro rata among the participating portfolios in proportion to their planned participation in the aggregated orders. Transaction costs for any transaction will be shared pro rata based on each portfolio's participation in the transaction. The Fund will not purchase securities during the existence of any underwriting or selling group relating to such security of which the Adviser or any affiliated person (as defined in the 1940 Act) thereof is a member except pursuant to procedures adopted by the Company's Board of Directors pursuant to Rule 10f-3 under the 1940 Act. The Fund expects that its annual portfolio turnover rate will not exceed 75%. A high rate (100% or more) of portfolio turnover involves correspondingly greater brokerage commission expenses and other transaction costs that must be borne directly by the Fund. The Fund anticipates that its annual portfolio turnover rate will vary from year to year. The portfolio turnover rate is calculated by dividing the lesser of a portfolio's annual sales or purchases of portfolio securities (exclusive of purchases or sales of securities whose maturities at the time of acquisition were one year or less) by the monthly average value of the securities in the portfolio during the year. PURCHASE AND REDEMPTION INFORMATION You may purchase shares through an account maintained by your brokerage firm and you may also purchase shares directly by mail or wire. The Company reserves the right, if conditions exist which make cash payments undesirable, to honor any request for redemption or repurchase of the Fund's shares by making payment in whole or in part in securities chosen by the Company and valued in the same way as they would be valued for purposes of computing the Fund's net asset value. If payment is made in securities, a shareholder may incur transaction costs in converting these securities into cash. A shareholder will also bear any market risk or tax consequences as a result of a payment in securities. The Company has elected, however, to be governed by Rule 18f-1 under the 1940 Act so that the Fund is obligated to redeem its shares solely in cash up to the lesser of $250,000 or 1% of its net asset value during any 90-day period for any one shareholder of the Fund. A shareholder will bear the risk of a decline in market value and any tax consequences associated with a redemption in securities. Under the 1940 Act, the Company may suspend the right to redemption or postpone the date of payment upon redemption for any period during which the New York Stock Exchange, Inc. (the "NYSE") is closed (other than customary weekend and holiday closings), or - 19 - during which trading on the NYSE is restricted, or during which (as determined by the SEC by rule or regulation) an emergency exists as a result of which disposal or valuation of portfolio securities is not reasonably practicable, or for such other periods as the SEC may permit. (The Company may also suspend or postpone the recordation of the transfer of its shares upon the occurrence of any of the foregoing conditions.) Shares of the Company are subject to redemption by the Company, at the redemption price of such shares as in effect from time to time: including, without limitation, to reimburse a Fund for any loss sustained by reason of the failure of a shareholder to make full payment for shares purchased by the shareholder or to collect any charge relating to a transaction effected for the benefit of a shareholder as provided in the Prospectus from time to time; if such redemption is, in the opinion of the Company's Board of Directors, desirable in order to prevent the Company or any fund from being deemed a "personal holding company" within the meaning of the Internal Revenue Code of 1986, as amended; or if the net income with respect to any particular class of common stock should be negative or it should otherwise be appropriate to carry out the Company's responsibilities under the 1940 Act. The computation of the hypothetical offering price per share, based on the projected value of the Fund's estimated net assets, is as follows: --------------------------------------------------------------------- Net assets $10.00 --------------------------------------------------------------------- Outstanding shares 1 --------------------------------------------------------------------- Net asset value per share $10.00 --------------------------------------------------------------------- Maximum sales charge --- --------------------------------------------------------------------- Maximum offering price to public $10.00 --------------------------------------------------------------------- TELEPHONE TRANSACTION PROCEDURES The Company's telephone transaction procedures include the following measures: (1) requiring the appropriate telephone transaction privilege forms; (2) requiring the caller to provide the names of the account owners, the account social security number and name of the Fund, all of which must match the Company's records; (3) requiring the Company's service representative to complete a telephone transaction form, listing all of the above caller identification information; (4) permitting exchanges (if applicable) only if the two account registrations are identical; (5) requiring that redemption proceeds be sent only by check to the account owners of record at the address of record, or by wire only to the owners of record at the bank account of record; (6) sending a written confirmation for each telephone transaction to the owners of record at the address of record within five Business Days (as defined at "Valuation of Shares") of the call; and (7) maintaining tapes of telephone transactions for six months, if the Fund elects to record shareholder telephone transactions. For accounts held of record by broker-dealers (other than the Distributor), financial institutions, securities dealers, financial planners and other industry professionals, additional documentation or information regarding the scope of a caller's authority is required. Finally, for telephone transactions in accounts held jointly, additional information regarding other account holders is required. Telephone transactions will not be permitted in connection with IRA or other retirement plan accounts or by an attorney-in-fact under a power of attorney. - 20 - VALUATION OF SHARES The net asset value per share of the Fund is calculated as of the close of the NYSE, generally 4:00 p.m. Eastern Time on each Business Day. A "Business Day" means each weekday when the NYSE is open. Currently, the NYSE is closed on New Year's Day, Dr. Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day (observed), Labor Day, Thanksgiving Day and Christmas Day (observed) and on the preceding Friday or subsequent Monday when one of those holidays falls on a Saturday or Sunday. Net asset value per share, the value of an individual share in a fund, is computed by adding the value of the Fund's portfolio securities, cash and other assets, subtracting its actual and accrued liabilities, and dividing the result by the number of outstanding shares of the Fund. Securities that are listed on stock exchanges are valued at the last sale price on the day the securities are valued or, lacking any sales on such day, at the mean of the bid and asked prices available prior to valuation. In cases where securities are traded on more than one exchange, the securities are generally valued on the exchange designated by the Board of Directors as the primary market. Securities traded in the over-the-counter market and listed on the National Association of Securities Dealers Automatic Quotation System ("NASDAQ") are valued at the last trade price listed on the NASDAQ at the close of regular trading (generally 4:00 p.m. Eastern Time); securities listed on NASDAQ for which there were no sales on that day and other over-the-counter securities are valued at the mean of the bid and asked prices available prior to valuation. Securities for which market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of the Company's Board of Directors. The amortized cost method of valuation may also be used with respect to debt obligations with sixty days or less remaining to maturity. Debt obligations having a remaining maturity of greater than 60 days are valued at the mean of the bid and asked prices. In determining the approximate market value of portfolio investments, the Fund may employ outside organizations, which may use a matrix or formula method that takes into consideration market indices, matrices, yield curves and other specific adjustments. This may result in the securities being valued at a price different from the price that would have been determined had the matrix or formula method not been used. All cash, receivables and current payables are carried on the Fund's books at their face value. Other assets, if any, are valued at fair value as determined in good faith by or under the direction of the Company's Board of Directors. - 21 - PERFORMANCE INFORMATION TOTAL RETURN. For purposes of quoting and comparing the performance of the Fund to that of other mutual funds and to stock or other relevant indices in advertisements or in reports to shareholders, performance may be stated in terms of total return. Under the rules of the Securities and Exchange Commission, funds advertising performance must include total return quotes calculated according to the following formula: P(1 + T) n = ERV Where: P = hypothetical initial payment of $1,000 T = average annual total return n = number of years ERV = ending redeemable value at the end of the 1, 5 or 10 year periods (or fractional portion thereof) of a hypothetical $1,000 payment made at the beginning of the 1, 5 or 10 year periods. Under the foregoing formula, the time periods used in advertising will be based on rolling calendar quarters, updated to the last day of the most recent quarter prior to submission of the advertisement for publication, and will cover one, five and ten year periods or a shorter period dating from the effectiveness of the Fund's registration statement. In calculating the ending redeemable value, the maximum sales load is deducted from the initial $1,000 payment and all dividends and distributions by the Fund are assumed to have been reinvested at net asset value, as described in the Prospectus, on the reinvestment dates during the period. Total return, or "T" in the formula above, is computed by finding the average annual compounded rates of return over the 1, 5 and 10 year periods (or fractional portion thereof) that would equate the initial amount invested to the ending redeemable value. Any sales loads that might in the future be made applicable at the time to reinvestments would be included as would any recurring account charges that might be imposed by the Fund. The formula for calculating aggregate total return is as follows: ERV Aggregate Total Return = [(--------) - 1] P The calculations are made assuming that (1) all dividends and capital gain distributions are reinvested on the reinvestment dates at the price per share existing on the reinvestment date, (2) all recurring fees charged to all shareholder accounts are included, and (3) for any account fees that vary with the size of the account, a mean (or median) account size in the Fund during the periods is reflected. The ending redeemable value (variable "ERV" in the formula) is determined by assuming complete redemption of the hypothetical investment after deduction of all non-recurring charges at the end of the measuring period. The Fund may compute an "average annual total return-after taxes on distributions" by determining the average annual compounded rate of return after taxes on distributions during specified periods that equates the initial amount invested to the ending value after taxes on distributions but not after taxes on redemption according to the following formula: P (1+T) n = ATV D Where: P = a hypothetical initial payment of $1,000 T = average annual total return (after taxes on distributions) n = number of years ATV D = ending value of a hypothetical $1,000 payment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year periods (or fractional portion), after taxes on distributions but not after taxes on redemption. Average annual total return (after taxes on distributions) for a specified period is derived by calculating the actual dollar amount of the investment return on a $1,000 investment made at the maximum public offering price applicable to the Fund at the beginning of the period, and then calculating the annual compounded rate of return (after federal income taxes on distributions but not redemptions) which would produce that amount, assuming a redemption at the end of the period. This calculation assumes a complete redemption of the investment but further assumes that the redemption has no federal income tax consequences. This calculation also assumes that all dividends and distributions, less the federal income taxes due on such distributions, are reinvested at net asset value on the reinvestment dates during the period. In calculating the impact of federal income taxes due on distributions, the federal income tax rates used correspond to the tax character of each component of the distributions (e.g., ordinary income rate for ordinary income distributions, short-term capital gain rate for short-term capital gains distributions and long-term capital gain rate for long-term capital gain distributions). The highest individual marginal federal income tax rate in effect on the reinvestment date is applied to each component of the distributions on the reinvestment date. These tax rates may vary over the measurement period. The effect of applicable tax credits, such as the foreign tax credit, is also taken into account in accordance with federal tax law. The calculation disregards (i) the effect of phase-outs of certain exemptions, deductions and credits at various income levels, (ii) the impact of the federal alternative minimum tax and (iii) the potential tax liabilities other than federal tax liabilities (e.g., state and local taxes). The Fund may compute an "average annual total return-after taxes on distributions and redemption" by determining the average annual compounded rate of return after taxes on distributions and redemption during specified periods that equates the initial amount invested to the ending redeemable value after taxes on distributions and redemption according to the following formula: P (1+T) n = ATV DR Where: P = a hypothetical initial payment of $1,000 T = average annual total return (after taxes on distributions and redemption) n = number of years ATV DR = ending value of a hypothetical $1,000 payment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year periods (or fractional portion), after taxes on distributions and redemption. Average annual total return (after taxes on distributions and redemptions) for a specified period is derived by calculating the actual dollar amount of the investment return on a $1,000 investment made at the maximum public offering price applicable to the Fund at the beginning of the period, and then calculating the annual compounded rate of return (after federal income taxes on distributions and redemptions) which would produce that amount, assuming a redemption at the end of the period. This calculation assumes a complete redemption of the investment. This calculation also assumes that all dividends and distributions, less the federal income taxes due on such distributions, are reinvested at net asset value on the reinvestment dates during the period. In calculating the federal income taxes due on distributions, the federal income tax rates used correspond to the tax character of each component of the distributions (e.g., ordinary income rate for ordinary income distributions, short-term capital gain rate for short-term capital gains distributions and long-term capital gain rate for long-term capital gain distributions). The highest individual marginal federal income tax rate in effect on the reinvestment date is applied to each component of the distributions on the reinvestment date. These tax rates may vary over the measurement period. The effect of applicable tax credits, such as the foreign tax credit, is taken into account in accordance with federal tax law. The calculation disregards the (i) effect of phaseouts of certain exemptions, deductions and credits at various income levels, (ii) the impact of the federal alternative minimum tax and (iii) the potential tax liabilities other than federal tax liabilities (e.g., state and local taxes). In calculating the federal income taxes due on redemptions, capital gains taxes resulting from redemption are subtracted from the redemption proceeds and the tax benefits from capital losses resulting from the redemption are added to the redemption proceeds. The highest federal individual capital gains tax rate in effect on the redemption date is used in such calculation. The federal income tax rates used correspond to the tax character of any gains or losses (e.g., short-term or long-term). PERFORMANCE. From time to time, the Fund may advertise its average annual total return over various periods of time. These total return figures show the average percentage change in value of an investment in the Fund from the beginning of the measuring period to the end of the measuring period. The figures reflect changes in the price of the Fund's shares assuming that any income dividends and/or capital gain distributions made by the Fund during the period were reinvested in shares of the Fund. Total return will be shown for recent one-, five- and ten-year periods, and may be shown for other periods as well (such as from commencement of the Fund's operations or on a year-by-year, quarterly or current year-to-date basis). When considering average total return figures for periods longer than one year, it is important to note that the Fund's annual total return for one year in the period might have been greater or less than the average for the entire period. When considering total return figures for periods shorter than one year, investors should bear in mind that the Fund seeks long-term appreciation and that such return may not be representative of the Fund's return over a longer market cycle. The Fund may also advertise aggregate total return figures for various periods, representing the cumulative change in value of an investment in the Fund for the specific period (again reflecting changes in the Fund's share prices and assuming reinvestment of dividends and distributions). Aggregate and average total returns may be shown by means of schedules, charts or graphs, may indicate various components of total return (i.e., change in value of initial investment, income dividends and capital gain distributions). Investors should note that total return figures are based on historical returns and are not intended to indicate future performance. - 22 - As of the date of this Statement of Additional Information, the Fund has not commenced investment operations and, accordingly, no performance figures are available. In reports or other communications to investors or in advertising material, the Fund may describe general economic and market conditions affecting the Fund and may compare its performance with (1) that of other mutual funds as listed in the rankings prepared by Lipper Analytical Services, Inc. or similar investment services that monitor the performance of mutual funds or as set forth in the publications listed below; (2) its benchmark indices, as well as the S&P 500 Index; or (3) other appropriate indices of investment securities or with data developed by the Adviser derived from such indices. Performance information may also include evaluation of the Fund by nationally recognized ranking services and information as reported in financial publications such as Business Week, Fortune, Institutional Investor, Money Magazine, Forbes, Barron's, The Wall Street Journal, The New York Times, or other national, regional or local publications. In reports or other communications to investors or in advertising, the Fund may also describe the general biography or work experience of the portfolio manager(s) of the Fund and may include quotations attributable to the portfolio manager(s) describing approaches taken in managing the Fund's investments, research methodology, underlying stock selection or the Fund's investment objective. The Fund may also discuss the continuum of risk and return relating to different investments, and the potential impact of foreign stock on a portfolio otherwise composed of domestic securities. In addition, the Fund may from time to time compare its expense ratios to those of investment companies with similar objectives and policies, as advertised by Lipper Analytical Services, Inc. or similar investment services that monitor mutual funds. TAXES The Fund intends to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code, and to distribute out its income to shareholders each year, so that the Fund itself generally will be relieved of federal income and excise taxes. If the Fund were to fail to so qualify: (1) the Fund would be taxed at regular corporate rates without any deduction for distributions to shareholders; and (2) shareholders would be taxed as if they received ordinary dividends, although corporate shareholders could be eligible for the dividends received deduction. Moreover, if the Fund were to fail to make sufficient distributions in a year, the Fund would be subject to corporate income taxes and/or excise taxes in respect to the shortfall or, if the shortfall is large enough, the Fund could be disqualified as a regulated investment company. A 4% non-deductible excise tax is imposed on regulated investment companies that fail to distribute with respect to each calendar year at least 98% of their ordinary taxable income for the calendar year and capital gain net income (excess of capital gains over capital losses) for the one year period ending October 31 of such calendar year and 100% of any such amounts that were not distributed in the prior year. The Fund intends to make sufficient - 23 - distributions or deemed distributions of its ordinary taxable income and any capital gain net income prior to the end of each calendar year to avoid liability for this excise tax. Dividends declared in October, November or December of any year that are payable to shareholders of record on a specified date in such months will be deemed to have been received by shareholders and paid by the Fund on December 31 of such year if such dividends are actually paid during January of the following year. The Fund may be required to withhold federal income tax at a rate of at least 30% ("backup withholding") from dividends and redemption proceeds paid to non-corporate shareholders. This tax may be withheld from dividends if (i) you fail to furnish the Fund with your correct taxpayer identification number, (ii) the Internal Revenue Service ("IRS") notifies the Fund that you have failed to report properly certain interest and dividend income to the IRS and to respond to notices to that effect, or (iii) when required to do so, you fail to certify that you are not subject to backup withholding. ADDITIONAL INFORMATION CONCERNING RBB SHARES The Company has authorized capital of 30 billion shares of Common Stock at a par value of $0.001 per share. Currently, 21.073 billion shares have been classified into 95 classes as shown in the table below. Under the Company's charter, the Board of Directors has the power to classify and reclassify any unissued shares of Common Stock from time to time.
NUMBER OF NUMBER OF AUTHORIZED SHARES AUTHORIZED SHARES CLASS OF COMMON STOCK (MILLIONS) CLASS OF COMMON STOCK (MILLIONS) ------------------------------------- -------------------- ----------------------------------- -------------------- A (Growth & Income) 100 YY (Schneider Capital Small Cap Value) 100 B 100 ZZ 100 C (Balanced) 100 AAA 100 D (Tax-Free) 100 BBB 100 E (Money) 500 CCC 100 F (Municipal Money) 500 DDD (Boston Partners Institutional Small Cap Value Fund II) 100 G (Money) 500 EEE (Boston Partners Investors Small Cap Value Fund II) 100 H (Municipal Money) 500 FFF 100 I (Sansom Money) 1500 GGG 100 J (Sansom Municipal Money) 500 HHH 100 K (Sansom Government Money) 500 III (Boston Partners Institutional Long/Short Equity) 100 L (Bedford Money) 1500 JJJ (Boston Partners Investors Long/Short Equity) 100 M (Bedford Municipal Money) 500 KKK (Boston Partners Institutional Long-Short Equity) 100 N (Bedford Government Money) 500 LLL (Boston Partners Investors Long-Short Equity) 100 O (Bedford N.Y. Money) 500 MMM (n/i numeric Small Cap Value) 100 P (RBB Government) 100 Class NNN (Bogle Institutional Small Cap Growth) 100 - 24 - NUMBER OF NUMBER OF AUTHORIZED SHARES AUTHORIZED SHARES CLASS OF COMMON STOCK (MILLIONS) CLASS OF COMMON STOCK (MILLIONS) ------------------------------------- -------------------- ----------------------------------- -------------------- Q 100 Class OOO (Bogle Investors Small Cap Growth) 100 Class PPP (Schneider Value Fund) 100 R (Municipal Money) 500 Select (Money) 700 S (Government Money) 500 Beta 2 (Municipal Money) 1 T 500 Beta 3 (Government Money) 1 U 500 Beta 4 (N.Y. Money) 1 V 500 Principal Class (Money) 700 W 100 Gamma 2 (Municipal Money) 1 X 50 Gamma 3 (Government Money) 1 Y 50 Gamma 4 (N.Y. Money) 1 Z 50 Bear Stearns Money 2,500 AA 50 Bear Stearns Municipal Money 1,500 BB 50 Bear Stearns Government Money 1,000 CC 50 Delta 4 (N.Y. Money) 1 DD 100 Epsilon 1 (Money) 1 EE 100 Epsilon 2 (Municipal Money) 1 FF (n/i numeric Micro Cap) 50 Epsilon 3 (Government Money) 1 GG (n/i numeric Growth) 50 Epsilon 4 (N.Y. Money) 1 HH (n/i numeric Mid Cap) 50 Zeta 1 (Money) 1 II 100 Zeta 2 (Municipal Money) 1 JJ 100 Zeta 3 (Government Money) 1 KK 100 Zeta 4 (N.Y. Money) 1 LL 100 Eta 1 (Money) 1 MM 100 Eta 2 (Municipal Money) 1 NN 100 Eta 3 (Government Money) 1 OO 100 Eta 4 (N.Y. Money) 1 PP 100 Theta 1 (Money) 1 QQ (Boston Partners Institutional Theta 2 (Municipal Money) 1 Large Cap) 100 RR (Boston Partners Investors Large Theta 3 (Government Money) 1 Cap) 100 SS (Boston Partners Advisor Large Theta 4 (N.Y. Money) 1 Cap) 100 TT (Boston Partners Investors Mid Cap) 100 UU (Boston Partners Institutional Mid Cap) 100 VV (Boston Partners Institutional All Cap Value) 100 WW (Boston Partners Investors All Cap Value) 100
The classes of Common Stock have been grouped into separate "families". There are six families that currently have operating portfolios, including: the Sansom Street Family, the Bedford Family, the Schneider Capital Management Family, the n/i numeric family of funds, the Boston Partners Family and the Bogle Family. The Sansom Street Family and the Bedford Family represent interests in the Money Market Portfolio; the n/i numeric investors family of funds represents - 25 - interests in four non-money market portfolios; the Boston Partners Family represents interests in five non-money market portfolios; the Bogle Family represents interests in one non-money market portfolio; and the Schneider Capital Management Family represents interests in two non-money market portfolios. Each share that represents an interest in the Fund has an equal proportionate interest in the assets belonging to such Fund with each other share that represents an interest in such Fund, even where a share has a different class designation than another share representing an interest in that Fund. Shares of the Company do not have preemptive or conversion rights. When issued for payment as described in the Prospectus, shares of the Company will be fully paid and non-assessable. The Company does not currently intend to hold annual meetings of shareholders except as required by the 1940 Act or other applicable law. The Company's amended By-Laws provide that shareholders owning at least ten percent of the outstanding shares of all classes of Common Stock of the Company have the right to call for a meeting of shareholders to consider the removal of one or more directors. To the extent required by law, the Company will assist in shareholder communication in such matters. Shareholders of the Company are entitled to one vote for each full share held (irrespective of class or portfolio) and fractional votes for fractional shares held. Holders of shares of each class of the Company will vote in the aggregate and not by class on all matters, except where otherwise required by law. Further, shareholders of the Company will vote in the aggregate and not by portfolio except as otherwise required by law or when the Board of Directors determines that the matter to be voted upon affects only the interests of the shareholders of a particular portfolio. Rule 18f-2 under the 1940 Act provides that any matter required to be submitted by the provisions of such Act or applicable state law, or otherwise, to the holders of the outstanding voting securities of an investment company such as the Company shall not be deemed to have been effectively acted upon unless approved by the holders of a majority of the outstanding voting securities, as defined in the 1940 Act, of each portfolio affected by the matter. Rule 18f-2 further provides that a portfolio shall be deemed to be affected by a matter unless it is clear that the interests of each portfolio in the matter are identical or that the matter does not affect any interest of the portfolio. Under the Rule, the approval of an investment advisory agreement or any change in a fundamental investment policy would be effectively acted upon with respect to a portfolio only if approved by the holders of a majority of the outstanding voting securities (as defined in the 1940 Act) of such portfolio. However, the Rule also provides that the ratification of the selection of independent public accountants, the approval of principal underwriting contracts and the election of directors are not subject to the separate voting requirements and may be effectively acted upon by shareholders of an investment company voting without regard to portfolio. Voting rights are not comulative and, accordingly, the holders of more than 50% of the aggregate shares of Common Stock of the Company may elect all directors. Notwithstanding any provision of Maryland law requiring a greater vote of shares of the Company's common stock (or of any class voting as a class) in connection with any corporate action, unless otherwise provided by law (for example, by Rule 18f-2 discussed above), or by the Company's Articles of Incorporation, the Company may take or authorize such action upon the favorable vote of the holders of more than 50% of all of the outstanding shares of Common Stock entitled to vote on the matter voting without regard to class (or portfolio). MISCELLANEOUS COUNSEL. The law firm of Drinker Biddle & Reath LLP, One Logan Square, 18th and Cherry Streets, Philadelphia, Pennsylvania 19103-6996 serves as counsel to the Company and the independent directors. - 26 - INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP, Two Commerce Square, Suite 1700, 2001 Market Street, Philadelphia, Pennsylvania 19103, serves as the Company's independent accountants. PricewaterhouseCoopers LLP performs an annual audit of the Company's financial statements. FINANCIAL STATEMENTS No financial statements are supplied for the Fund because as of the date of the Prospectus and this Statement of Additional Information, the Fund had no operating history. CONTROL PERSONS As of the date of this Statement of Additional Information, the Fund's initial shareholder owned all of the Fund's outstanding Shares. As of April 26, 2002, to the Company's knowledge, the following named persons at the addresses shown below owned of record approximately 5% or more of the total outstanding shares of the class of the Company indicated below. As of April 26, 2002, the Fund had no shareholders. See "Additional Information Concerning RBB Shares" above. The Company does not know whether such persons also beneficially own such shares. Any shareholder who owns 25% or more of the outstanding shares of a portfolio may be presumed to "control" (as that term is defined in the 1940 Act) the portfolio. Shareholders controlling a portfolio could have the ability to vote a majority of the shares of the portfolio on any matter requiring approval of the shareholders of the portfolio.
---------------------------------------------------------------------------------------------------------------------- FUND NAME SHAREHOLDER NAME AND ADDRESS PERCENTAGE OF FUND HELD ---------------------------------------------------------------------------------------------------------------------- CASH PRESERVATION MONEY MARKET PFPC Trust Company CUST FBO Karen M. McElhinny 33.71% and Contribution Account 4943 King Arthur Drive Erie, PA 16506-3959 ---------------------------------------------------------------------------------------------------------------------- Theresa M. Palmer 10.92% 5731 N 4th Street Philadelphia, PA 19120-2323 ---------------------------------------------------------------------------------------------------------------------- Virginia M. Brennan and Donald L. Newell JT TEN WROS 5.16% 216 Garfield Road King of Prussia, PA 19406-2415 ---------------------------------------------------------------------------------------------------------------------- David F. Miller and Cynthia M. Miller JT TEN WROS 18.41% 981 Oakcrest Lane Media, PA 19063-2223 ---------------------------------------------------------------------------------------------------------------------- Helen M. Ellenby 11.40% 503 Falcon Lane West Chester, PA 19382-5716 ---------------------------------------------------------------------------------------------------------------------- -27 - ---------------------------------------------------------------------------------------------------------------------- FUND NAME SHAREHOLDER NAME AND ADDRESS PERCENTAGE OF FUND HELD ---------------------------------------------------------------------------------------------------------------------- Marian E. Kunz 6.00% 301 Norristown Road APT E103 Ambler, PA 19002-2776 ---------------------------------------------------------------------------------------------------------------------- SANSOM STREET MONEY MARKET Saxon and Co. c/o PNC Bank, N.A. 94.49% F6-F266-02-2 8800 Tinicum Blvd. Philadelphia, PA 19153-3111 ---------------------------------------------------------------------------------------------------------------------- Painewebber 5.44% C/O SAL Pace Managed Account Services A/C 32 32 400 4000038 1200 Harbor BLVD STE 3 Weehawken, NJ 07086-6728 ---------------------------------------------------------------------------------------------------------------------- CASH PRESERVATION Kenneth Farwell and Valerie Farwell MUNICIPAL MONEY MARKET JT TEN 70.45% 3854 Sullivan Ave Saint Louis, MO 63107-2001 ---------------------------------------------------------------------------------------------------------------------- David L. Ferguson and Jill A. Ferguson JT TEN 5.54% 1840 Nashville Lane Crystal Lake, IL 60014-2919 ---------------------------------------------------------------------------------------------------------------------- N/I MICRO CAP FUND Public Institute for Social Security 27.77% 1001 19th St., N. 16th Flr. Arlington, VA 22209-1722 ---------------------------------------------------------------------------------------------------------------------- McKinsey Master Retirement Trust 13.47% C/O Paul Harris Management, Inc. 114 W. 47th Street 20th Floor New York, NY 10036-1525 ---------------------------------------------------------------------------------------------------------------------- - 28 - ---------------------------------------------------------------------------------------------------------------------- FUND NAME SHAREHOLDER NAME AND ADDRESS PERCENTAGE OF FUND HELD ---------------------------------------------------------------------------------------------------------------------- Janis Claflin, Bruce Fetzer and 8.02% Winston Franklin Robert Lehman Trust. The John Fetzer Institute, Inc. U/A DTD 06-1992 Attn: Christina Adams 9292 West KL Ave Kalamazoo, MI 49009-5316 ---------------------------------------------------------------------------------------------------------------------- Louisa Stude Sarofilm Foundation 5.34% DTD 01/04/91 C/O Nancy Head 1001 Fannin Street Suite 4700 Houston, TX 77002-6798 ---------------------------------------------------------------------------------------------------------------------- Charles Schwab & Co., Inc 7.60% Special Custody Account for the Exclusive Benefit of Customers A/C 3143-0251 Attn: Mutual Funds 101 Montgomery St. San Francisco, CA 94104-4122 ---------------------------------------------------------------------------------------------------------------------- N/I GROWTH FUND Citibank North America Inc. 56.73% Sargent & Lundy Retirement Trust DTD 06/01/96 Mutual Fund Unit Bld. B Floor 1 Zone 7 3800 Citibank Center Tampa, FL 33610-9122 ---------------------------------------------------------------------------------------------------------------------- Louisa Stude Sarofim Foundation 7.49% C/O Nancy Head DTD 01/04/91 1001 Fannin Street, Suite 4700 Houston, TX 77002 -6798 ---------------------------------------------------------------------------------------------------------------------- - 29- ---------------------------------------------------------------------------------------------------------------------- FUND NAME SHAREHOLDER NAME AND ADDRESS PERCENTAGE OF FUND HELD ---------------------------------------------------------------------------------------------------------------------- Charles Schwab & Co., Inc 5.55% Special Custody Account for the Exclusive Benefit of Customers Attn: Mutual Funds 101 Montgomery St. San Francisco, CA 94104-4122 ---------------------------------------------------------------------------------------------------------------------- N/I MID CAP National Investor Services Corp. 6.61% for the Exclusive Benefit of Our Customers 55 Water St. 32nd Floor New York, NY 10041-3299 ---------------------------------------------------------------------------------------------------------------------- Charles Schwab & Co., Inc 20.62% Special Custody Account for the Exclusive Benefit of Customers Attn: Mutual Funds 101 Montgomery St. San Francisco, CA 94104-4122 ---------------------------------------------------------------------------------------------------------------------- N/I SMALL CAP VALUE FUND National Investors Services Corp. 15.48% for the Exclusive Benefit of Our Customers 55 Water St. 32nd Floor New York, NY 10041-3299 ---------------------------------------------------------------------------------------------------------------------- McKinsey Master Retirement Trust 6.63% McKinsey and Company U/A DTD 1994 C/O Paul Harris Management Inc. 114 W. 47th Street 20th Floor New York, NY 10036-1525 ---------------------------------------------------------------------------------------------------------------------- Charles Schwab & Co., Inc. 26.73% Special Custody Account for the Exclusive Benefit of Customers Attn: Mutual Funds 101 Montgomery St. San Francisco, CA 94104-4122 ---------------------------------------------------------------------------------------------------------------------- BOSTON PARTNERS LARGE CAP VALUE Union Bank of California 14.73% FUND - FBO Service Employees BP 610001265-01 INSTITUTIONAL SHARES P.O. Box 85484 San Diego, CA 92186-5484 ---------------------------------------------------------------------------------------------------------------------- - 30 - ---------------------------------------------------------------------------------------------------------------------- FUND NAME SHAREHOLDER NAME AND ADDRESS PERCENTAGE OF FUND HELD ---------------------------------------------------------------------------------------------------------------------- Northern Trust Company 18.29% FBO AEFC Pension Trust A/C 22-53582 P. O. Box 92956 Chicago, IL 60675-2956 ---------------------------------------------------------------------------------------------------------------------- U.S. Bank National Association 15.33% FBO A-Dec Inc. DOT 093098 P. O. Box 1787 Milwaukee, WI 53201-1787 ---------------------------------------------------------------------------------------------------------------------- Swanee Hunt and Charles Ansbacher 16.67% Trust Swanee Hunt Family Foundation C/O Beth Benham 168 Brattle Street Cambridge, MA 02138-3309 ---------------------------------------------------------------------------------------------------------------------- Samuel Gray and Ronald Williams and David Younggren 6.24% Trust Gary Tax Advantaged PRO and PSP 370 17th Street Suite 5300 Denver, CO 80202-5653 ---------------------------------------------------------------------------------------------------------------------- Charles Schwab & Co., Inc. 10.08% Special Custody Account for Benefit of Customers Attn: Mutual Funds 101 Montgomery St. San Francisco, CA 94104-4122 ---------------------------------------------------------------------------------------------------------------------- BOSTON PARTNERS LARGE CAP VALUE National Financial Services Corp. 8.40% FUND INVESTOR SHARES for Exclusive Benefit of Our Customers Attention: Mutual Funds 5th Floor 200 Liberty St. 1 World Financial Center New York, NY 10281-1003 ---------------------------------------------------------------------------------------------------------------------- Charles Schwab & Co., Inc. 77.78% Special Custody Account for Benefit of Customers Attn: Mutual Funds 101 Montgomery St. San Francisco, CA 94104-4122 ---------------------------------------------------------------------------------------------------------------------- - 31 - ---------------------------------------------------------------------------------------------------------------------- FUND NAME SHAREHOLDER NAME AND ADDRESS PERCENTAGE OF FUND HELD ---------------------------------------------------------------------------------------------------------------------- BOSTON PARTNERS MID CAP VALUE FUND Belmont Hill School, Inc. 8.31% INSTITUTIONAL SHARES 350 Prospect Street Belmont, MA 02478-2656 ---------------------------------------------------------------------------------------------------------------------- MAC & Co. 18.82% A/C CHIF1001182 FBO Childrens Hospital LA P.O. Box 3198 Pittsburgh, PA 15230-3198 ---------------------------------------------------------------------------------------------------------------------- MAC & Co. 14.89% A/C BPHF3006002 Mutual Funds Operations P.O. Box 3198 Pittsburgh, PA 15230-3198 ---------------------------------------------------------------------------------------------------------------------- USB 19.70% Custody SIS of Order of St. Bene P.O. Box 1787 Milwaukee, WI 53201-1787 ---------------------------------------------------------------------------------------------------------------------- American Express Trust Co. 17.20% FBO American Express Retirement Serv Plans Attn: Pat Brown 50534 AXP Financial Center Minneapolis, MN 55474-0505 ---------------------------------------------------------------------------------------------------------------------- BOSTON PARTNERS MID CAP VALUE FUND National Financial Services Corp. 29.69% - INVESTOR SHARES for Exclusive Benefit of Our Customers Attn: Mutual Funds 5th Floor 200 Liberty St. New York, NY 10281-1003 ---------------------------------------------------------------------------------------------------------------------- Charles Schwab & Co., Inc. 32.48% Special Custody Account for Benefit of Customers Attn: Mutual Funds 101 Montgomery St. San Francisco, CA 94104-4122 ---------------------------------------------------------------------------------------------------------------------- - 32 - ---------------------------------------------------------------------------------------------------------------------- FUND NAME SHAREHOLDER NAME AND ADDRESS PERCENTAGE OF FUND HELD ---------------------------------------------------------------------------------------------------------------------- BOSTON PARTNERS A Cleveland R. Dastin and W. Donovan 5.41% SMALL CAP VALUE FUND II T. Burback J. Dibrigidu -INSTITUTIONAL SHARES Trst. Sheehan Phinney Bass & Green Profit Sharing Plan 1000 Elm Street Manchester, NH 03101-1730 ---------------------------------------------------------------------------------------------------------------------- National Financial Services Corp. 12.58% for the Exclusive Benefit of Our Customers Attn: Mutual Funds 5th Floor 200 Liberty St. 1 World Financial Center New York, NY 10281-1003 ---------------------------------------------------------------------------------------------------------------------- National Investor Services Corp. 9.20% FBO Exclusive Benefit for Our Customers 55 Water St. New York, NY 10041-0004 ---------------------------------------------------------------------------------------------------------------------- Naidot and Co. 5.84% Bessemer Trust Company 100 Woodbridge Avenue Woodbridge, NJ 07095-3336 ---------------------------------------------------------------------------------------------------------------------- Georgetown Memorial Hospital 5.16% Depreciation Fund P.O. Box 1718 Georgetown, SC 29442-1718 ---------------------------------------------------------------------------------------------------------------------- MCNC Endowment 13.23% P.O. Box 110023 Research Triangle Park, NC 27709-5023 ---------------------------------------------------------------------------------------------------------------------- Plumbers and Steamfitters 8.02% Local No. 7 Pension Fund Robert M. Valenty, Administrator Mary Ellen Smith, Assistant Administrator 308 Wolf Road Latham, NY 12110-4802 ---------------------------------------------------------------------------------------------------------------------- - 33 - ---------------------------------------------------------------------------------------------------------------------- FUND NAME SHAREHOLDER NAME AND ADDRESS PERCENTAGE OF FUND HELD ---------------------------------------------------------------------------------------------------------------------- BOSTON PARTNERS SMALL CAP VALUE National Financial Services Corp. 36.04% FUND II - INVESTOR SHARES for the Exclusive Benefit of Our Customers Attn: Mutual Funds 5th Floor 200 Liberty St. 1 World Financial Center New York, NY 10281-1003 ---------------------------------------------------------------------------------------------------------------------- National Investors Services Corp. 7.48% FBO Exclusive Benefit of Our Customers 55 Water Street New York, NY 10041-0004 ---------------------------------------------------------------------------------------------------------------------- Charles Schwab & Co., Inc. 40.67% Special Custody Account for Benefit of Customers Attn: Mutual Funds 101 Montgomery St. San Francisco, CA 94104-4122 ---------------------------------------------------------------------------------------------------------------------- BOSTON PARTNERS LONG/SHORT EQUITY National Investors Services Corp. 16.10% FUND - for the Exclusive Benefit of Our Customers INSTITUTIONAL SHARES Attn: Mutual Funds 5th Floor 200 Liberty St. New York, NY 10281-1003 ---------------------------------------------------------------------------------------------------------------------- National Investors Services Corp. 6.71% FBO Exclusive Benefit of Our Customers 55 Water Street New York, NY 10041-0004 ---------------------------------------------------------------------------------------------------------------------- Charles Schwab & Co., Inc. 63.77% Special Custody Account for Benefit of Customers Attn: Mutual Funds 101 Montgomery Street San Francisco, CA 94104-4122 ---------------------------------------------------------------------------------------------------------------------- BOSTON PARTNERS LONG/SHORT EQUITY National Financial Services Corp. 70.00% FUND - for the Exclusive Benefit of Our Customers INVESTOR SHARES 200 Liberty St. New York, NY 10281-1003 ---------------------------------------------------------------------------------------------------------------------- - 34 - ---------------------------------------------------------------------------------------------------------------------- FUND NAME SHAREHOLDER NAME AND ADDRESS PERCENTAGE OF FUND HELD ---------------------------------------------------------------------------------------------------------------------- SCHNEIDER SMALL CAP VALUE FUND John Frederick Lyness 5.27% 81 Hillcrest Ave. Summit, NJ 07901-2012 ---------------------------------------------------------------------------------------------------------------------- Ursinus College Endowment Fund 14.70% P.O. Box 1000 Collegeville, PA 19426-1000 ---------------------------------------------------------------------------------------------------------------------- MAC & CO. 6.67% A/C CPVF1854542 Mutual Funds Operations P.O. Box 3198 Pittsburgh, PA 15230-3198 ---------------------------------------------------------------------------------------------------------------------- Charles Schwab & Co., Inc. 34.99% Special Custody Account A/C For Benefit of Customers Attn: Mutual Funds 101 Montgomery Street San Francisco, CA 94104-4122 ---------------------------------------------------------------------------------------------------------------------- BOGLE SMALL CAP GROWTH FUND National Investors Services Corp. 11.28% -INVESTOR SHARES for the Exclusive Benefit of Our Customers 55 Water Street 32nd floor New York, NY 10041-3299 ---------------------------------------------------------------------------------------------------------------------- BOGLE SMALL CAP GROWTH FUND U.S. Equity Investment Portfolio L.P. 12.43% -INSTITUTIONAL SHARES 1001 North U.S. Highway One Suite 800 Jupiter, FL 33477-4407 ---------------------------------------------------------------------------------------------------------------------- Charles Schwab & Co, Inc. 58.89% Special Custody Account for the Benefit of Customers Attn: Mutual Funds 101 Montgomery St. San Francisco, CA 94104-4122 ----------------------------------------------------------------------------------------------------------------------
As of April 26, 2002, directors and officers as a group owned less than one percent of the shares of the Company. - 35 - APPENDIX A SHORT-TERM CREDIT RATINGS A Standard & Poor's short-term issue credit rating is a current opinion of the creditworthiness of an obligor with respect to a specific financial obligation having an original maturity of no more than 365 days. The following summarizes the rating categories used by Standard & Poor's for short-term issues: "A-1" - Obligations are rated in the highest category and indicate that the obligor's capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligor's capacity to meet its financial commitment on these obligations is extremely strong. "A-2" - Obligations are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor's capacity to meet its financial commitment on the obligation is satisfactory. "A-3" - Obligations exhibit adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation. "B" - Obligations have significant speculative characteristics. The obligor currently has the capacity to meet its financial commitment on the obligation. However, it faces major ongoing uncertainties which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation. "C" - Obligations are currently vulnerable to nonpayment and are dependent upon favorable business, financial and economic conditions for the obligor to meet its financial commitment on the obligation. "D" - Obligations are in payment default. The "D" rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The "D" rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized. Local Currency and Foreign Currency Risks - Country risk considerations are a standard part of Standard & Poor's analysis for credit ratings on any issuer or issue. Currency of repayment is a key factor in this analysis. An obligor's capacity to repay foreign currency obligations may be lower than its capacity to repay obligations in its local currency due to the sovereign government's own relatively lower capacity to repay external versus domestic debt. These sovereign risk considerations are incorporated in the debt ratings assigned to specific A-1 issues. Foreign currency issuer ratings are also distinguished from local currency issuer ratings to identify those instances where sovereign risks make them different for the same issuer. Moody's short-term ratings are opinions of the ability of issuers to honor senior financial obligations and contracts. These obligations have an original maturity not exceeding one year, unless explicitly noted. The following summarizes the rating categories used by Moody's for short-term obligations: "Prime-1" - Issuers (or supporting institutions) have a superior ability for repayment of senior short-term debt obligations. Prime-1 repayment ability will often be evidenced by many of the following characteristics: leading market positions in well-established industries; high rates of return on funds employed; conservative capitalization structure with moderate reliance on debt and ample asset protection; broad margins in earnings coverage of fixed financial charges and high internal cash generation; and well-established access to a range of financial markets and assured sources of alternate liquidity. "Prime-2" - Issuers (or supporting institutions) have a strong ability to repay senior short-term debt obligations. This will normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, may be more subject to variation than is the case for Prime-1 securities. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. "Prime-3" - Issuers (or supporting institutions) have an acceptable ability for repayment of senior short-term debt obligations. The effect of industry characteristics and market compositions may be more pronounced. Variability in earnings and profitability may result in changes in the level of debt-protection measurements and may require relatively high financial leverage. Adequate alternate liquidity is maintained. "Not Prime" - Issuers do not fall within any of the Prime rating categories. Fitch short-term ratings apply to time horizons of less than 12 months for most obligations, or up to three years for U.S. public finance securities, and thus place greater emphasis on the liquidity necessary to meet financial commitments in a timely manner. The following summarizes the rating categories used by Fitch for short-term obligations: "F1" - Securities possess the highest credit quality. This designation indicates the strongest capacity for timely payment of financial commitments and may have an added "+" to denote any exceptionally strong credit feature. "F2" - Securities possess good credit quality. This designation indicates a satisfactory capacity for timely payment of financial commitments, but the margin of safety is not as great as in the case of the higher ratings. A-2 "F3" - Securities possess fair credit quality. This designation indicates that the capacity for timely payment of financial commitments is adequate; however, near-term adverse changes could result in a reduction to non-investment grade. "B" - Securities possess speculative credit quality. This designation indicates minimal capacity for timely payment of financial commitments, plus vulnerability to near-term adverse changes in financial and economic conditions. "C" - Securities possess high default risk. Default is a real possibility. This designation indicates a capacity for meeting financial commitments which is solely reliant upon a sustained, favorable business and economic environment. "D" - Securities are in actual or imminent payment default. LONG-TERM CREDIT RATINGS The following summarizes the ratings used by Standard & Poor's for long-term issues: "AAA" - An obligation rated "AAA" has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is extremely strong. "AA" - An obligation rated "AA" differs from the highest rated obligations only in small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong. "A" - An obligation rated "A" is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong. "BBB" - An obligation rated "BBB" exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation. Obligations rated "BB," "B," "CCC," "CC" and "C" are regarded as having significant speculative characteristics. "BB" indicates the least degree of speculation and "C" the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions. "BB" - An obligation rated "BB" is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial or economic conditions which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation. "B" - An obligation rated "B" is more vulnerable to nonpayment than obligations rated "BB," but the obligor currently has the capacity to meet its financial commitment on the A-3 obligation. Adverse business, financial or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation. "CCC" - An obligation rated "CCC" is currently vulnerable to nonpayment and is dependent upon favorable business, financial and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation. "CC" - An obligation rated "CC" is currently highly vulnerable to nonpayment. "C" - A subordinated debt obligation rated "C" is currently highly vulnerable to nonpayment. The "C" rating may be used to cover a situation where a bankruptcy petition has been filed or similar action taken, but payments on this obligation are being continued. "D" - An obligation rated "D" is in payment default. The "D" rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payment will be made during such grace period. The "D" rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized. PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. The following summarizes the ratings used by Moody's for long-term debt: "Aaa" - Bonds are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. "Aa" - Bonds are judged to be of high quality by all standards. Together with the "Aaa" group they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in "Aaa" securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risk appear somewhat larger than the "Aaa" securities. "A" - Bonds possess many favorable investment attributes and are to be considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. "Baa" - Bonds are considered as medium-grade obligations, (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable A-4 over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. "Ba" - Bonds are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. "B" - Bonds generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. "Caa" - Bonds are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. "Ca" - Bonds represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. "C" - Bonds are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating classification from "Aa" through "Caa." The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of its generic rating category. The following summarizes long-term ratings used by Fitch: "AAA" - Securities considered to be investment grade and of the highest credit quality. These ratings denote the lowest expectation of credit risk and are assigned only in case of exceptionally strong capacity for timely payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events. "AA" - Securities considered to be investment grade and of very high credit quality. These ratings denote a very low expectation of credit risk and indicate very strong capacity for timely payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events. "A" - Securities considered to be investment grade and of high credit quality. These ratings denote a low expectation of credit risk. The capacity for timely payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings. "BBB" - Securities considered to be investment grade and of good credit quality. These ratings denote that there is currently a low expectation of credit risk. The capacity for timely payment of financial commitments is considered adequate, but adverse changes in circumstances A-5 and in economic conditions are more likely to impair this capacity. This is the lowest investment grade category. "BB" - Securities considered to be speculative. These ratings indicate that there is a possibility of credit risk developing, particularly as the result of adverse economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met. Securities rated in this category are not investment grade. "B" - Securities considered to be highly speculative. These ratings indicate that significant credit risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is contingent upon a sustained, favorable business and economic environment. "CCC," "CC" and "C" - Securities have high default risk. Default is a real possibility, and capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic developments. "CC" ratings indicate that default of some kind appears probable, and "C" ratings signal imminent default. "DDD," "DD" and "D" - Securities are in default. The ratings of obligations in these categories are based on their prospects for achieving partial or full recovery in a reorganization or liquidation of the obligor. While expected recovery values are highly speculative and cannot be estimated with any precision, the following serve as general guidelines. "DDD" obligations have the highest potential for recovery, around 90%-100% of outstanding amounts and accrued interest. "DD" indicates potential recoveries in the range of 50%-90%, and "D" the lowest recovery potential, i.e., below 50%. Entities rated in this category have defaulted on some or all of their obligations. Entities rated "DDD" have the highest prospect for resumption of performance or continued operation with or without a formal reorganization process. Entities rated "DD" and "D" are generally undergoing a formal reorganization or liquidation process; those rated "DD" are likely to satisfy a higher portion of their outstanding obligations, while entities rated "D" have a poor prospect for repaying all obligations. PLUS (+) or MINUS (-) may be appended to a rating to denote relative status within major rating categories. Such suffixes are not added to the "AAA" long-term rating category or to categories below "CCC". NOTES TO SHORT-TERM AND LONG-TERM CREDIT RATINGS STANDARD & POOR'S CREDITWATCH: CreditWatch highlights the potential direction of a short- or long-term rating. It focuses on identifiable events and short-term trends that cause ratings to be placed under special surveillance by Standard & Poor's analytical staff. These may include mergers, recapitalizations, voter referendums, regulatory action, or anticipated operating developments. Ratings appear on CreditWatch when such an event or a deviation from an expected trend occurs A-6 and additional information is necessary to evaluate the current rating. A listing, however, does not mean a rating change is inevitable, and whenever possible, a range of alternative ratings will be shown. CreditWatch is not intended to include all ratings under review, and rating changes may occur without the ratings having first appeared on CreditWatch. The "positive" designation means that a rating may be raised; "negative" means a rating may be lowered; and "developing" means that a rating may be raised, lowered or affirmed. RATING OUTLOOK: A Standard & Poor's Rating Outlook assesses the potential direction of a long-term credit rating over the intermediate to longer term. In determining a Rating Outlook, consideration is given to any changes in the economic and/or fundamental business conditions. An Outlook is not necessarily a precursor of a rating change or future CreditWatch action. o Positive means that a rating may be raised. o Negative means that a rating may be lowered. o Stable means that a rating is not likely to change. o Developing means a rating may be raised or lowered. o N.M. means not meaningful. MOODY'S WATCHLIST: Watchlists list the names of credits whose ratings have a likelihood of changing. These names are actively under review because of developing trends or events which, in Moody's opinion, warrant a more extensive examination. Inclusion on this Watchlist is made solely at the discretion of Moody's Investors Services, and not all borrowers with ratings presently under review for possible downgrade or upgrade are included on any one Watchlist. In certain cases, names may be removed from this Watchlist without a change in rating. FITCH WITHDRAWN: A rating is withdrawn when Fitch deems the amount of information available to be inadequate for rating purposes, or when an obligation matures, is called, or refinanced. RATING WATCH: Ratings are placed on Rating Watch to notify investors that there is a reasonable probability of a rating change and the likely direction of such change. These are designated as "Positive", indicating a potential upgrade, "Negative", for a potential downgrade, or "Evolving", if ratings may be raised, lowered or maintained. Rating Watch is typically resolved over a relatively short period. RATING OUTLOOK: A Rating Outlook indicates the direction a rating is likely to move over a one to two-year period. Outlooks may be positive, stable or negative. A positive or negative Rating Outlooks does not imply a rating change is inevitable. Similarly, companies whose outlooks are "stable" could be upgraded or downgraded before an outlook moves to a positive or negative if circumstances warrant such an action. Occasionally, Fitch may be unable to identify the fundamental trend. In these cases, the Rating Outlook may be described as evolving. A-7 MUNICIPAL NOTE RATINGS A Standard & Poor's note rating reflects the liquidity factors and market access risks unique to notes due in three years or less. The following summarizes the ratings used by Standard & Poor's for municipal notes: "SP-1" - The issuers of these municipal notes exhibit a strong capacity to pay principal and interest. Those issues determined to possess a very strong capacity to pay debt service are given a plus (+) designation. "SP-2" - The issuers of these municipal notes exhibit a satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes. "SP-3" - The issuers of these municipal notes exhibit speculative capacity to pay principal and interest. In municipal debt issuance, there are three rating categories for short-term obligations that are considered investment grade. These ratings are designated Moody's Investment Grade ("MIG") and are divided into three levels - MIG 1 through MIG 3. In the case of variable rate demand obligations, a two-component rating is assigned. The first element represents Moody's evaluation of the degree of risk associated with scheduled principal and interest payments. The second element represents Moody's evaluation of the degree of risk associated with the demand feature, using the MIG rating scale. The short-term rating assigned to the demand feature is designated as VMIG. MIG ratings expire at note maturity. By contrast, VMIG ratings expirations will be a function of each issue's specific structural or credit features. The following summarizes the ratings by Moody's for these short-term obligations: "MIG-1"/"VMIG-1" - This designation denotes superior credit quality. Excellent protection is afforded by established cash flows, highly reliable liquidity support or demonstrated broad-based access to the market for refinancing. "MIG-2"/"VMIG-2" - This designation denotes strong credit quality. Margins of protection are ample although not as large as in the preceding group. "MIG-3"/"VMIG-3" - This designation denotes acceptable credit quality. Liquidity and cash flow protection may be narrow and market access for refinancing is likely to be less well established. "SG" - This designation denotes speculative-grade credit quality. Debt instruments in this category lack sufficient margins of protection. Fitch uses the same ratings for municipal securities as described above for other short-term credit ratings. A-8 ABOUT CREDIT RATINGS A Standard & Poor's issue credit rating is a current opinion of the creditworthiness of an obligor with respect to a specific financial obligation. The issue credit rating is not a recommendation to purchase, sell or hold a financial obligation. Credit ratings may be changed, suspended or withdrawn. Moody's credit ratings must be construed solely as statements of opinion and not recommendations to purchase, sell or hold any securities. Fitch credit ratings are an opinion on the ability of an entity or of a securities issue to meet financial commitments on a timely basis. Fitch credit ratings are used by investors as indications of the likelihood of getting their money back in accordance with the terms on which they invested. However, Fitch credit ratings are not recommendations to buy, sell or hold any security. Ratings may be changed or withdrawn. A-9